Division in the Democratic Party over whether to extend expiring tax rates has led to several different scenarios that could play out this fall.
President Obama on Wednesday doubled down on his position, personally calling for the phasing out of tax cuts for the rich in a high-profile speech in Cleveland.
But many vulnerable Democrats in the House and Senate aren’t as sure as Obama. They oppose raising any taxes, even on the rich, given the sluggish economy. Others want middle-class tax cuts only; while some are prepared to accept the "millionaire compromise" or let the cuts expire.
And resurgent Republicans hopeful their party is on the verge of winning back control of Congress have hammered Obama, warning any tax increase would hinder recovery efforts.
Moody’s Analytics Chief Economist Mark Zandi, who has advised both parties on the economy, has said all of the tax cuts should be extended temporarily, and the White House on Tuesday was blindsided by its former budget director, Peter Orszag. He said all of the cuts should be extended for two years, and then all of them should be phased out to reduce the deficit.
Senate Majority Leader Harry Reid (D-Nev.) has signaled that he will move a tax package that aligns with Obama when Congress returns next week, but it is far from clear whether he has the 60 votes necessary to pass it.
“This is a proposal that should enjoy broad support of Democrats on the Hill,” a Reid staffer said. “However, the only way we can get it done is if Republicans agree to support it.”
Four scenarios seem most likely to play out between now and the end of the year, when the tax cuts expire.
A temporary extension
The most likely scenario, given the politics of the tax debate, is an extension of all the tax rates.
Such a move would kick down the road the decision of whether to allow the tax cuts for wealthier taxpayers to expire.
This is the policy advocated by Zandi and Orszag, who says that in two years all of the tax cuts should be phased out because of the country’s dire budget deficit. The move could also allow Congress to revisit the issue after the debt commission reports to Obama and Congress at the end of the year.
A one-year extension of the tax cuts for upper-bracket taxpayers would cost approximately $35 billion, which in congressional terms is not that expensive.
Congress could also write the legislation so that most of the tax cuts would be permanent, while those for wealthier taxpayers are only extended for two years. When that time runs out, the taxes would automatically expire in the absence of new action by Congress.
What’s unclear is whether Republicans would agree to such a plan, even after the midterm election.
It’s possible Obama could get his way this fall when congressional Republicans and Democrats play a game of legislative chicken.
Congress will have to vote to extend the Bush tax cuts to keep them alive. If they do nothing, all tax rates will jump up on Jan. 1.
That means Democrats could bring legislation to the floor that would extend most of the tax cuts — but not those for the wealthy. While this could put some Democrats in a tough position, it could also be a tough vote for Republicans worried about opposing a tax break for the middle class.
The millionaire compromise
Some Democrats have suggested a compromise in which all taxpayers making less than $1 million would see the low rates extended, which they argue would be difficult for Republicans to oppose.
The move would stop millionaires from receiving an average tax refund of approximately $100,000 and allow Democrats to keep their word that the wealthy did not profit from their tax policy.
Sen. Evan Bayh (Ind.), who wants to extend all of the tax cuts, said this was discussed at a Democratic caucus meeting. He said a liberal member of the caucus argued any tax increases on people earning less than $1 million could hamper economic growth.
“I won’t identify the member, but someone who you would quickly recognize as a very liberal member of the caucus yesterday was speaking up about she happened to believe that raising taxes on anyone making less than $1 million a year, at this moment, was not the right thing to do,” he told MSNBC.
Lobbying sources have told The Hill that this scenario seems remote, partly because it would be perceived as a sudden change in message for Democrats. Obama spent the 2008 campaign arguing that those making more than $250,000 would see their tax rates rise.
While few are expecting it, a protracted debate over the fate of the Bush tax cuts could leave Congress in gridlock and push the issue into next year.
That’s what happened to the estate tax, which surprised tax lobbyists, who couldn’t believe Congress was unable to come to a compromise last year.
But unlike other tax changes, the Bush tax cuts would affect paychecks; if Congress fails to act this year, workers will see a tax increase in their paychecks starting in January. That would seem to make no action a decision both parties can’t afford to choose.
Still, U.S. Chamber of Commerce economist Martin Regalia recently predicted the contentious midterm elections will keep the issue on the back burner until after ballots are cast in November.
That means lawmakers returning for a lame-duck session could be left with the decision on taxes. They’d have little time to make a decision, and they could be returning to a changed political environment.
“We’re entering a hot and heavy campaign season that is likely to be noteworthy in terms of the amount of effort spent by both sides,” said Regalia. “That complicates, I think tremendously, whether we actually get something done. It’s hard to envision handling this particular issue in the heat of the campaign.”