Fight looms over continuing tax cuts

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WASHINGTON -- When the turkey-stuffed lame-duck Congress returns from its holiday this week, a particularly urgent leftover awaits -- the George W. Bush administration's expiring tax cuts.

President Barack Obama will host Republican and Democratic congressional leaders at the White House on Tuesday to discuss options for how to extend the tax cuts, passed in 2001 and 2003 and due to expire at year's end.

Both parties agree that it is prudent to extend the current rates for individual taxpayers making less than $200,000 and joint filers making less than $250,000. But there are varying opinions on how to deal with earners in the top two tax brackets, who would see their rates rise from 33 percent to 36 percent, and 35 percent to 39.6 percent on Jan. 1. The higher rates would apply only after the first $200,000 or $250,000 of income.

Republican leaders, arguing that any tax increase would further hamper the economy, are pushing for a full extension of all of the tax cuts. Top Democrats would like to see the top rates return to Clinton administration levels, pointing out that the wealthy are less likely to spend their increased income and that extending all the current rates would cost $700 billion over 10 years, the bulk of which comes from the top two brackets -- comprising less than 3 percent of all filers.

Potential compromises have been floated as well.

One would be to extend the current rates for a year or two. This scenario would allow Democrats, who control both houses for another couple weeks, to avoid criticism that they are blunting the recovery without caving completely. That kind of course would earn the support of Rep. Jason Altmire, D-McCandless, who sides with Republicans in calling for a full extension.

"I want the top bracket extended at a minimum temporarily, and I don't know if it's a possible outcome to extend everything permanently," Mr. Altmire said. "I do think we need to give certainty to folks in [the] top bracket that their taxes won't go up."

The structure of a temporary extension could prove controversial, though. Democrats would like to separate -- or, in Washington-speak "decouple" -- the middle class tax cuts from the top bracket, forcing a politically unsavory vote for only tax cuts for the wealthy. House Democrats laid the groundwork for this before leaving for Thanksgiving by announcing a simple vote on extending the tax cuts for earners below $250,000.

"I don't know why Republicans wouldn't agree to that," said Sen. Bob Casey, D-Pa. "I know people will analyze it as a through the lens of politics or political strategy, but I also think it just makes sense functionally to be able to vote. When we have a consensus on something, let's vote on it and get it done, then we can have a vote on upper income tax breaks and the inheritance tax."

But Republicans, in their public statements, have held fast to demanding a vote on all the tax cuts.

After House Democrats announced their plan to vote only on the middle-class cuts, Minority Leader John Boehner -- who will become speaker of the House in January -- issued a scathing statement.

"The last thing our economy needs right now is a massive tax hike on families and small businesses -- and that's what the House Democratic leaders' plan would mean," the Ohio Republican said. "We will oppose their job-killing tax hike and do everything we can to stop it."

Foes of raising the rates on top earners often point out its effect on the business community, as small businesses filing as individuals with profits of more than $250,000 would be hit by a tax hike if the top-bracket rates are not extended. The Joint Committee on Taxation, in a staff analysis published in August, estimated that the tax increases would hit about 750,000 individuals with net business income.

"I think that businesses who file in that top bracket have been reluctant to do new hiring and expansions of their businesses and taking risks because they don't know what the playing field going to look like," Mr. Altmire said.

Another possible compromise has been pitched by Sen. Charles Schumer, D-N.Y., the third-ranking Democrat in the Senate. His plan would extend the cuts for all earners except those making more than $1 million per year.

This would produce the vast majority of the revenue and end any debate over whether the higher rates would hit anyone's definition of "middle class." But it would constitute a big change to the tax structure by adding a new bracket, and it would not satiate conservatives who argue that any tax increase is a bad idea in an uneven economy.

The tax cut fight is one of the final clashes of the polarizing 111th Congress, and will help set the tone for the next one. Democrats have some time left with commanding majorities in the House and Senate to push their agenda, but a tax hike on top earners likely will face the same roadblocks in the Senate that felled major Democratic initiatives of the past year, necessitating some kind of compromise to pull in conservative Democrats and a centrist Republican or two to break a GOP filibuster.

The upper chamber will shift by six seats in January, but the House will undergo a sea change with a new Republican majority. Speaker Nancy Pelosi will remain as Democratic leader, fighting to keep the party's financial, health care and other reforms in place.

And in her final weeks as speaker, she will look to make a stand on taxes.

"She wants to show that she's relevant in the discussion and the debate, and the only way you do that from her perspective is by pushing through the cuts without including that top bracket," said Mr. Altmire, who did not support Ms. Pelosi's minority leader bid.

"That's my concern, but I don't think there are the votes in the Senate or maybe in the House to get that done."

Daniel Malloy: or 1-202-445-9980. Follow him on Twitter at PG_in_DC.


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