Obama's tax dilemma: $1M or $250k?

President Obama faces a difficult choice in his upcoming budget: Stick with his policy of raising taxes on families making more than $250,000 annually or boost that threshold to $1 million.

The president’s decision has major political ramifications, as Democrats and Republicans are expected to clash repeatedly this election year over taxes.

Following historic Republican gains in the 2010 election, many congressional Democrats embraced the $1 million figure over fears that the GOP had gained the upper hand by criticizing the $250,000 mark.

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Democrats like Sen. Charles Schumer of New York have suggested that many families making $250,000 are not rich. He has acknowledged that Republicans scored political points by arguing that raising taxes on individual income above $200,000 and couples making more than $250,000 would hit a fair amount of small businesses.

But while the president has adopted rhetoric calling on millionaires to pay their fair share, his proposals on the Bush tax cuts haven’t budged from $250,000. And if that approach continues, the Republican presidential nominee could use Schumer’s words against Obama in the 2012 general election. 

“They are not rich, and in large parts of the country, that kind of income does not get you a big home or lots of vacations or anything else that’s associated with wealth in America,” Schumer said in October. “They are firmly in the middle class. Same with small-business owners in that level.”

With the Bush-era tax rates scheduled to expire at year’s end, Obama must spell out what he wants Congress to do in his budget request that is expected to be released early next month. 

Obama, dating back to his days as an Illinois senator running for the Oval Office, has steadfastly called for allowing the Bush rates to expire at family income above $250,000 a year. It worked for him in 2008, though some think it could be a liability as the president seeks his second term.

Congressional Democrats believe they have had success in recent months pounding Republicans for siding with millionaires and billionaires over the middle class— leading some to claim that the $1 million threshold offers better messaging opportunities than the $250,000 mark.

Mark Mellman, a Democratic pollster and a columnist for The Hill, said many polls have shown that a majority of voters back allowing the Bush cuts to expire at income above the $250,000 mark.

“But when you get into the heat of the political back-and-forth, the bright line at 250 becomes smudged,” Mellman said. “It’s easier to maintain that bright line at a million. We have a word for millionaires.”

Key figures on the left agree, including Rep. Raúl Grijalva (D-Ariz.), a co-chairman of the Congressional Progressive Caucus. In an interview with The Hill last March, Grijalva said Democratic lawmakers wanted to avoid “nuance” on what the tax-income bar should be. “ ‘Millionaires’ sets a starker option,” he said at the time.

And last April, House Minority Leader Nancy Pelosi (D-Calif.) floated a plan to raise rates only on incomes above $1 million a year.

There are pros and cons for Obama on both the $250,000 and $1 million thresholds. If he sticks to the former, his budget plan would haul in revenue that could be used for new initiatives and/or deficit reduction. But he could be criticized by conservatives for being to the left of Pelosi.

If Obama embraces the Pelosi and Schumer approach, Republicans would likely accuse the president of playing election-year politics. However, his reelection campaign would arguably be in a position to play offense on tax policy against the GOP nominee.

Mitt Romney, the Republican presidential front-runner, supports extending all of the Bush tax rates.

Many Capitol Hill observers expect the debate over the tax rates to be settled in the post-election lame-duck session. But the party that wins the message war on taxes is expected to do well on Nov. 6, when control of the White House and Congress will be up for grabs.

Democratic operatives note that the Bush tax rates are just one part of their strategy to frame Republicans as too beholden to the wealthy.

Obama, for instance, came out last year with his so-called “Buffett Rule,” which stated that people making north of $1 million a year should not pay a lower percentage in taxes than middle-class families.

“The Bush tax cuts are one conversation,” said Karen Finney, a former spokeswoman for the Democratic National Committee and columnist for The Hill. “The talk about millionaires and billionaires is a broader conversation about having people pay their fair share.”

Republicans are expected to lean on a line they used for much of 2011 — that the Democratic push to raise taxes on the highest earners would hurt job creators and stifle the economy’s growth. GOP officials also point out that Obama agreed to extend the Bush tax rates at the end of 2010, a move that infuriated liberals.

GOP officials claim that the $1 million mark would still hit small firms.

After Senate Democrats proposed paying for an extension of the payroll tax with a surtax on millionaires, House Speaker John Boehner’s (R-Ohio) office cited an analysis from the nonpartisan Joint Committee on Taxation that stated that roughly a third of small-business income in 2013 would be hit by the levy.

Obama has given no hint that he will move off of $250,000. He included that figure when he rolled out a plan to pay for his jobs bill and reduce the deficit.

Some liberal groups believe it would be irresponsible for policymakers to extend the Bush-era rates for income up to $1 million.

The White House has said that cutting off the Bush tax cuts for individual income over $200,000 a year and family income above $250,000 a year would save roughly $866 billion over a decade. But Steve Wamhoff of Citizens for Tax Justice, a group with significant union ties, says about half of that revenue would be lost if the Bush rates were extended for income up to $1 million.

By keeping the line at $250,000, Obama could also keep the $1 million threshold as a natural compromise with GOP lawmakers who want to see the Bush-era rates made permanent.

“The president’s position has always been to draw the line at $250,000, and it’s perfectly consistent for him to stick with that in his next budget proposal,” said a Democratic leadership aide. “But that doesn’t mean the coming debate with Republicans can’t or won’t be centered around whether millionaires and billionaires should get another tax cut next year.”

Election years are usually more about politics than policymaking, and from a message standpoint, $1 million has worked well, Democrats say.

“I think it’s been pretty effective,” said Michael Bocian, a Democratic pollster and consultant. “When it comes down to it, Republicans have showed very little willingness to ask the wealthy to share in the sacrifice.”


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