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Angry Democrats rebel against Obama's tax-cut deal with Republicans

By Shailagh Murray and Lori Montgomery
Washington Post Staff Writers
Wednesday, December 8, 2010; 12:28 AM

President Obama on Tuesday faced an uprising among angry Democrats who strongly opposed his deal with Republicans on tax cuts, opening a public rift that could prevent the White House from ending the year with a fresh dose of stimulus for the economy.

The Obama-GOP compromise would extend all the tax cuts that are set to expire Dec. 31, including for the wealthiest households; continue long-term unemployment benefits through the end of next year; give businesses a major tax break to encourage capital investment; and provide working couples as much as $4,200 in extra cash in 2011 through a one-year payroll-tax holiday.

The far-reaching package - which would add more than $900 billion to the deficit over the next two years, economists said - contains numerous other provisions, including extensions of smaller individual and business tax breaks that had been widely expected to lapse. Democrats expressed astonishment at the plan's scope and price tag, though they reluctantly conceded its potential to create jobs and boost consumer spending.

But they were furious that Obama capitulated to Republicans over the main provisions - an array of individual tax breaks signed by President George W. Bush nearly 10 years ago that have remained controversial.

Vice President Biden, who helped negotiate the accord, received a stony response when he pitched the package to Senate Democrats at a private luncheon Tuesday. Sen. Dianne Feinstein (Calif.) was among those who emerged unconvinced. "I'm just staggered by the enormity of this package," she said.

Others were in full revolt. Sen. Bernard Sanders (I-Vt.) was one of three senators who interrupted Biden's presentation. Afterward, he vowed to "do everything I can to defeat this proposal," including staging a filibuster.

"The president's heart is in the right place," Sanders said. But "I think he has not fully understood that the American people are prepared for a fight. The American people do not want to give tax cuts to billionaires."

Biden will return to the Hill on Wednesday to talk to House Democrats, according to several lawmakers.

The center of the debate

Set to expire on New Year's Eve, the Bush tax cuts are at the heart of a post-election drama: Obama and most Democrats have sought to end benefits for the wealthiest households as a down payment on deficit reduction. But Republicans oppose any form of tax increase and blocked two attempts by Senate Democrats to break up the Bush package and preserve only the provisions that benefit the middle class.

At a news conference Tuesday, Obama said he had weighed the alternative to a GOP deal - allowing all the tax cuts to expire - and concluded the price was too high.

"I understand the desire for a fight. I'm sympathetic to that. I'm as opposed to the high-end tax cuts today as I've been for years," he said. "But in the meantime, I'm not here to play games with the American people or the health of our economy."

For the first time in his presidency, Obama is pursuing a legislative path that does not cut exclusively through Democratic territory. Republicans, who opposed the president virtually unanimously on all of his major initiatives over the past two years, warmly embraced the tax deal. Senate Minority Leader Mitch McConnell (Ky.) called the plan "essentially final" and predicted that a "vast majority" of Senate Republicans will back it.

Democrats were cool by comparison. House Speaker Nancy Pelosi (Calif.) ignored the deal in a statement that lambasted Republicans, saying they have "held the middle class hostage for provisions that benefit only the wealthiest 3 percent." She concluded tersely, "We will continue discussions with the president and our caucus in the days ahead."

Senate Democrats also described the deal as a work in progress. "This is only a framework. It's up to the Congress to pass it," Majority Leader Harry M. Reid (Nev.) said after the Biden meeting. The Senate could take up the package next week. But, Reid said, "I think we're going to have to do some more work on it."

While liberals plotted rebellion, some Democratic moderates were open to the plan. Sen. Kent Conrad (N.D.), chairman of the Budget Committee, said he will support it despite the large increase in short-term deficits, conceding that compromise on the Bush tax cuts was inevitable.

The next step for Obama will be identifying key Democrats in both chambers who can help push the package forward. For instance, Senate Majority Whip Richard J. Durbin (D-Ill.), a traditional ally, signaled in recent days that a compromise would be necessary - but he declined to comment Tuesday.

A bigger boost

The mood was cheery at the White House as administration officials celebrated a package that, if approved by Congress, would provide a far bigger jolt to the economy than anyone had expected. While lamenting the need to compromise on the Bush tax cuts and particularly on a revived estate tax, administration officials said the package would inject an extra $300 billion into the economy next year alone.

Mark Zandi, chief economist for Moody's Analytics, predicted that the package would accelerate economic growth, adding more than 1.6 million jobs next year and driving unemployment down to 8.5 percent by the end of 2011.

Buyers of U.S. government debt were less pleased with the prospect of additional borrowing: The interest rate the government must pay to borrow money for 10 years rose 0.2 percentage points to 3.1 percent, a rate that, if it persists, could reduce the stimulative effects of the tax cuts.

But White House economic adviser Lawrence H. Summers said that "the first priority for addressing the budget deficit has to be getting the economy growing again at a rapid rate." The tax deal, he said, "offers the best prospect that was available for achieving the kind of escape velocity that we've been seeking for the past two years."

The deal developed over the past two weeks, after congressional leaders from both parties met with Obama at the White House. While Treasury Secretary Timothy F. Geithner and White House budget director Jacob Lew led talks with Democratic and Republican negotiators, Biden talked separately with McConnell and Sen. Jon Kyl (R-Ariz.) about the prospects for a Senate vote to ratify the New START nuclear arms treaty with Russia, a top White House priority.

Talk of the tax cuts inevitably crept into those conversations, administration officials said, and the outlines of a compromise became clear over the weekend. Obama would agree to extend all the tax cuts for two years in exchange for another year of long-term unemployment insurance and a payroll tax holiday, which would reduce the Social Security tax that workers pay on income up to $106,800 from 6.2 percent to 4.2 percent. Economists rank the two provisions as among the most powerful ways to inject cash into the economy.

Republicans were still pressing on the estate tax, demanding more generous terms that would exempt estates worth up to $10 million for couples and impose a rate above that amount of only 35 percent. On Monday, Biden made a counteroffer: The GOP could have a relaxed estate tax in exchange for a two-year extension of refundable tax credits created in the 2009 stimulus package that benefit college students and working-class families.

McConnell agreed, and a deal was struck late Monday that would give Democrats at least $100 billion more in middle-class benefits than the GOP would win for the wealthiest taxpayers, senior administration officials said.

"This gave us a chance to do what most people thought wasn't going to be possible in this environment," Summers said, "which is to provide a real forward lift to the economy relatively quickly."

murrays@washpost.com montgomeryl@washpost.com

Staff writer Felicia Sonmez contributed to this report.

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