As recently as a few weeks ago, Democrats in Congress were sure that they'd be able to repeal the Bush-era tax cuts for wealthiest Americans—and some thought it might be a winning issue for the midterm elections.
But as lawmakers run though the final days before they return to the campaign trail, the tax-cut issue has been put on hold until after the November elections. With Democrats divided on strategy and Republicans united in opposition to anything short of a full extension, Democratic leaders concluded that there was little hope of enacting President Obama's proposal to extend the tax cuts for everyone except individuals earning more than $200,000 per year or joint filers earning more than $250,000.
"That's just the reality," says Illinois Sen. Dick Durbin, the Senate Democratic whip, adding that he doesn't expect the Senate to pass much before the election aside from a continuing resolution to keep the federal government funded. Many Democratic members say they don't want to vote on the issue unless it is sure to pass.
Senate Majority Leader Harry Reid of Nevada last week promised that the Senate will vote on taxes during a lame-duck session following the November elections. Although a vote in the House is still possible before members leave to campaign, Maryland Rep. Steny Hoyer, the House majority leader, said on Fox News Sunday that he "doubted" it would happen.
Without congressional action, all of the income tax cuts expire at year-end. This is not a stated goal of either party, but it is a possibility if legislative gridlock continues past November. For a family earning from $50,000 to $75,000 a year, for instance, that would mean an average tax increase of $1,180, according to the nonpartisan Tax Policy Center in Washington, D.C.
Many Democratic lawmakers fear that, heading into a heated midterm election, Democrats could get tagged as wasteful tax-and-spend liberals if they allow any taxes to increase, including those for the highest earners. "Tax policy is not one of our strongest political issues," says Sen. Chris Dodd, a Connecticut Democrat who retires next year. Thirty-eight moderate Democrats, the so-called Blue Dogs, signed a letter to House Speaker Nancy Pelosi, a California Democrat, urging her to retain all of the tax cuts. "While those in the highest income brackets comprise only 2 to 3 percent of American taxpayers, economists estimate that they are responsible for 25 percent of national consumer spending. As 70 percent of our economy is driven by consumer spending, this is not the time to jeopardize further growth," the letter states. While it is correct that the wealthy spend a lot overall, economists say that lower-income households tend to spend all or most of any tax savings, providing an immediate boost to the economy, while the wealthy are more inclined to save.
Despite an early indication from Ohio Rep. John Boehner, the House GOP leader, that a compromise was possible, House and Senate Republicans have stuck to their guns on an across-the-board extension. Senate Majority Leader Harry Reid of Nevada is promising that Democrats will push for the tax extension for middle-class Americans after the elections. "We will come back in November and stay in session as long as it takes to get this done," said his spokesman, Jim Manley, in a statement.
The extension of income-tax cuts is not the only tax issue on the congressional plate. Also unresolved are capital gains taxes, the estate tax (due to return next year after being zeroed out for 2010), and other elements in the 2001 and 2003 tax legislation. Democrats also hope to take up a package of miscellaneous tax cuts, which expired last year, as well as the tax incentives included in the stimulus bill, which are set to expire in December.
The tax cuts are bound to become a hot campaign issue, with Republicans already accusing Democrats of allowing tax rates to increase. "To be clear, a vote to adjourn Congress at the end of this week will be a vote to raise taxes on the American people and kill American jobs," states a news release from the office of House Republican Leader John Boehner of Ohio.
Over the weekend, Hoyer tried to push back against this message, calling the possible 2011 tax hikes a "Republican increase in middle-income taxes" since the expiration of the tax cuts was part of the original legislation passed in 2001 and 2003 by a Republican majority in Congress. The legislation was written that way in order to appear to hold down the long-term costs of the tax cuts in the so-called "out years" of budget forecasts.
Hoyer also said that Democrats can "guarantee" passage of a middle-class tax extension during the lame duck session.