Republicans and Democrats are hurtling toward a fiscal cliff, and neither side wants to take the plunge.
In less than nine months, Bush-era tax rates are scheduled to expire, hiking rates for the middle class as well as top income earners. At the same time, automatic spending cuts will kick in. The combination, coupled with the expiration of the payroll tax cut and other factors, would constitute a blow that analysts say could imperil the economic recovery and send America crashing back into recession.
“I think the specter of a fiscal contraction that’s north of 3 percent of GDP should get even the most dysfunctional of Congresses’ attention,” said Jared Bernstein, former economic adviser to Vice President Biden.
Even so, practically no one in Washington believes an agreement will come together until an expected lame duck session after the November election upon which all political eyes are focused. And the results of that campaign will also have a big impact on the end-of-year tax debate.
President Obama cut a deal in the lame duck session of 2010 to maintain all of former President Bush’s tax rates for two more years, but he says he won’t do that a second time for the highest rates.
Ken Kies, a top GOP tax lobbyist, predicted that Obama would be able to keep that promise if he gets another four years in the Oval Office, even if Republicans still control at least part of Congress.
“It’s going to be a key issue in the campaign, so whoever wins is going to say: ‘OK, the American people have spoken,’ ” Kies told The Hill. “If Obama gets reelected, what are they going to say?”
But Kies added that Republicans will probably carry the day if their presumed nominee, Mitt Romney, unseats Obama — even if that means having to confirm the Bush rates retroactively and through a budget maneuver known as reconciliation.
In either scenario, families making under $250,000 could easily see a similar tax bill next year.
But Clint Stretch, a veteran Washington tax observer at Deloitte Tax, said the wealthiest Americans face more uncertainty.
Republicans pushing to overhaul the tax code have said for months they would like to eventually lower the top rate to 25 percent. But the highest earners could also face a rate as high as 40 percent or more if the Bush tax cuts lapse and taxes from the Democratic healthcare overhaul are implemented.
“That’s very frustrating,” Stretch said. “It makes it very difficult to plan for long-term investments.”
Since both parties have signaled that they will campaign on taxes in the months leading up to the election, serious negotiations on the issue appear to be on the backburner for the time being.
Instead, Senate Democrats have scheduled a procedural vote Monday on the so-called “Buffett Rule,” a proposal that the president — preparing for a campaign against Romney and the 14 percent tax rate he paid in 2010 — repeatedly pressed the case for last week.
The vote is infused with presidential politics. Obama and Democrats see the Buffett Rule as a useful attack against Romney, and Senate Democrats have suggested they will try to vote on the proposal multiple times, if need be.
Speaker John Boehner (R-Ohio), for his part, has also pledged to hold tax votes before November’s election, and some around Washington expect that to include votes on extending Bush-era tax policies.
Despite the gamesmanship, House Ways and Means Committee Chairman Dave Camp (R-Mich.) hopes upcoming meetings with Republican members on taxes can pave the way for the first broad overhaul of the tax code since 1986.
“Our goal is to not only block massive, job-killing tax increases,” said Sage Eastman, a spokesman for Camp, “but also to enact comprehensive tax reform.”
Camp and Senate Finance Committee Chairman Max Baucus (D-Mont.) are among those laying the ground work for tax reform, an effort that many expect to bleed into the next Congress.
Some lawmakers hope Democrats and Republicans can come together after the election on an elusive “grand bargain” to rein in entitlement spending, raise revenues by overhauling the tax code and put the United States on a solid fiscal path.
But Kies, Stretch and others also say that a later-year tax deal may not give policymakers much momentum for tax reform.
“I don’t see yet that this year’s election is going to produce any consensus on tax policy going forward,” Stretch said.
The latest House GOP budget included a simplified tax system with only two individual rates, and was crafted with significant input from Camp and Ways and Means Republicans.
But Democrats have sharply criticized the plan — noting that, while the GOP would need to eliminate roughly $4.5 trillion in tax breaks and incentives, they have yet to put a single one on the chopping block.
In fact, there’s even a divide over how much revenue the government should collect. The House GOP budget sets a revenue target of 18 percent to 19 percent of gross domestic product, while the president’s fiscal commission sought to get revenues to 21 percent.
Kies said a President Romney might have a chance to quickly move on a tax revamp tied to entitlement reforms next year, given that newly inaugurated presidents often have success getting their priorities enacted.
Even so, the parties remain deeply divided over what to do about Medicare. And policymakers may have to try to hammer out a tax reform deal at a time with not only steep deficits, but the economy in a delicate state as well.
“You have to remember that the 1986 moment started in more like 1982. I don’t think you’re going to see that kind of reform-based coalition forming any time soon,” said Bernstein, now a senior fellow at the Center on Budget and Policy Priorities. “There are fundamental disagreements — really existential disagreements — on the role of government.”