President Barack Obama on Monday struck a deal with Republicans to extend the Bush-era tax cuts and federal unemployment insurance as well as a host of other tax breaks, but now he faces an uphill battle to convince reluctant members of his own party to go along.
Ignoring Democratic opposition, President Obama agreed to the compromise package, which cuts taxes on businesses in an effort to help the economy recover.
The deal capped weeks of negotiations between leaders in Congress and an administration team led by U.S. Treasury Secretary Timothy Geithner. Ultimately, Obama accepted a deal that contradicts his long-held position that tax cuts should only be extended for lower and middle-class earners in exchange for a 13-month extension of jobless benefits for the long-term unemployed.
The president said he agreed to the temporary, two-year extension of cuts for all income levels, because the country could not afford a political deadlock.
If the Congressional stalemate continued and led to a broad tax increase, "that could cost our economy well over a million jobs," President Obama said.
Republicans, such as Senate Minority Leader Mitch McConnell from Kentucky, welcomed the compromise, but several Democrats remain uncommitted to the plan and leftist activists initiated campaigns to kill it.
"House Democrats have not signed off on this deal," Maryland Rep. Chris Van Hollen, a member of the House Democratic leadership, told Bloomberg Television yesterday (Tuesday). "I have some serious reservations."
House Speaker Nancy Pelosi said Democrats "will continue discussions" with President Obama. She criticized some parts of the plan demanded by Republicans, especially extending the breaks for high-earners. But she stayed away from saying she’ll lobby House Democrats to scuttle the deal.
Meanwhile, Republican leaders portrayed the deal as a positive for the economy and unemployment.
"No one gets everything they want in a deal, but our top priority is to restore certainty to the private sector so that businesses small and large can start hiring again," House Whip Eric Cantor, R-VA, said in a statement.
Sen. McConnell also praised the deal and asked that Democrats in Congress now "show the same openness to preventing tax hikes the administration has already shown."
White House officials will descend on Capitol Hill to persuade Democrats to back the agreement, but without support from the left the president will need to call on Republican troops to get the bill passed before Christmas. The current tax rates were enacted in 2001 and 2003, and will expire at yearend, allowing higher rates to take effect for all taxpayers on Jan 1.
Besides extending lower rates on high earners’ income, the deal also sustains lower rates on dividends and capital gains for the next two years.
Other elements of the deal include a temporary reinstatement of the estate tax at 35% with an exemption for the first $5 million, cutting the payroll tax by $120 billion for one year, and letting companies claim 100% deductions on purchases of equipment and other investments.
"This compromise is an essential step on the road to recovery," said President Obama, who criticized Republicans for insisting on permanent tax cuts for the wealthiest Americans "regardless of the cost of impact on the deficit."
Altogether, the bill could add as much as $750 billion to the deficit over the next decade, according to data compiled by Bloomberg.
In order to get the bill passed, Democrats and Republicans would have to set aside budget constraints that they passed in February under a "pay-as-you-go" law. The law was aimed at limiting Congress’s ability to expand the budget deficit with higher spending or tax reform.
Lawmakers are prepared to declare a budget emergency that would override the so-called "pay-go" law to finance about $300 billion contained in the bill that the law would not allow.
Despite all the political talk about deficit reduction and tough talk from a bipartisan budget commission, Washington insiders say the "pay-go" law won’t be a procedural or political obstacle to extending the tax cuts even without the required offsets in spending.
"I never think paygo is out the window, in my own personal view," Rep. Baron Hill, D-IN, told Bloomberg. "But any rate, that’s what’s going to happen."
Hill, who lost in a campaign for re-election last month, co-chairs the Blue Dog Coalition, a group of House Democrats that championed the pay-go law.
News & Related Story Links:
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- Money Morning:
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