Fight with Obama set on tax breaks, jobless aid
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."