By Lori Montgomery Washington Post Staff Writer
Thursday, November 4, 2010; A29
The White House and a transformed Congress are bracing for a high-stakes battle this month over a host of expiring tax breaks and benefits for the unemployed that could 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 nearly every U.S. taxpayer and more than 3 million people will lose their unemployment checks. Together, these could suck more than $450 billion out of the pockets of consumers and business owners next year.
Economists across the political spectrum say such a blow could stall the fragile recovery.
"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 resort to a quick-fix measure that would extend the most significant provisions - including all the Bush-administration tax breaks for individuals - at least through next year.
Republican leaders have said they are open to such a move. Obama, chastened by the election results, signaled that he, too, is open to compromise, despite his pledge to let the parts 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. "
But, he said, "we all have an interest in growing the economy. We're not going to play brinksmanship."No incentive for compromise
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 that the GOP views as bloated by spending on Obama's 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."
Lawmakers are set to return to Washington on Nov. 15 for a lame-duck legislative session that is scheduled to stretch into mid-December. But the length of the session depends heavily on the mood among disheartened Democrats, who remain in control of both chambers of Congress until new members are seated in January.
For the remaining weeks, Senate Democrats will control 58 seats - two shy of the 60 needed to avert a GOP filibuster and pass legislation - as they attempt to resolve a bewildering array of tax and spending issues.
These are so contentious that Congress has repeatedly postponed their consideration, often passing temporary fixes that are about to expire.
For more than two years, for example, Congress has been punting on a decision on how to handle a steep scheduled pay cut for doctors who see Medicare patients.
A decision on unemployment benefits is even more pressing. Unless Congress acts, emergency jobless benefits that provide up to 99 weeks of income support are due to expire Nov. 30.
With the unemployment rate stuck at 9.6 percent, Obama argued Wednesday for another extension. Republicans are open to the idea, according to advocates for the jobless, but have proposed a two- to three-month extension, paid for through new spending cuts in the federal budget.
"Both parties are acutely aware of the need for an extension. And of how hideous it would be to let these benefits lapse just before the holidays," said Judy Conti, federal advocacy coordinator for the National Employment Law Project (NELP), which champions the cause of the unemployed.
On taxes, the big battle is over the Bush-era tax cuts, which are set to expire Dec. 31. But Congress also has a multitude of lesser tax issues to resolve.
A package of temporary tax breaks that mainly benefit business expired in December. Unless Congress renews its provisions retroactively to cover the 2010 tax year, many firms are bracing for big losses on this year's tax bill.
"This is really scaring people," said Republican lobbyist Ralph Hellmann, a senior vice president at the Information Technology Industry Council.
The alternative minimum tax falls into the same category: Unless lawmakers adopt an adjustment for inflation for the 2010 tax year, 23 million families - many of them middle class - would be hit by the tax, adding an average of more than $2,000 in taxes to their bills April 15.
In addition, Obama hopes to extend his signature middle-class tax cut, called Making Work Pay, which is also set to expire Dec. 31. Enacted in last year's stimulus package, the tax break lets working families keep an extra $800 a year.
If all the tax provisions expire as scheduled, employers would begin withholding at the higher tax rates immediately, leaving many taxpayers $100 or $200 a month poorer beginning in January.
"We've never before been in a situation where taxes were going to go up of their own accord without congressional action," said Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center. "It's like Cinderella at the ball: At the stroke of midnight, everything disappears."