By Lori Montgomery
Washington Post Staff Writer
Sunday, July 25, 2010; A01
President Obama and Democratic leaders in Congress are setting the stage for a high-stakes battle over taxes in the final weeks before the November congressional elections, betting that their plan to eliminate tax breaks for the wealthy will resonate with voters who have lost houses and jobs to what many see as an era of Wall Street greed.
Raising taxes is usually a perilous move. But Democrats, facing the potential loss of their majorities on Capitol Hill, believe that the strategy will both force Republicans to defend tax breaks for a tiny, wealthy minority and expose GOP hypocrisy on budget deficits.
The cuts, enacted under President George W. Bush, are set to expire in January. Given partisan gridlock in the Senate, congressional aides and administration officials acknowledge that lawmakers could run out of time, leaving virtually every American taxpayer with a significantly higher bill in 2011.
Although they have blamed Democrats for record budget deficits, most Republican lawmakers want to extend all of the tax cuts, adding at least $2 trillion over the next decade to the national debt. President Obama and senior Democrats want to extend the cuts only for families making less than $250,000 a year.
"This blows a hole in their argument that they're deficit hawks. They're not deficit hawks; they're deficit chickens," said Rep. Chris Van Hollen (Md.), who heads the Democratic Congressional Campaign Committee, which is tasked with defending the party's House majority.
Republicans say the tax cuts are critical to bolstering a feeble economic recovery. And with unemployment at 9.5 percent, even some Democrats are queasy about raising taxes on high earners -- a category that includes many small-business owners -- when policymakers are trying to encourage them to create jobs.
"We are eager to oblige our friends on the other side of the aisle who want to have this debate," said Sen. Orrin G. Hatch (Utah), a senior Republican on the tax-writing Senate Finance Committee. "They can talk about the wealthy all they want, but this is about stopping a job-killing tax hike on small businesses during tough economic times."
On Saturday, Obama pressed the attack in his weekly radio address, criticizing House Minority Leader John A. Boehner (Ohio) for urging repeal of Obama's health-care initiative and vowing to "permanently keep in place the tax cuts for the very wealthiest Americans -- the same tax cuts that have added hundreds of billions of dollars to our debt."
"These are not new ideas. They are the same policies that led us into this recession," Obama said. "They will not create jobs; they will kill them."Surpluses to deficits
The Bush tax cuts are among the three biggest federal tax reductions since the end of World War II, comparable to the Reagan tax cut of 1981 and the Kennedy tax cut of the 1960s, according to the nonprofit Tax Foundation. Conceived during Bush's 2000 presidential campaign as a way to return huge projected government surpluses to taxpayers, the cuts were enacted in 2001 and 2003. But because they were expected to eventually cause huge deficits, Republicans wrote them to expire in 2010.
Reluctant to take the political hit either for raising taxes or for increasing the deficit, Obama and Democratic lawmakers have postponed action on extending the middle-class tax cuts. Doing so would cost nearly $1.4 trillion through 2020, according to the nonpartisan Joint Committee on Taxation.
Republicans have been capitalizing on that delay, accusing Democrats of plotting to let all the cuts expire.
"After 18 months of runaway spending, bailouts and takeovers, Washington Democrats are poised to allow the largest tax increase in American history to take effect next year," Rep. Mike Pence (Ind.), a member of the GOP leadership, said Saturday in the party's weekly radio address. "House Republicans will oppose this tax increase with everything we've got."
Democrats saw the issue in a new light after Sen. Jon Kyl (R-Ariz.) stumbled last week when asked on "Fox News Sunday" why Republicans are willing to increase deficits to cut taxes for the wealthy but not to provide assistance to the unemployed. Kyl said it was "a loaded question," then offered the long-held GOP view that "you do need to offset the cost of increased spending. . . . But you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans."
The next day, Obama blasted GOP priorities in a Rose Garden news conference. By week's end, Treasury Secretary Timothy F. Geithner had reiterated Obama's pledge to let the upper income tax cuts expire, a stand echoed by House Speaker Nancy Pelosi (D-Calif.).
The battle will be fully engaged in September, when Sen. Max Baucus (D-Mont.), the Finance Committee chairman, aims to draft legislation to deal with the Bush tax cuts.Democrats with doubts
Not every Democrat is on board with the strategy. Sen. Kent Conrad (N.D.), a Finance Committee member who also chairs the Budget Committee, said he would prefer to extend all the tax cuts, at least until the economy fully recovers.
"In a perfect world, I would not be cutting spending or raising taxes in the next 18 months to two years," Conrad said.
Rep. Gerald E. Connolly (D-Va.), whose constituents are among the wealthiest in the nation, also wants to extend the upper-income tax breaks temporarily, arguing that the richest taxpayers are responsible for the bulk of consumer activity.
"If they close up their wallets and checkbooks and debit cards because they have less disposable income, this is the wrong time for that," Connolly said. "This isn't an argument for never, ever, ever. It's an argument for not now."
Still others -- particularly vulnerable House members fighting to keep their seats in conservative districts -- want to postpone any action until after the election. Paul Lindsay, spokesman for the National Republican Congressional Committee, which is in charge of electing House Republicans, said they are wise to be nervous.
"Democrats who have a hard time defending spending will have an even tougher time defending tax increases," Lindsay said.
After a closed-door meeting late Thursday with Finance Committee members from both parties, Baucus declined to rule out extending the cuts for the wealthy. The committee, he said, will "figure out what we think is best."
One potential compromise: temporarily renewing the cuts for the rich if Republicans are willing to cover the cost with spending cuts or other tax increases. But aides in both parties said that idea has gained little traction, either among Republicans or among liberal lawmakers, who view Obama's campaign promise to end Bush-era giveaways for the wealthy as nonnegotiable.
Another possibility is a temporary extension of the middle-class cuts, with some incentives for small business, as a bridge to a broader overhaul of the tax code in the next Congress.
Given the competing political pressures, it is not clear that Democrats can push anything through Congress before they have to face voters. Even if Baucus wins approval of a tax-cut extension in committee, Senate Majority Leader Harry M. Reid (D-Nev.) has yet to decide whether to bring it before the full Senate.
Privately, some Democrats say the debate is more important politically than actually passing legislation. But Rep. Gene Green (Tex.), who like most Democrats voted against the Bush cuts, said Congress should move as quickly as possible to provide people and businesses "some certainty on tax policy" and "to set the stage saying that we, as Democrats, can do tax cuts that actually benefit the huge majority of the people."
Staff writer Brady Dennis contributed to this report.