Battle over tax cuts shapes up in D.C.

WASHINGTON — Republican leaders in Congress on Monday backed away from a possible compromise with the Obama administration over expiring Bush-era tax cuts, committing both sides to an election year battle with significant stakes for the economy.

Senate Minority Leader Mitch McConnell of Kentucky and the party's conservative members distanced themselves from a statement Sunday by House Republican leader John Boehner that he might agree to let tax relief for wealthy Americans expire if that was politically necessary to save middle class tax cuts.

By the end of the day Monday, Boehner, of Ohio, issued a statement dropping his earlier suggestion and saying he too would fight higher taxes affecting any bracket.

President Barack Obama is pushing for a permanent middle-class tax cut, but only if cuts for top earners are eliminated. Republicans, in turn, want permanent tax relief for all income levels.

The divide is rapidly becoming the marquee issue of the midterm election.

McConnell proposed legislation Monday to continue all of the tax cuts indefinitely, testing the willingness of Democrats to allow a tax increase on the wealthiest Americans in a weak economy and making clear that a partisan fight will extend deep into the campaign season if not beyond.

In part, McConnell's proposal illustrated the greater leverage that Republicans enjoy in the Senate, where they control 41 seats — enough to filibuster and block any bill.

McConnell's position also served as a political counterweight to Boehner's statement Sunday, which suggested that some Republicans wanted to avoid a brawl in which they would be cast as blocking tax relief for the middle class to ensure that tax cuts continued for the wealthy. Senate Republicans, by contrast, seem to relish the fight.

Democrats dismissed McConnell's plan, noting that he had not offered any way to make up the $700 billion in lost revenue over 10 years that extending the tax breaks at the highest income levels would cost the government.

And Obama, at a town hall meeting in Fairfax, Va., said that rich households would still benefit from his plan, with lower taxes on their first $250,000 of income, but that Republicans stood in the way.

"We could get that done this week," he said. "But we're still in this wrestling match with John Boehner and Mitch McConnell."

Obama's plan appears increasingly likely to founder before Election Day.

The cuts, which were passed in the first term of the Bush presidency, expire at the end of the year. Economists generally agree that the United States faces a strong possibility of a renewed recession should lawmakers do nothing and let all of the cuts die.

Renewing the tax cuts for everyone would cost the government almost $4 trillion over the next decade, according to congressional analysts, who also assume that Congress won't allow the alternative minimum tax to hit millions of middle class taxpayers with eye-popping tax hikes.

With polls showing broad public anger over spiraling federal deficits, Obama wants to exclude individuals earning over $200,000 and couples making over $250,000 — who account for $700 billion of that $4 trillion total. They represent about 3 percent of taxpayers, according to the Tax Policy Center, a Washington think tank.

At issue is a year-end deadline to renew a variety of tax cuts enacted in 2001 — when the federal government was running a surplus. They include lower rates, a $1,000 per-child tax credit, relief for married couples, and lower taxes on investments and large estates.

Republicans, particularly in the Senate, are gambling that Democrats will be unable to muster enough votes to pass a package that includes only the middle-class cut — and will have to offer relief to all tax brackets to get any legislation through.

In a forceful floor speech, McConnell accused the White House and Democrats in Congress of using their one-party control of Washington over the last two years to run up spending.

"Democrats spent the last two years putting government in charge of health care, the financial sector, car companies, insurance companies, student loans — you name it," McConnell said as the Senate resumed work after a five-week recess. "Now they want the tax hike to pay for it all." McConnell moved quickly to exploit the discord among Democrats who disagree internally about how to handle the expiring tax cuts given the sluggish economy. He noted that five members of the Senate Democratic caucus have said they favor continuing all of the tax cuts, at least temporarily, putting them at odds with Obama.

That was bolstered Monday when Sen. Joseph Lieberman, an independent from Connecticut, said he would push to extend the Bush-era cuts for all taxpayers for at least one more year.

Other moderate Democrats in both the House and Senate are nervous about leaving themselves open to the charge that they raised taxes during a recession. Those Democrats may be open to a short-term approach that would extend the cuts for everyone for a limited period time, after which some or all would expire.

Obama administration officials insist that letting the tax cut expire for wealthy earners won't hurt job creation. In fact, they said, it would be good for jobs and economy in the medium-term and long-term because it will bring down the deficit.

That "far outweighs any other effect the expiration of tax cuts (for the wealthy) would have," said Jason Furman, deputy director of the National Economic Council.

Some analysts, however, say the statistics aren't clear on how much the tax increase would hurt small employers. Proponents of extending the tax cuts for the wealthy worry about the psychological effect in the near term, and the potential for damage later if Congress allows taxes on such investment incentives as dividends to rise to as high as nearly 40 percent from the current 15 percent. Obama has proposed that rate rise to 20 percent.

Information from the Tribune Washington Bureau, New York Times and Associated Press was used in this report.

1.3T

Yes, that's a T, as in trillion and it refers to the Treasury Department's projection of the U.S. deficit. The federal government is on track to record the second-highest deficit of all time with one month left in the budget year. The deficit totaled $1.26 trillion through August, the Treasury Department said Monday. That puts it on pace to total $1.3 trillion when the budget year ends Sept. 30, slightly below last year's record $1.4 trillion. Republicans say the deficits illustrate the growth of spending under Democrats. The Obama administration contends the record deficits were necessary to combat the most serious economic crisis since the Great Depression. About one-third of the higher deficits are a result of a drop in government tax revenues. The other two-thirds of the deficit increases reflect higher government spending to stabilize the financial system and boost the economy.

Battle over tax cuts shapes up in D.C. 09/13/10 [Last modified: Tuesday, September 14, 2010 12:23am]

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