Beat butter and cream cheese in a medium mixing bowl with an electric mixer on medium speed for 30 seconds. Add powdered sugar and baking powder; beat until combined. Beat in egg, lime juice and vanilla. Beat in as much of the flour and lime peel as you can with the mixer. Stir in remaining flour with a wooden spoon.
Bake in a 375 degree F oven for 8 to 9 minutes or until edges are set. Transfer cookies to wire racks to cool. Glaze cookies with the tinted Powdered Sugar Icing. Sprinkle yellow-glazed cookies with orange decorating sugar and green-glazed cookies with green decorating sugar. Makes about 42 cutouts.
Powdered Sugar Icing
In a medium bowl stir together powdered sugar and 2 tablespoons milk. Stir in enough additional milk, 1 teaspoon at a time, to reach drizzling consistency. Tint half of the icing with yellow food coloring and the remaining icing with green food coloring.