To: Our Readers

• Paulson pushes for AMT 'patch'
• Petraeus and Crocker hearings provide few surprises
• Congress and White House setting stage for veto battles
• Hagel retirement creates more GOP headaches for 2008
• Doolittle insists on running again, Republicans line up for primary challenge

Outlook

1. Contrary to the happy talk coming out of the Bush Administration, well-informed business sources have heightened the perceived risk of recession. If the Federal Open Market Committee (FOMC) at its meeting next Tuesday does anything less than cut the federal funds rate by 50 basis points, it will be a major disappointment and damaging to markets and the broader economy. Indeed, a cut that deep already has been discounted in markets.
   
   
2. The long awaited launch of former Sen. Fred Thompson's (R-Tenn.) presidential candidacy failed to achieve the dynamism that he needed to compensate for his late start. Every GOP candidate is flawed in one way or another, which is Thompson's principal asset. Thompson's decision to announce his candidacy on "The Tonight Show" with Jay Leno on the night of a New Hampshire debate was an incredible blunder that casts doubt on the competence of his campaign.
   
   
3. Apart from Thompson's absence, the big story out of the New Hampshire debate was the "comeback" by Sen. John McCain (R-Ariz.). He showed that he performs best as an underdog, but he has a long way to go to rebuild his credibility. Just as insiders began to consider former Massachusetts Gov. Mitt Romney (R) as the most likely nominee, his performance was unimpressive. His judgment has been called into question by his statement (later recanted) comparing his sons' work in his presidential campaign with military service in Iraq.
   
   
4. Accepting money from her fugitive fundraiser surely cannot be blamed personally on Sen. Hillary Clinton (D- N.Y.), but her return of the funds raised by him may have long-ranging consequences on her front-running candidacy. It recalls the Clinton image of illegal overseas fund-raisers, stigmatizing her as an old-fashioned politician while Sen. Barack Obama (D-Ill.) represents change.
   
   
5. The decision not to run (see below) by Sen. Chuck Hagel (R-Neb.) now raises to five the possible losses of Senate seats by Republicans. Democrats also are targeting Sen. Gordon Smith (R-Ore.) for a sixth seat. If 2008 turns into a Democratic landslide, Senators Elizabeth Dole (R-N.C.) and even Mitch McConnell (R-Ky.) could be in danger.

Bush Administration

Taxation: President George W. Bush's second-term goal of comprehensive tax reform died long ago, but Treasury Secretary Henry Paulson has a more limited tax agenda.

1. Paulson makes it clear that with recession posing a danger on the horizon, the economy cannot afford a tax increase. Consequently, his primary goal in the field of taxation is a "patch" limiting the current impact of the runaway Alternative Minimum Tax (AMT). Paulson's problem is the tax redistribution measures likely to be added by Congress to any AMT revision.
   
   
2. Paulson also is asserting that the U.S. is losing out competitively because the corporate income tax rate, once the lowest in the industrialized world, is no longer competitive. Chances of this Democratic Congress's cutting the corporate rate, however, seem to be between slim and none.

Congress

Iraq: The Capitol Hill appearances of Gen. David Petraeus and Ambassador Ryan Crocker provided few surprises and little real substantive engagement.

1. The full-page advertisement in the New York Times from liberal 527 group MoveOn.org, calling Petraeus dishonest and accusing him of "cooking the books for the White House," played to Republicans' advantage. The White House, congressional Republicans and conservative media seized on this ad and successfully used it as a distraction. Republicans' prepared statements focused mostly on praising Petraeus's integrity, either directly or indirectly responding to the MoveOn.org ad. Most Democrats felt pressure to distance themselves from the ad, which meant also sticking up for Petraeus's integrity and ability.
   
   
2. The newest angle in the testimonies from Petraeus and Crocker was the focus on Iran. In describing that a "premature withdrawal" would create a "vacuum," the two men argued that Iran would fill that leadership vacuum -- a more concrete and ominous threat than the earlier warnings that chaos would reign. This argument lends some strength to the White House case that an ongoing troop presence is needed.
   
   
3. One fundamental fact in the debate on war is that Congress never really wants to meddle in foreign policy when it doesn't have to. Democrats will be happy to criticize the administration and to continue holding symbolic votes, but it would be surprising to see actual policy changes forced by Congress.
   
   
4. This Democratic reluctance is causing rifts between the party and its anti-war base -- a cost of being the majority party. Handling this rift will be the chief challenge for the Democratic presidential hopefuls. Because the Democratic frontrunners are both lawmakers, and the Republican favorites mostly are not, the White House and the congressional GOP could help their party's chances of retaining the presidency by forcing tough votes.
   
   
5. While Democrats are made uneasy by the war, it is a downright liability for the GOP, and some Republicans are inching away from it. Former Massachusetts Gov. Mitt Romney (R) notably has refused to join his fellow Republicans in declaring he would have invaded Iraq knowing what he does today.

Veto Battles: Congress and the White House are setting the stage for a few veto battles this fall.

1. The President appears to have backed down from his threat to veto the toothless "lobbying reform" bill passed with overwhelming bipartisan majorities. While the White House and some other critics grant the bill is "better than nothing," it may not be. Thanks to late changes in the bill that rank-and-file members never noticed, the legislation actually makes it easier for senators to sneak through unauthorized spending plans without oversight or transparency. Bush could still pick a veto battle over this, but most of the mainstream media -- and most Republican lawmakers, for that matter -- have bought into the line that this is a lobbying reform measure. Given the party's circumstances, any Republican would be uneasy standing up to the bill.
   
   
2. The Senate today will vote on passage of a generous transportation bill with discretionary spending $3.1 billion higher than Bush requested. The White House officially sent notice to the Hill that the price tag would incur a veto. Democrats might not mind forcing the President to veto a highway bill shortly after the deadly bridge collapse in Minnesota.
   
   
3. Democrats also look forward to a veto battle over their expansion of the State Children's Health Insurance Program (SCHIP). Congress has voted to expand the program to cover people who are neither children nor poor -- giving government health coverage to middle-class young adults. For Democrats, passing the bill into law would be a great step towards universal government-funded healthcare, but inducing a Bush veto would create a wedge issue. This is the power of the majority.
   
   
4. The White House also seems to have backed down from a veto threat against the bill overhauling student loans, increasing Pell grants and creating new entitlements for student-loan forgiveness. Bush had threatened a veto, but after the bill passed with veto-proof majorities in both chambers, Education Secretary Margaret Spellings signaled the White House would sign the bill.

Senate 2008

Nebraska: The retirement announcement by Sen. Chuck Hagel (R-Neb.) adds to GOP headaches for 2008, creating a third Senate open seat for Republicans to defend.

The good news for the GOP is that Nebraska is strong Republican territory, with all three congressmen, the governor and the unicameral legislature all Republican. The bad news: Former Sen. Bob Kerrey (D-Neb.) might run. Kerrey, also a former governor, retired in 2000, handing his seat over to former Gov. Ben Nelson (D-Neb.). Kerrey was an immensely popular senator and governor, and his role on the 9/11 Commission strengthened his bipartisan bona fides and his adeptness on intelligence and security issues. Kerrey also would start with nearly a half-million dollars in his campaign war chest.

Kerrey's major disadvantage would be being a Democrat in Nebraska in a presidential year. However, Nelson won his first election under such conditions. A 2001 New York Times Magazine article about Kerrey's central role in a Vietnam slaughter could haunt Kerrey and possibly even discourage him from running.

The strongest potential candidate in the GOP field is Agriculture Secretary Mike Johanns. Himself a former governor and mayor of Lincoln, Johanns would seem the only Republican with a chance to beat Kerrey.

The biggest name already in the race is Atty. Gen. Jon Bruning (R), who was poised to challenge Hagel in the GOP primary over Hagel's outspoken Iraq position. Former congressman and former Omaha Mayor Hal Daub (R) is also running, as is businessman Tony Raimondo (R).

Current Omaha Mayor Mike Fahey (D) may run, as may Scott Kleeb (D), who fared unusually well in his 2006 run for Congress in the overwhelmingly Republican 3rd District.

If Kerrey passes, this seat leans strongly to Republicans. If it's Kerrey vs. Johanns, it will be a clash of the titans. If it's Kerrey against anybody else, this will probably will be another lost GOP seat. Leaning Democratic Takeover.

South Dakota: Sen. Tim Johnson (D-S.D.), who returned to work this month, nine months after a debilitating brain hemorrhage, announced he currently intends to seek a third term in 2008. His plans could certainly change by the end of the year, however.

While Johnson's recovery is impressive and uplifting, his slurred speech on national television and the Senate floor could hurt him. South Dakota Democrats are wary about putting Johnson up for re-election, worrying he may not have the energy to campaign and that voters might doubt his ability to serve them in the Senate.

The key factor that might encourage Johnson to step down is that he has a strong understudy. Rep. Stephanie Herseth Sandlin (D) is ready to step into Johnson's spot, and she would be a very strong candidate. Indeed, the same Republicans who say they could beat Johnson profess that they don't think they could beat Sandlin with any of the current GOP candidates.

State Sen. Joel Dykstra (R) is now the top Republican in the race. Businessman Sam Kephardt (R) is running, and state bureaucrat Dusty Johnson (R) is considering a bid. Sen. John Thune (R) and Gov. Mike Rounds (R) are trying to talk former State's Attorney Jim Seward (R) into running. Rounds, according to a South Dakota source, would rather not run. Leaning Democratic Retention.

House 2008

California-4: The power vacuum in the House GOP showed itself last week in the announcement by Rep. John Doolittle (R-Calif.) that he will seek re-election while under federal investigation in connection with the Jack Abramoff probe.

Republican leaders had wanted Doolittle, whose home was raided by the FBI and whose staff has been subpoenaed by a federal grand jury (apparently connected to his wife's work with Abramoff), to step down even though he has not been indicted. When asked recently on the record about Doolittle, Republican House leaders Roy Blunt (Mo.) and Adam Putnam (Fla.) pointedly refused to endorse him.

This spells trouble for GOP hopes to hold onto this seat in a very Republican district. Doolittle's insistence on running again leaves only two possible outcomes: Doolittle as the nominee or an ugly GOP primary. Both of these situations could tilt the race towards the Democratic candidate.

Retired Air Force officer Charlie Brown (D) held Doolittle under 50% last year and came within three points of unseating the congressman. Brown, who was boosted by MoveOn.org and bankrolled by Democrats nationwide, has recently announced he will run next year. Once again, he will be well funded, and his name recognition will be high.

A squadron of Republicans has lined up to challenge Doolittle or run if he drops out. State Assemblyman Ted Gaines (R), Iraq war veteran Eric Egland (R) and 2006 primary candidate Mike Holmes (R) are all running, and radio host Tom Sullivan (R) might jump in. With that many candidates attracting the anti-Doolittle vote, Doolittle would have a strong chance of winning the nomination. As his legal woes seem to have worsened since 2006 -- and because 2008 may be a worse year for Republicans in California than 2006 was -- this one looks like another Democratic pickup. Leaning Democratic Takeover.