By Lori Montgomery
Washington Post Staff Writer
Friday, October 29, 2010; 9:26 PM
With Republicans poised to gain ground in Tuesday's elections, the White House is losing hope that Congress will approve its plan to raise taxes on the nation's wealthiest families and is increasingly focusing on a new strategy that would preserve tax breaks for both the wealthy and the middle class.
According to people familiar with talks at the White House and among senior Democrats on Capitol Hill, breaking apart the Bush administration tax cuts is now being discussed as a more realistic goal. That strategy calls for permanent extension of cuts that benefit families earning less than $250,000 a year, and temporary extension of cuts on income above that amount.
The move would "decouple" the two sets of provisions, Democrats said, and focus the debate when tax cuts for the rich expired next year or the year after. Republicans would be forced to defend carve-outs for a tiny minority populated by millionaires, an unpopular position that would be difficult to advance without the cover of a broad-based tax cut for everyone, aides in both parties said.
"The concept of 'decoupling' is a hot topic right now," said one senior Democratic aide.
The Bush tax cuts are set to expire in December. Republicans are pushing to extend them all, while President Obama has forcefully argued that the country cannot afford to keep tax breaks on income over $250,000 a year for families, or $200,000 for individuals.
Extending all the cuts would add nearly $4 trillion to deficits over the next decade. Extending only the middle-class cuts would drive the nation more than $3 trillion deeper into debt.
The battle over taxes will be reengaged when lawmakers return to Washington in mid-November. If Congress fails to act before the end of the year, virtually every taxpayer will see increased withholding take a bite out of their paychecks in January.
Democrats had hoped to deal with the issue before the election but could not agree on a strategy. House and Senate leaders said they backed Obama's tax policy. But a sizeable group of Democrats - worried that the recovery was losing steam and fearful of hurting conservative Democrats in a tough election season - argued that all the cuts should be extended at least through 2011.
If Republicans take control of the House and make significant gains in the Senate, as many analysts predict, Obama and congressional Democratic leaders could find their ranks even more badly split. Some liberals are balking at the idea of voting to extend tax cuts they opposed when they were originally enacted in 2001 and 2003. Obama ran on a promise to repeal the upper-income cuts, and some Democrats say even one more year of tax breaks for the wealthy would amount to a betrayal.
Republicans, for their part, have no interest in undoing the Bush tax package, which was painstakingly designed to win approval in an evenly divided Senate. "If you break it apart, you undo the coalition," said a Senate GOP tax aide, making it less likely that the upper-income cuts and other Bush breaks that Republicans say encourage investment would ever again be approved.
While advocating permanent extension, Republican leaders have said they would accept a two-year extension of all the cuts.
Administration officials said they have begun plotting strategy for the lame-duck legislative session but declined to comment on decoupling or another idea floated in recent weeks: embracing tax breaks for the rich in exchange for Republican support for additional economic stimulus.
The stimulus could take the form of Obama's proposal to provide additional business tax breaks, which the president touted Friday during an event in Beltsville, Md. Or it could take the form of an extension of Obama's signature tax break for the middle class, Making Work Pay, which is scheduled to expire in December, congressional aides said.
"Our only focus is on ensuring middle-class families wake up on January first with the knowledge that their taxes will not go up," said Jen Psaki, a White House spokeswoman. "The president's position is clear: We should give them that certainty, and do it without adding another $700 billion to the deficit to pay for an additional tax cut to millionaires and billionaires that we simply can't afford."