GOP retreat on taxes likely if Obama wins

Senior Republicans say they will be forced to retreat on taxes if President Obama wins a second term in November, clearing the biggest obstacle to a deal with Democrats to defuse a year-end budget bomb that threatens to rock the U.S. economy.

Republicans have long resisted tax increases of any kind. But taxes are a major battleground in the campaign between Obama and Republican Mitt Romney, Capitol Hill veterans say, and the victor will be able to claim a mandate for his policies.

“This is a referendum on taxes,” said Rep. Tom Cole (R-Okla.), a senior member of the House Budget Committee. “If the president wins reelection, taxes are going up” for the nation’s wealthiest households, and “there’s not a lot we can do about that.”

With Election Day still more than six weeks away and the president holding a thin lead in national polls, Republicans say they are not conceding that an Obama victory is the likely outcome. But they are beginning to plan for that possibility.

Lawmakers expect to leave town Friday and will not return until mid-November, when they will have little time to head off $500 billion in automatic tax increases and spending cuts set to take effect Jan. 2.

If Romney wins the White House, Republicans say, their strategy is clear: They would push to maintain current tax rates through 2013, giving the new president time to draft a blueprint for overhauling the tax code and taming the $16 trillion national debt.

But if Obama wins, the GOP would have no leverage — political or procedural — to force him to abandon his pledge to raise taxes on family income over $250,000, according to senior Republicans in the House and the Senate.

So they are beginning to contemplate a compromise that would let taxes go up in exchange for Democratic concessions on GOP priorities.

At the very least, that would mean protecting the Pentagon from the budget ax, which is set to whack $55 billion out of national security accounts next year. But it could also mean major changes to Medicare, which many Republicans said could quickly become the new front in the partisan battle over the budget.

“I hope, obviously, the status quo doesn’t prevail” on Nov. 6. “But if things stay as they are, and all the players are generally the same . . . finding a responsible reform for Medicare is the secret to unleashing very productive talks that would put in place a balanced solution to our fiscal problems,” said Sen. Bob Corker (R-Tenn.). “If you deal with the Medicare issue, then Republicans are far more open to looking at revenues.”

Difficult details would have to be hammered out. And any compromise would face head winds in the House, where a large bloc of GOP freshmen opposed new taxes during a messy fight to raise the federal debt limit last summer.

Many say they that are still not ready to agree to higher taxes and that they will press to maintain tax rates for families at all income levels no matter who wins the White House.

“As long as we have control of the House, I’m going to be really surprised if we capitulate on what’s essentially a core fundamental of conservative orthodoxy,” said Rep. Trey Gowdy (R-S.C.).

“We were sent here to fight, and I don’t think that message changes,” added Rep. H. Morgan Griffith (R-Va.).

There’s more fertile ground in the Senate, where even some ardent conservatives say Republicans may have no choice but to throw in the towel on taxes if they want to persuade Democrats to spare the Pentagon budget.

“We’re not going to save our defense unless we go along with the president’s wishes to raise taxes on small business,” said Sen. Jim DeMint (R-S.C.), a leader of the tea party movement. “It’s not a good choice. I would never support it. . . . [But] there are enough Republicans, I think, who are so afraid of defense cuts that they would probably give in.”

After nearly two years of gridlock, the anticipation of movement on the debt has touched off a frenzy of hopeful activity. The “Gang of Six” senators who have long labored to bring a bipartisan debt-reduction plan to a vote are back at work with an expanded membership that includes Sens. Lamar Alexander (R-Tenn.) and Michael F. Bennet (D-Colo.). Meanwhile, Corker is one of several senators circulating his own proposal to restrain spending on health-care and retirement programs, overhaul the tax code and significantly reduce future borrowing.

“I detect among my colleagues a growing sense of urgency,” said Senate Budget Committee Chairman Kent Conrad (D-N.D.), a Gang of Six member.

Without congressional action, the nation faces the largest dose of fiscal austerity in more than 40 years, a budgetary spasm that could trigger a significant recession. A host of tax cuts are set to expire on Dec. 31, ranging from the lower income tax rates adopted under George W. Bush to the temporary payroll tax holiday that currently increases the average paycheck by 2 percent.

In addition, as part of last summer’s deal to raise the debt limit, Congress ordered the White House to make across-the-board cuts to agency budgets totaling $110 billion next year, with the pain inflicted evenly on domestic and defense programs.

Although this “fiscal cliff” could damage the economy, it would do wonders for the budget deficit. So the Gang of Six senators and others are working to develop a post-election strategy that would do three things:

●Postpone the automatic spending cuts and some of the tax increases for about six months, giving lawmakers time to enact a comprehensive debt-reduction plan.

●Cover the cost of postponing the automatic spending cuts and tax increases so the deficit does not increase during the six months.

●Automatically carry out a new debt-reduction plan if Congress does not act within six months. The new plan could look a lot like the recommendations of Obama’s independent fiscal commission, lawmakers said.

Administration officials declined to comment on planning for the fiscal cliff. But key Democrats and others who have met recently with White House officials say Obama is likely to act fast to propose such a plan on his own if he wins in November.

The president wants “to finally address this,” said Sen. Richard J. Durbin (D-Ill.), a Gang of Six member and an Obama ally. “They believe — most of us believe — if we can find a way to reach this goal that doesn’t kill off the recovery . . . but puts the dramatic signal to the world that we have finally come to grips with this, it will launch an even greater economic recovery.”

Lori Montgomery covers U.S. economic policy and the federal budget, focusing on efforts to tame the national debt.
Paul Kane covers Congress and politics for the Washington Post.
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