Fate of tax cuts is key issue as Congress returns

By Shailagh Murray and Lori Montgomery
Washington Post Staff Writers
Monday, September 13, 2010; 8:02 AM

Congress is returning for a final pre-election legislative session on Monday to confront the thorny issue of potentially raising taxes during an economic downturn, with neither party showing clear consensus on a solution.

The main order of business in the coming weeks will be debating the fate of income tax cuts approved under the George W. Bush administration in 2001 and 2003 that are scheduled to expire at the end of this year. House Minority Leader John A. Boehner (R-Ohio) surprised Democrats on Sunday when he said he might not oppose President Obama's plan to extend the cuts for all but the wealthiest households, although he reiterated his preference for keeping the lower rates in place for all income groups.

Boehner's comments, made on the CBS program "Face the Nation," altered the landscape of the tax debate by suggesting that Republicans might not obstruct Democratic efforts to raise taxes on the top earners - a move advocated by Obama and many other Democrats as necessary to lowering the record deficit.

But the leader's assertion also makes the Republican position on the issue all the murkier. Numerous GOP lawmakers, including Senate Minority Leader Mitch McConnell (Ky.), have been unyielding in their demand that all cuts be extended.

"If the only option I have is to vote for those at [$250,000] and below, of course I'm going to do that," Boehner said. "But I'm going to do everything I can to fight to make sure that we extend the current tax rates for all Americans."

The White House seized on Boehner's comments as a capitulation. "We welcome John Boehner's change in position," White House press secretary Robert Gibbs said in a statement. Boehner's office fired back that Obama's plan was a "job killer" aimed at stoking "class warfare."

Democrats have a full plate of bills they'd like to consider in the coming weeks, mostly related to the bleak economy. But they face dim prospects for scoring many big wins before returning to the campaign trail in early October.

The five-week August break, an unusually long stretch for Congress, brought Democrats little but bad news. The economy isn't showing the clear signs of improvement that the White House and party leaders had expected after 18 months of federal government intervention. Polls show frustrated voters are giving up on the Democrats' four-year reign of Congress and are gravitating to GOP candidates.

Although voter perceptions about the economy are unlikely to brighten between now and Nov. 2, individual Democratic incumbents could use the upcoming work period to soften negative views that their constituents may have about them personally. And by pressing ahead with popular causes such as discouraging the moving abroad of U.S. jobs, the party could rally core supporters and narrow the enthusiasm gap with Republicans.

"Incumbents can make a case and get a second look based on their contributions, what they've done for their districts," said Andrew Kohut, president of the Pew Research Center. "There, I think, there's a little more room to maneuver. But views about the economy are what they are."

The tax-cut debate could be risky for both parties. The Bush-era breaks reduced income taxes for virtually every U.S. taxpayer since their enactment, but to minimize their long-term budget impact they were written to expire this year, leading to what amounts to a $3.8 trillion tax increase over the next decade.

Republicans want to extend all the tax cuts; Obama wants to extend the cuts for households with incomes of up to $250,000 a year and raise rates on income above that threshold. His proposal would cost around $3 trillion over the next decade, with the additional $800 billion going to deficit reduction.

McConnell said Democrats have zero chance of passing Obama's plan in the Senate. He said not a single Republican would support it, leaving Democrats short of the 60 votes needed to cut off a filibuster.

"That's a debate we're happy to have. That's the kind of debate that unifies my caucus, from Olympia Snowe to Jim DeMint," McConnell said, citing the most liberal and most conservative Republicans in the Senate.

Senate Majority Leader Harry M. Reid (D-Rev.) and House Speaker Nancy Pelosi (D-Calif.) are pledging to back the president's position as in sync with the views of a majority of Democrats in each chamber. But amid signs of a weakening economy, a growing number of Democrats would prefer to extend all tax cuts, at least for a year or two - a compromise that Obama did not explicitly rule out during his news conference on Friday. Another approach that is gaining traction would raise the $250,000 income threshold to $1 million per household, to exempt families who live in regions with high costs of living.

Half a dozen Democratic senators and Senate candidates have voiced support for a temporary extension of tax cuts for the rich. In the House, more and more incumbents have also taken that position. Among them is Rep. Gary Peters, a Michigan Democrat who represents a traditionally Republican seat in the Detroit suburbs. Peters told the Detroit Free Press last week that extending the cuts "is the right thing to do, as anything less jeopardizes economic recovery."

Some Democrats would even prefer to push the tax cuts aside until after the election.

But Boehner wasn't the only prominent Republican to suggest Sunday that the GOP could stand down in its opposition on Obama's proposal, to blunt perceptions that the party is holding tax cuts for the middle class hostage to tax cuts for the wealthy.

"Republicans would be very wise to say, 'We will pass any tax cut this president will sign as long as it doesn't have a poison pill of a tax increase,' " former House speaker Newt Gingrich told "Fox News Sunday."

At the very least, House Democrats want the Senate to go first, aware that the chamber might not be able to pass any tax bill before the election. Jim Manley, spokesman for Reid, said his boss is determined to forge ahead.

"We're going to work very hard to extend the middle-class tax cuts," said Rep. Chris Van Hollen (Md.), a member of Pelosi's leadership team and chairman of the House Democratic election effort. But "it's going to be very important, if we can't get them passed, for people to know where the battle lines are on this issue."

The session is expected at least to open on a high note for Democrats. Retiring Sen. George Voinovich (R-Ohio) has agreed to provide the 60th vote needed to push through a package of small-business incentives, including a $30 billion loan fund to improve access to credit. The bill would then bounce to the House, where it is expected to pass quickly.

Democrats will also take on the forces of globalization, a rallying cry in working-class communities across the Rust Belt and New England, where dozens of House and Senate seats are being contested. Lawmakers in both chambers are angling to vote on a package of tax increases aimed at discouraging U.S. multinationals from moving American jobs abroad.

In the House, the Ways and Means Committee will hold hearings on Chinese currency manipulation, a major barrier to the exports that create many U.S. jobs. House Democratic leaders plan to seek to advance their "Make it in America" slate of smaller incentives aimed at reviving the sagging U.S. manufacturing sector.

For every glimmer of opportunity, Democrats face numerous potential pitfalls. As part of the small-business debate this week, the Senate is to return briefly to the contentious issue of health care. An amendment offered by Sen. Mike Johanns (R-Neb.) would repeal a portion of the new health-care law that threatens to impose onerous new tax requirements on business owners.

Democrats agree that the provision is problematic but are eager to avoid full repeal, which would cost a $15 billion hole in lost revenue. They plan to offer an alternative proposal that would be paid for by eliminating tax benefits for the five largest oil companies - the source of funding that Obama included in his proposal, announced last week, to pump into the economy an additional $18 billion in transportation spending and new corporate tax breaks.

The Obama plan is derided by Republicans as a redux of the $814 billion stimulus bill Congress approved in early 2008, and has generated tepid interest among Democrats. .

murrays@washpost.com montgomeryl@washpost.com

Staff writer Paul Kane contributed to this report.

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