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WASHINGTON — Lawmakers clear out this week for summer recess but not without having drawn battle lines for what could be the biggest issue of the fall: what to do with the Bush tax cuts.
The most sweeping package of cuts in a generation is set to expire Dec. 31, but the economy has given Republicans a powerful argument to keep them going.
Democrats contend that they should, but not for the wealthy — couples with income above $250,000 and others with income over $200,000.
Both sides see political advantages heading into the midterm elections, and both face risks.
If they insist on only a temporary extension, Democrats could be setting up a major tax increase on the middle class in a few years.
Republicans have already been accused of hypocrisy. For the past year they have used the growing national debt as a political sledgehammer, blasting the stimulus and bailouts. But a big chunk of the debt is attributable to the tax cuts, and continuing them indefinitely could only add to the problem.
"If there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing," David Stockman, President Ronald Reagan's budget director, wrote in scathing column in the New York Times.
Through it all is a reminder of how polarizing George W. Bush remains a year and half after leaving the White House. The cuts, enacted in 2001 and 2003, have been heralded as Bush's greatest legacy.
Keeping them going for 10 years would cost $3.7 trillion, according to Treasury Department estimates. But with Democrats in control and the national debt reaching alarming levels, that option is a nonstarter.
The Democrats' plan to exclude the rich would trim that by about $680 billion. In other terms, that's how much more tax revenue the government would collect over a decade. The deficit would still grow, just not as much.
The plan being pushed by President Barack Obama would return two top tax rates to their precut levels: the 35 percent rate would go to 39.6 percent and the 33 percent rate would go to 36 percent. Tax rates would also rise on capital gains and dividends.
"It'll have the devastating impact of raising taxes in the middle of a recession," Senate Republican Leader Mitch McConnell of Kentucky said at a news conference Wednesday.
A showdown could come earlier than expected. Majority Leader Harry Reid indicated Wednesday that legislation could be taken up in September rather than after the November election.
Some Democrats are siding with the Republican argument that this is not the time to be eliminating any tax cuts. "It would absolutely impair recovery," not to fully extend the cuts, said Sen. Ben Nelson of Nebraska.
Although he originally voted against the Bush tax cuts, Sen. Joseph Lieberman, I-Conn., now is in favor of a temporary extension. Raising taxes, even on high-income earners, could have a negative effect on the economy, he said. "They're going to spend less," Lieberman said of the wealthy.
But a Congressional Budget Office study concluded that extending the higher-income cuts would be the least effective economic stimulus option because those households would probably save a larger fraction of their increase in after-tax income.
There is also a dispute about the effect on small-business owners. Republicans note that small-business owners file as individuals and the higher rate could lead to job cuts.
"This claim is misleading," William Gale, an expert at the centrist-liberal Brookings Institution, wrote Sunday in the Washington Post. "Less than 2 percent of tax returns reporting small-business income are filed by taxpayers in the top two income brackets."
Florida lawmakers reflect the partisan division. Democratic Sen. Bill Nelson favors extending the cuts for the middle class. He said the wealthy would simply return to where they were. "It's the same tax rate that was there in the 1990s when the economy was doing exceptionally well."
"The middle class was squeezed by the Bush economic policies, and prior tax cuts for the wealthy was one of the main drivers of the deficit and debt," said U.S. Rep. Kathy Castor, D-Tampa.
Republican Sen. George LeMieux , however, said it would be a "foolish mistake to raise taxes in the middle of a recession." He called it a "false logic" that taxes raise revenue.
The debate puts LeMieux in an interesting spot, and illustrates a larger issue facing his party. Since becoming the temporary senator (Sen. Mel Martinez retired 16 months before his term expired), LeMieux has focused on the national debt, even putting a debt clock on his website.
He recently voted against extending unemployment benefits, contending Congress had to take a stand on spending.
The bleak fiscal outlook LeMieux rails about is made up of various parts, including the recession, the federal stimulus, bailouts and other government spending.
But of the $9.2 trillion in national debt, which does not include trust fund debt, $2.6 trillion is attributable to the Bush tax cuts, according to the Center on Budget and Policy Priorities. One of the reasons the tax cuts had a sunset to begin with was fear over deficits.
LeMieux would not acknowledge the package has added to the debt.
"It's a hard question to answer," he said, "because you don't know how people in businesses would have done if the tax cuts were not in place."
He added, "Washington doesn't have a tax problem; Washington has a spending problem."
Alex Leary can be reached at leary@sptimes.com. Follow him on Twitter @learyspt.
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