Tax Deal Within Reach

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The Wall Street Journal
By: John D. McKinnon & Janet Hook
December 6, 2010

Cuts Could Be Temporarily Extended in Exchange for Unemployment Benefits.

WASHINGTON--White House officials and congressional Republicans are closing in on a deal that would extend current income-tax rates for all Americans as well as a benefits program for the long-term unemployed, staving off tax increases for middle-class and wealthy taxpayers alike that are set to take effect after this year.

Leaders of both parties appeared optimistic over the weekend about reaching an agreement on a broad tax package by midweek, following the failure of two Democratic-sponsored tax measures in a rare Saturday session of the Senate. Those measures would have extended current tax rates for all except high earners. Failure of the proposals paved the way for the two parties to continue negotiating toward a package that could gain enough votes to pass.

The economic and political stakes are considerable, because without a compromise, the tax rates signed into law by former President George W. Bush will go up for virtually every U.S. taxpayer on Jan. 1. If a compromise passes before then, it would mark a rare bipartisan accomplishment for President Barack Obama and the congressional GOP leadership, who have found little common ground over the past two years. But it would also come at a cost for Mr. Obama, who risks alienating members of his own party who have resisted extending the cuts and liberal supporters as he begins his likely 2012 re-election run.

Even now, House Democrats, unhappy with concessions the White House seems prepared to make, present a potential hurdle to the gathering bipartisan consensus in the Senate.

To avert a revolt, Vice President Joe Biden met with House Speaker Nancy Pelosi, Democratic Leader Steny Hoyer and Rep. Chris Van Hollen (D., Md.), a negotiator for the party in bipartisan tax talks, for about two hours at the vice president's residence Saturday night.

According to an aide briefed on the meeting with Mr. Biden, the vice president and other administration officials laid out options for compromise on the tax bill, but no agreement was sought or achieved.

Separately, Mr. Obama met with Ms. Pelosi and Senate Majority Leader Harry Reid on Saturday after the Senate votes. The president let the leaders know he was open to a compromise on taxes if it included extensions of jobless benefits and temporary breaks benefiting middle-class families. On Sunday, Mr. Obama again spoke to Mr. Reid by telephone to discuss the tax deal, a Reid aide said.

Republicans on Sunday seemed open to one of Mr. Obama's priorities--extending a program of enhanced benefits for the long-term unemployed, which has lapsed. "I think we will extend unemployment compensation," Senate Republican Leader Mitch McConnell of Kentucky said Sunday on NBC's "Meet the Press." He said discussions were under way on whether to pay for the extension or to add the cost to the deficit.

The tax package being discussed, including a likely temporary extension of a number of tax breaks for businesses, could add more than $500 billion to the deficit, depending on details. But supporters in both parties believe much of that money would be poured back into the economy at a time when recovery remains tentative.

Still, many elements of a potential deal were unsettled, including issues such as the estate tax, which has been eliminated entirely for 2010. Most Republicans would support setting the top rate at 35% for estates over $5 million. Most Democrats want to set the rate at 45% for estates over $3.5 million. Without action, the top rate next year goes to 55% for estates over $1 million.

Also unresolved is whether the package will include provisions that Democrats want that would benefit the middle class and working poor, such as expanded tax breaks for students and children that were part of the 2009 stimulus legislation.

The Obama White House also is making the case for an extension of its Making Work Pay tax credit, which gives as much as $400 to lower- and middle-income people who have enough wages to qualify. But even many Democrats have shown little interest in extending the credit, and the White House might have to be willing to make concessions in order to preserve it.

A slowdown in the negotiations could have important consequences. The threat of rising rates could pose a danger to retail sales and the U.S. economy during the holiday shopping season, according to some economists and retailers.

A delay could also endanger other goals for the end-of-year legislative session if the Senate doesn't have time to debate them. These include Mr. Obama's hopes for the Senate to ratify a nuclear-weapons treaty with Russia.

In television interviews Sunday, Senate leaders of both parties said that the most likely compromise would be a temporary extension of tax cuts for all income levels in exchange for an extension of unemployment benefits that expired last week.

The two proposals defeated in the Senate over the weekend would have extended Bush-era tax rates only for earners under certain thresholds--$250,000 per family under one proposal, $1 million under another. Under each plan, however, top earners would have faced higher rates only on the income they receive above those thresholds.

Outstanding questions are the length of an extension of the tax cuts and whether the cost of extending the unemployment benefits is offset by spending cuts elsewhere--elements that will affect the compromise's price tag and the amount of resistance it will meet among lawmakers.

A senior Republican aide close to the negotiations said that a one-year extension of the tax cuts is unlikely. Aides from both parties said that a two-year extension is considered the most likely outcome, but that this would mean the issue would reemerge in the middle of a presidential election year.

A three-year extension is also possible, some aides say, but that would boost the projected revenue loss and likely further anger liberals, who are frustrated that it now seems inevitable that the Bush-era tax cuts will remain in effect throughout the entirety of Mr. Obama's first term as president.

On unemployment insurance, Republicans have long insisted that the only way to pay for an extension is by cutting expenses elsewhere. A GOP aide said there may be some "buckle" on that point in the interest of getting the deal done.

The White House has been negotiating mostly with Republicans in the Senate, who have the most clout to block any compromise legislation. But some Democrats say the White House shouldn't take for granted that the House will go along with a deal struck in the Senate. "There is a ruling assumption that whatever deal the White House strikes with the Senate is something that House Democrats are just going to rubber stamp," said a senior Democratic aide. "That is incorrect."

Another senior Democratic aide said that Mr. Obama might have to move the final deal through the House without winning a majority of Democrats in the chamber. That is what he had to do on legislation to fund the Iraq and Afghanistan wars, which was vehemently opposed by his party's liberals.

Write to John D. McKinnon at

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This page contains a single entry by CFED published on December 6, 2010 4:10 PM.

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