CQ TODAY ONLINE NEWS – TAXES
Updated Nov. 7, 2012 – 10:15 a.m.
Election Sets Stage for Major Battle in Congress Over Taxes
By Sam Goldfarb, CQ Staff
With his second term in hand, President Obama will almost immediately confront one of the stiffest fiscal challenges of his, or indeed almost any, presidency.
Since World War II, Republican and Democratic administrations have raised taxes with the support of Democrats in Congress, but no Democrat in the White House has managed to substantially increase the overall tax burden when Republicans have held majorities either in the House or the Senate.
In the coming weeks, Obama will try to make history by doing exactly that.
In his appeal to voters, Obama largely avoided laying out a detailed second-term agenda, but he made clear that he wanted to raise taxes on high-income earners. He explicitly made the case that tax rates set by President George W. Bush and Republicans in the early 2000s should be allowed to expire at the end of the year on incomes above $200,000 for individuals and $250,000 for couples, rising to the levels established by President Bill Clinton and Democrats a decade earlier.
Democratic leaders believe the election was a vindication of that position. The Obama campaign “couldn’t have been more clear” about the White House position on taxes, Rep.
Senate Minority Leader
He suggested in a statement that he foresees a two-step process that would extend current tax rates sometime into next year while Republicans and Democrats work out an agreement to overhaul the tax code.
“That begins by proposing a way for both parties to work together in avoiding the ‘fiscal cliff’ without harming a weak and fragile economy, and, when that is behind us, work with us to reform the tax code and our broken entitlement system,” McConnell said.
Obama did compromise and extend the Bush-era tax cuts once before in 2010 (PL 111-312), but that was after a sweeping victory for Republicans in the 2010 midterm elections. This year, White House officials have repeatedly said that Obama, if re-elected, would veto any legislation that maintains the top two income tax rates at 33 percent and 35 percent.
At the same time, Speaker
Republicans traditionally have been wary of making the tax code more progressive. Doing so, they argue, would hurt small businesses and generally put a damper on the American dream and the entrepreneurial spirit. Today’s crop of Republican lawmakers are only more conservative and less open to compromise than their predecessors were. And their interest in bending on one of their core principles is not likely to increase much in the wake of Tuesday’s results, which were favorable to Obama and Senate Democrats but not devastating for Republicans, who maintained a solid House majority.
The stakes of the upcoming standoff and the economic consequences of the so-called “fiscal cliff” are widely known. Steep across-the-board spending cuts coupled with the expiration of tax cuts set to lapse at the end of the year would depress household incomes and possibly lead to another recession by the middle of 2013.
No less than Republicans, Obama has strong beliefs about the purpose of government that have propelled him to this moment. To a greater degree than some of the more politically cautious members of his party might like, he appears intent on promoting the social safety net not just by preserving or expanding it but by financing it with more taxes while drawing limits on future growth in ways that limit the need for more taxes in the future.
Election Sets Stage for Major Battle in Congress Over Taxes
“In the coming weeks and months, I am looking forward to reaching out and working with leaders of both parties to meet the challenges we can only solve together,” Obama said in his acceptance speech. He listed “reducing our deficit” and “reforming our tax code” as his highest priorities, along with updating immigration laws and promoting energy independence.
In recent weeks, Obama and other Democratic leaders have suggested that their opening bid to Republicans in a lame-duck session of Congress will include a heavy dose of spending cuts but no compromise with respect to taxes. Any initial offer will almost certainly be rejected by Republicans, and most observers expect a face-off between the two parties to last at least until Christmas.
Adding pressure on lawmakers is that some forms of temporary tax relief have already expired and could be difficult to renew retroactively after Jan. 1. Perhaps most significantly, the alternative minimum tax has not been indexed for inflation for 2012, threatening many middle-income earners with a large tax bill to pay early next year.
But issues such as the AMT, the payroll tax and capital gains rates won’t be considered in isolation, at least at first. In the coming weeks, lawmakers are certain to again broach the subject of a “grand bargain” deficit reduction agreement involving significant changes to Medicare and Medicaid, along with a structural overhaul of the tax system.
To date, Republicans have been more open to raising tax revenue by curtailing tax breaks than by lifting rates. A tax overhaul that raises new revenue, restructures some tax breaks and reduces the corporate tax rate could find some bipartisan support, especially in the Senate. But the presidential campaign, in which Obama strongly criticized Mitt Romney for being open to scaling back certain tax breaks for middle-income earners, may have complicated such efforts. Those benefits include the deduction for mortgage interest payments and the exclusion from taxes of employer-provided health care benefits.
First posted Nov. 7, 2012 10:15 a.m.