Tax trial balloon pops

The Obama administration on Monday quickly shot down a trial balloon it floated over the weekend that opened the possibility of new taxes on the middle class after the idea came under heavy fire from labor unions, liberal leaders and Republicans.

White House press secretary Robert Gibbs scrambled to backtrack on the idea during Monday’s briefing.

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“The president was clear during the campaign about his commitment on not raising taxes on middle-class families,” Gibbs told reporters. “And I don’t think any economist would believe that in the environment that we’re in, raising taxes on middle-class families would make any sense. And the president agrees.”

Labor unions and liberal activists — a large part of the Democratic base — criticized the administration for going back on one of President Barack Obama’s campaign promises.

“It’s a pretty important campaign promise,” said Thea Lee, policy director at the AFL-CIO.

Lee described the comments as a “trial balloon” and shift in the administration’s message.

“I think they’re struggling with the current [fiscal] situation and what we’ve learned about the budget deficit,” Lee said.

Robert Borosage, an influential liberal activist and co-director of the Campaign for America’s Future, said the administration’s suggestion that it might raise middle-class taxes “strikes me as preposterous.”

“In a recession, talking about raising taxes doesn’t make any sense,” he said.

But some Democrats on Capitol Hill concede privately that it may be necessary to raise middle-class taxes in some form to keep the cost of healthcare reform from spiraling out of control.

Senate Democrats noted it may be necessary to raise taxes on some people who earn less than $250,000 a year.

Borosage said that administration officials appear to be anticipating that outcome because the House plan to pay for healthcare reform — which levies a surtax on the nation’s highest wage-earners — appears to be a non-starter in the Senate.

“There are only two ways to read it,” said Borosage, who postulated that either Obama’s advisers “have a tin ear for politics” or “they’re anticipating not getting the House plan for paying for healthcare. But taxing middle-class healthcare benefits would be a huge mistake.”

“The majority of our caucus has been on the record about how they feel about this — they oppose it,” said a senior Democratic aide. “But there are at least six weeks for this to shake out.

“Whatever [our healthcare reform legislation] is, it has to get near-unanimous support among Democrats and bring over Republicans,” said the aide.

Obama and Senate Majority Leader Harry Reid (D-Nev.) have pressured Senate Finance Committee Chairman Max Baucus (D-Mont.) to drop a proposal to tax employer-provided health benefits, which would affect Americans who earn less than $250,000.

But it appears Baucus has not yet abandoned the proposal, which remains popular among conservative Democrats and Republicans.

“It still floats around up there,” said Lee.

The AFL-CIO strongly opposes taxing employer-provided health benefits and is generally skeptical about raising any taxes on the middle class.

“It seems to us there are other options that need to be explored before we turn to the middle class,” Lee added. “In the short run, the administration should focus more on economic recovery than the budget deficit.”

Obama pledged during his White House campaign not to raise “one dime” of taxes on Americans earning below $250,000 a year.

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“If you make under $250,000, you will not see your taxes increased by a single dime. Not your income tax. Not your payroll tax. Not your capital gains tax. No tax,” Obama vowed.

But in a television interview Sunday, senior Obama economic adviser Lawrence Summers declined to rule out raising taxes on the middle class to pay for healthcare reform, prompting an uproar on Monday.

In another television appearance that day, Treasury Secretary Timothy Geithner said, “We’re going to have to do what is necessary” to rein in the deficit, also declining to rule out new taxes.

Senate Republicans pounced on Summers and Geithner.

“The continuing decline in GDP [gross domestic product] highlights that now is exactly the wrong time to take on even more debt, raise taxes or otherwise slow our nation’s entrepreneurial spirit,” said Senate Minority Leader Mitch McConnell (R-Ky.).

Sen. Jeff Sessions (R-Ala.) said, “I’ve always suspected that he would prefer to raise taxes than cut spending,” in reference to Obama.

When asked why Geithner and Summers refused to rule out such taxes, Gibbs responded: “I think they allowed themselves to get into a little bit of a hypothetical back-and-forth.”

But some centrist Democrats say that Obama may have boxed himself in by making such a broad, definitive pledge not to raise taxes on those earning less than a quarter-million dollars a year.

“I do think that healthcare [reform] has to be paid for and cost containment has to be a higher priority than it has been in the debate so far,” said freshman Sen. Mark Warner (D-Va.). “Sometimes these uniform blanket statements have a tendency to come back and get you.”

Darrell West, the director of governance studies at the Brookings Institution, warned that Obama risked stepping on a political landmine because of his pledge.

“It’s always dangerous to reverse a major campaign pledge,” said West. “It opens you to criticism from opponents who say, ‘We told you so. He wanted to do this all along.’ ”

West noted that former President George H.W. Bush suffered damaging political fallout when he agreed to tax increases after famously declaring on the campaign trail: “Read my lips: no new taxes.”