Obama Tax Credit Looks Endangered

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The Wall Street Journal
By: John D. McKinnon
September 22, 2010

President Barack Obama's signature tax policy, known as the Making Work Pay credit, might not continue past this year, just like the Bush-era tax cuts.

Senate Democrats struggled Tuesday to develop a plan to extend the Bush-era breaks for middle-class people, and it is doubtful the Making Work Pay credit would be included, according to several people familiar with the situation.

The tax break, an Obama campaign pledge first adopted as part of the 2009 stimulus legislation, has provided as much as $400 a year for working Americans who earn below $75,000, and $800 for couples earning below $150,000.

But it has made little impression on the public, lawmakers of both parties say. In part, that's because the break came in the form of small adjustments to paycheck withholdings, rather than as a lump sum. Economists believed that would encourage taxpayers to spend the money, rather than save it.

Now, as Democratic lawmakers look for ways to trim their tax package and differentiate it from the more-costly Republican version, they are weighing whether to exclude a long-term extension of the Making Work Pay credit, as well as a set of breaks for college students in the 2009 stimulus bill. The Making Work Pay credit has a 10-year price tag of about $600 billion, making it one of the more expensive items in the mix.

Some people familiar with the situation say Senate Finance Committee Chairman Max Baucus (D., Mont.) prefers to leave those provisions out of the tax-cut extension legislation he hopes to roll out this week. That could help prevent the bill from becoming a vehicle for other proposals that would add to its size and cost.

A senior Democratic aide said only that the 2009 Obama tax breaks "are something the chairman is looking at."

Democrats foreshadowed the likely end of Making Work Pay earlier this year when they adopted a budget rule that requires them to find offsetting spending cuts or tax increases to cover the cost of extending the Obama credit beyond this year.

An administration official noted Tuesday that the White House proposed extending the Making Work Pay credit in its 2011 budget. Some liberal advocates have raised concerns about ending the Making Work Pay credit.

"If we're interested in reviving the economy, we should try to avoid taking money in the next year or so out of the hands of people who are likely to spend rather than save a large share of it," wrote Chuck Marr of the liberal Center on Budget and Policy Priorities on his blog last week.

Mr. Baucus's tax bill is expected to propose that the expiring Bush-era tax rates for families making less than $250,000 be made permanent. It is also expected to provide only two more years of relief for middle-class families from the alternative minimum tax. It would reimpose the estate tax, which lapsed this year, at 2009 levels, including a 45% rate.

Senate GOP Leader Mitch McConnell of Kentucky on Tuesday said it was "remarkable" that Democrats "have doubled down on their plans in the teeth of public outrage." He said recent poll results suggested most Americans favor extending Bush-era breaks for all, including higher earners.

On Tuesday, Democrats appeared to be making only slow progress in their efforts to resolve a range of lingering internal differences over the tax-cut extensions, and the possibility that Congress won't vote on a plan before the November elections is rising.

"In my opinion, I don't know who takes a tax vote, in their right mind, just before an election," Sen. Dianne Feinstein (D., Calif.) complained. "But that's just me." Ms. Feinstein's California colleague, Democrat Sen. Barbara Boxer, is in a difficult re-election fight where taxes are a hot topic; voting on a middle-class extension that allows rates to rise for higher earners could worsen her problems.

As a way to dramatize their differences with Republicans, Senate Democrats also have been weighing a vote on a proposal to offer a payroll-tax holiday to multinationals that move jobs to the U.S. from overseas. The proposal was likely to include new taxes on many U.S. multinationals that have overseas operations, making it difficult for Republicans and some centrist Democrats to support.

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