White House, Congress poised for battle over tax breaks in lame-duck session

Nov. 3 (Bloomberg) -- Billionaire investor Wilbur Ross, chairman of WL Ross & Co., talks about U.S. midterm elections. Republicans were projected to take control of the U.S. House and had picked up at least two Senate seats in elections marked by voter anxiety over jobs and the economy. Ross also discusses U.S. global competitiveness. He speaks from Washington with Charlie Rose on Bloomberg Television's "Battle for Capitol Hill." (Source: Bloomberg)
By Lori Montgomery
Washington Post Staff Writer
Wednesday, November 3, 2010; 7:41 PM

The White House and a transformed Congress are bracing for a high-stakes battle later this month over a host of expiring tax breaks and benefits for the unemployed that will mark the first test of the new political dynamic in Washington.

If President Obama, his weakened Democratic allies and a resurgent Republican Party cannot find a way to work together, taxes will rise sharply in January for virtually every American taxpayer, and more than 3 million people will lose their unemployment checks - which together could suck more than $300 billion out of the pockets of consumers and business owners next year.

Economists across the political spectrum say such a blow would be devastating to the economy and has the potential to halt the fragile recovery in its tracks.

"Businesses and households would run for the bunker, and we'd be back in recession. I don't see how we could avoid it," said Mark Zandi, chief economist at Moody's Analytics.

With so much at stake, lobbyists and other congressional analysts expect lawmakers to approve a quick-fix measure that would extend the most critical provisions - including all the Bush-administration tax breaks for individuals - at least through next year.

Republican leaders have signaled that they are open to such a move. On Wednesday, a chastened President Obama signaled that he, too, is open to such a compromise, despite his earlier pledge to let the portion of the Bush tax cuts that benefit the wealthy disappear from the tax code at midnight Dec. 31.

Obama said he would sit down "in the next few weeks" with the Republicans who have reclaimed the House and made big gains in the Senate and "see where we can move forward in a way that, first of all, does no harm. . . .

"How that negotiation works is too early to say," Obama said. But "we all have an interest in growing the economy. We're not going to play brinksmanship."

Congressional Democrats, however, are deeply divided over tax policy. Some liberals say that extending tax breaks for the rich for even one more year would amount to a betrayal of Obama's promise, while many moderates say the weak economy argues against raising taxes for anyone.

On Wednesday, Senate Majority Leader Harry M. Reid (D-Nev.) said he supports Obama's plan to let taxes rise for the wealthiest 2 percent of taxpayers, but "I'm not bullheaded." He added that he plans to meet with Senate Democrats before deciding how to move forward.

Republicans, for their part, say they have no incentive to compromise on the tax cuts, citing a mandate from voters to keep taxes low and to begin whacking at a federal budget bloated by spending on what the GOP views as Obama's failed economic policies.

"We should not allow any tax increases, period, because it's going to slow the economy down," said Rep. Paul D. Ryan (R-Wis.), who is in line to chair the House Budget Committee. "If you want to get this deficit down, you need two things: economic growth and spending cuts."

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