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Correction to This Article
This article incorrectly described the payroll tax holiday agreed upon by President Obama and Republican congressional leaders. The holiday would cut the Social Security payroll tax for all workers by two percentage points, not by 2 percent, in 2011.
Obama, GOP reach deal to extend tax breaks

By Lori Montgomery and Shailagh Murray
Washington Post Staff Writers
Tuesday, December 7, 2010; 2:42 AM

President Obama and congressional Republicans have reached a tentative accord on a far-reaching economic package that would preserve George W. Bush administration tax breaks for families at all income levels for two years, extend emergency jobless benefits through 2011 and cut payroll taxes by 2 percent for every American worker through the end of next year.

The scope of the agreement, announced by the White House late Monday, was far broader than lawmakers in either party had been expecting. The deal would extend a college tuition tax credit and other breaks for middle-class families that were due to expire New Year's Eve. And it would revive the inheritance tax after a year-long lapse, imposing a 35 percent rate on estates worth more than $5 million for individuals and $10 million for couples.

The package would add more than $700 billion to the rising national debt, said congressional sources who were briefed on the deal. But with the unemployment rate at 9.8 percent, the White House was focused on winning a compromise that could boost the fragile recovery while preventing the economic damage that could result from letting the expiring tax breaks affect paychecks next month.

The payroll tax holiday, in particular, is striking for its universal application. Unlike most tax breaks, it would be available to taxpayers at every income level, letting consumers keep an extra $120 billion in their pockets next year. For a couple making $70,000 a year, the holiday would provide a tax savings of $1,400.

Still, that victory came at the cost of a painful concession: Obama campaigned on a promise to repeal the Bush-era tax cuts that benefit the wealthiest 2 percent of U.S. households, a stance that many Democrats were unwilling to surrender. But with Republicans insistent on preserving all of the cuts, the president acknowledged that abandoning that long-held Democratic position was the price of preventing a political stalemate that would have caused taxes to rise across the board.

"This would be a chilling prospect for the American people," he said during a White House news conference. "I am not willing to let that happen."

Obama also delivered a sharp rebuke to Democrats who said they would rather let tax rates rise for everyone than continue perks for millionaires.

"I am not willing to let working families across this country become collateral damage for political warfare here in Washington," he said. "The American people didn't send us here to wage symbolic battles or win symbolic victories."

Republicans embraced the agreement. Sen. Olympia J. Snowe (Maine), a key moderate, said she was "encouraged" by the development. Senate Minority Leader Mitch McConnell (Ky.), who took a lead role in talks with the White House, expressed appreciation for "the determined efforts of the president and vice president in working with Republicans on a bipartisan plan to prevent a tax hike on any American and in creating incentives for economic growth."

"I am optimistic that Democrats in Congress will show the same openness to preventing tax hikes the administration has already shown," McConnell said in a statement.

That optimism may prove to be misplaced. The agreement has yet to win the support of Democratic leaders in either chamber, and senior aides said the White House will need significant Republican support to push the package through Congress. Democrats said the lenient terms of the estate tax agreement are likely to be particularly problematic, because they would layer another big tax break for the nation's wealthiest families on top of the perks they already get from lower tax rates on income, capital gains and dividends.

"The House Democrats have not signed off on any deal," said Rep. Chris Van Hollen (Md.), who has served as the lead negotiator for House Democrats in talks between the White House and bipartisan representatives from both chambers. Van Hollen said House leaders would review the package and discuss it with their rank and file in a meeting Tuesday night.

Vice President Biden made plans to visit Capitol Hill on Tuesday to pitch the plan to Senate Democrats, who were largely silent after the announcement. Over the weekend, the Senate did not approve two measures that would have extended the Bush cuts only on family income less than $250,000 a year and $1 million a year, respectively.

Senate Majority Leader Harry M. Reid (D-Nev.) plans to discuss it with his caucus Tuesday, Reid spokesman Jim Manley said in a statement.

The deal represents an attempt by the White House to reframe the debate over tax cuts as a broader effort to assist the economic recovery despite lawmakers' reluctance to approve additional stimulus measures. Although many economists say Obama's 2009 stimulus package has prevented a descent into a depression, the measure has proven unpopular politically amid heightened concerns about expanding government and swollen deficits.

The bipartisan framework announced Monday seeks to reach the same goals through more straightforward means.

Instead of a host of business tax breaks aimed at encouraging companies to part with the cash reserves they have accumulated, the deal calls for a single perk that would permit companies of all sizes to write off the entire value of their capital investments next year. A senior White House official called the proposal "the largest temporary business tax incentive in history," worth an estimated $150 billion to businesses next year.

Instead of Obama's signature "Making Work Pay" tax credit worth up to $800 to middle-class families - a provision its beneficiaries barely noticed - the deal calls for a simple 2 percent reduction in the 6.2 percent payroll tax that workers pay on income up to $106,800 to finance Social Security.

The loss to the Social Security trust fund would be covered by general revenue.

The deal also seeks to extend a number of tax breaks created by the stimulus package that the administration views as successful. For example, an expanded college tuition deduction that provides additional support to about 8 million students would remain on the books. So would expanded versions of the child tax credit and the earned income tax credit that benefit working-class families.

The deal would also extend a series of small but popular tax breaks for businesses through next year.

One major inducement in the package for Democrats is a 13-month extension of emergency jobless benefits, which provide income support for up to 99 weeks to workers who have exhausted state benefits. The latest round of benefits expired last week, and 2 million jobless workers are due to be cut off by the end of the year.

Democrats have struggled for more than a year to keep benefits flowing, but they were unhappy with the terms of the deal as announced by Obama.

Republicans "have successfully used the fragile economic security of our middle class and the hardship of millions jobless American as bargaining chips to secure tax breaks for the very wealthiest among us," said Sen. Tom Harkin (D-Iowa).

montgomeryl@washpost.com murrays@washpost.com

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