A colossal battle is shaping up in Congress over what to do about the Bush-era tax cuts that are set to expire at the end of this year. It's an issue that entails sufficient economic and political consequences that could shape the fall elections and fiscal policy for years to come.
The expiring tax breaks received little public attention this year as Congress tussled with heavyweight issues like healthcare reform and financial regulation. But the fate of the tax cuts will be a major focus of debate in September when lawmakers return to Washington from their summer recess and the midterm campaign gets rolling.
"It has enormous ramifications for the fall and clearly will be one of the dominant issues," Sen. Ron Wyden, D-OR, told The New York Times. "This is code for the role of the federal government, the debate over the size of government and the priorities of the nation."
Democratic party leaders, including President Barack Obama, have said they want to extend the tax cuts for individuals earning less than $200,000 and families earning less than $250,000, while letting the cuts expire as scheduled for those exceeding those thresholds.
Most Republicans, and some Democrats, want to extend the tax cuts for everyone, characterizing any tax increases on anyone in this fragile economy as unwise. If no action is taken, taxes on income, dividends, capital gains and estates will all rise.
Both parties have been meeting to decide on strategy, but most analysts are saying Democrats will try to pass a bill before the election and not wait for a lame-duck session.
"You can't play chicken with this much of the tax system," a senior Republican Senate aide, who spoke on the condition of anonymity, told The Times.
Democrats are expected to introduce a bill in the Senate soon to test the waters.
"The Senate will move first, and it will be a test to see whether Republicans filibuster" to block the bill in a bid to also win tax cuts for higher earners, Rep. Chris Van Hollen D-MD, the head of the House Democrats' re-election effort told The Wall Street Journal.
"If you can't get it out of the Senate, then you take it to the election. You say to the American people that Republicans want to continue to hold middle-class tax relief hostage for an extension of tax breaks for [the well-to-do]. That will be the debate."
With the outcome in the Senate uncertain, the GOP will likely counter that Democrats have abandoned most Americans by allowing all the Bush tax cuts to lapse. The cuts, passed in 2001 and 2003, will expire on Jan. 1, 2011, unless Congress passes legislation to extend them.
Even if the tax-cut bill manages to pass the Senate, it could expose Democrats to the charge that they are raising taxes on higher earners in the midst of a weak economy, and hurting small-business owners.
"Washington Democrats are poised to allow the largest tax increase in American history to take effect next year," Rep. Mike Pence, R-IN, said Saturday in the GOP's weekly address.
In appearances on two television programs Sunday, Treasury Secretary Timothy Geithner pressed the administration's case, saying that letting tax cuts expire is "the responsible thing to do," and those who make $250,000 a year or more make up only 2% to 3% of all Americans.
He dismissed concerns that the move could push a teetering economy back into recession and argued that it would demonstrate America's commitment to addressing its trillion-dollar budget deficit.
"While we are supporting measures like small-business lending and tax cuts to spark growth, it is also important to show the world that we are following through on our commitment to long-term fiscal discipline," Gene Sperling, a counselor to Geithner told The Times.
Some legislators are warning that extending the tax cuts would add more than $2 trillion to the federal budget deficits at a time when the national debt is becoming an economic issue with American voters.
In data released last week, the White House said the budget deficit will be $1.42 trillion this year and the federal government is now borrowing 41 cents of every dollar it spends.
But Republicans reject the idea that extending the cuts for all Americans is fiscally irresponsible.
"We are eager to oblige our friends on the other side of the aisle who want to have this debate," Sen. Orrin Hatch, R-UT, said in a statement Sunday. "This is about stopping a job-killing tax hike on small businesses during tough economic times."
News & Related Story Links:
- New York Times:
Next Big Battle in Washington: Bush's Tax Cuts
- Wall Street Journal:
Bush-Era Tax Cuts a Likely Campaign Theme
- New York Times:
Geithner Dismisses Concerns on Letting Tax Cuts Expire