Obama's Tax Deal a Tough Sell for Liberal Democrats

The president's deal with the GOP to extend the Bush tax cuts faces an uncertain future.

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President Obama is learning the hard way that reaching a deal that pleases Republicans and Democrats can be harder than corralling a herd of cats. With liberal Democrats in an open rebellion against their president, and Republicans holding firm on all of their demands, a $900 billion proposal to extend tax cuts and unemployment insurance faces an uncertain future.

[See photos of the Obamas behind the scenes.]

The deal, which was hammered out by White House officials and Democratic and Republican negotiators from Congress, at first seemed like a breakthrough for the beleaguered White House. As announced on December 6, the package gave into many Republican demands, but won some concessions for Democrats, including extending unemployment insurance, cutting payroll taxes, and continuing some stimulus tax credits. But liberal Democrats have blasted provisions in the bill that would extend tax benefits for the wealthiest Americans, and Democrats in the House rejected the current deal in a nonbinding caucus vote on Thursday. "We will work to improve it before having a floor vote," House Speaker Nancy Pelosi said Thursday in a Twitter message. [Read 10 Things You Didn't Know About the Bush Tax Cuts.]

The deal would help Democrats and the Obama administration achieve many of their goals, including an extension of jobless benefits through 2011 for the long-term unemployed, which Republicans had previously blocked because of cost concerns. The deal would also continue several tax incentives from the stimulus bill. Perhaps most significantly, it would cut the payroll tax by 2 percentage points, from 6.2 percent to 4.2 percent, in 2011. Supporters of the deal say that the cut will not only give middle- and lower-income workers extra cash to help make ends meet next year, it will pump more money into the economy and jolt the faltering recovery. Aside from the payroll tax, the deal would also extend the $1,000 child tax credit, the expanded earned-income tax credit, and a college tuition tax credit, all of which were included in the stimulus bill but were set to expire. The deal includes some help for businesses, such as a tax incentive for investment, as well as a tax break for research and development. It also includes some energy tax credits, as well as a temporary fix to the alternative minimum tax, which Congress normally passes each year.

In exchange, Republicans will get much of what they wanted out of the tax cuts, but only until 2012. The deal would extend all of the Bush-era income-tax cuts for another two years. Those cuts were to expire at the end of this year, and Democratic efforts to allow the tax cuts for top earners to expire ran aground over Republican opposition to anything except a full extension. In addition, the deal would set the estate tax on inherited wealth at 35 percent, and would include an exemption for all estates worth up to $5 million for individuals and up to $10 million for married couples. That is lower than the Democrats' preferred rate of 45 percent, and much lower than the 55 percent rate that the estate tax would revert back to next year if the law isn't changed. The estate-tax adjustment would also last only for two years.

For many Democrats, the bill is too bitter a pill to swallow. "Borrowing nearly a trillion dollars to finance tax cuts that disproportionately favor millionaires and billionaires threatens our ability to create jobs, grow the middle class, and protect seniors," said Democrat Peter Welch, Vermont's lone representative. Fifty-three other House Democrats signed a letter by Welch opposing the deal. Many Democrats don't want to back down from their position that only the tax cuts for annual income of under $250,000 should be extended, and some liberal lawmakers are also worried that the bill's steep price tag could endanger Social Security or Medicare. [See who donates to Welch's campaigns.]

To try to shore up support, the White House dispatched Vice President Joe Biden to Congress twice to lobby for the measure. In a Tuesday meeting with senators and a Wednesday meeting with representatives, the vice president answered questions about the deal, but showed little wiggle-room for further compromise. With House members apparently unwilling to consider the deal as it now is written, lawmakers are struggling to figure out how to get the bill through both chambers of Congress. Some possibilities floated by senators and representatives include changing the length of the tax-cut or unemployment-insurance extensions or splitting the tax cuts so only those for high-income earners would expire in 2012.

Updated on 12/13/10 and Corrected on 12/14/10. The original story was published under the wrong date.