Senate Dems balk at ending Bush-era tax rates on wealthy without a deficit deal

A growing number of Senate Democrats are signaling they are not prepared to raise taxes on anyone in the weak economy unless Congress approves a grand bargain to reduce the deficit.

At least seven Democratic senators have declined to rule out supporting a temporary extension of the Bush-era income tax rates, breaking with party leaders who have called for letting the rates expire for people earning more than $1 million per year.

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That gives Senate Republicans a chance to push a temporary extension similar to the deal Minority Leader Mitch McConnell (R-Ky.) struck with President Obama in December of 2010.

Democrats running for reelection, such as Sens. Jon Tester (D-Mont.) and Joe Manchin (D-W.Va.), have declined to endorse their leadership’s call for a tax increase on wealthy families.

Instead, they want Congress to pass a broad package that would cut spending and reform the tax code, which they argue would inject new confidence into the private sector.

“I would much prefer dealing with the tax code, with all the expenditures, in a bigger package similar to the Simpson-Bowles [deficit reduction] proposal,” Tester said. “If we can do that and we can roll out a big package that is significant, then we can do something with the tax rate from a reforming-it standpoint and do some things that really get our deficit and debt under control.”

Manchin sounded the same theme.

“I’m totally for the Bowles-Simpson [plan] and will continue to work for Bowles-Simpson. We need to revamp the system and I think Bowles-Simpson is the pragmatic way to do it.”

The blueprint crafted by former White House Chief of Staff Erskine Bowles and former Sen. Alan Simpson (R-Wyo.) would achieve $4 trillion in savings over 10 years through spending cuts and tax code reform.

Bowles and former Sen. Judd Gregg (R-N.H.) are scheduled to brief a bipartisan group of senators this week on the need for a broad deficit-reduction package.

But many lawmakers are skeptical that a multitrillion-dollar entitlement and tax reform package can be passed during the compressed lame-duck 

session between Election Day and New Year’s.

The most tempting option for some Democrats would be to extend the Bush tax rates temporarily to give Congress more time to work on a broader deal, which is what congressional Republican leaders have proposed.

Extending all income tax rates for only one year would undercut the Democratic leadership’s plan to use their imminent expiration as leverage to move Republicans to accept some tax increases.

Some Senate Democrats in safe seats have even gone so far as to privately propose allowing all the Bush tax rates to lapse to maximize their bargaining power with Democrats.

Democrats in Republican-leaning states blanch at this idea. They do not want to have to explain an across-the-board tax hike to constituents when economic growth is sluggish and unemployment is high.

Sen. Mark Pryor (D), who faces a 2014 reelection race in Arkansas, the state that saw the biggest shift to the GOP in the 2008 presidential election, says he has not decided whether it might be necessary to extend all the Bush-era income tax rates.

Retiring Sen. Jim Webb (D-Va.) is holding fast to his position that tax rates should not be raised on any income brackets, and retiring Sen. Ben Nelson (D-Neb.) says that is his position as well, though he appears more flexible on the issue.

“We shouldn’t raise [rates] on ordinary income,” said Webb. “If you listen to what Warren Buffett really says, people at the very, very top make most of their income off of capital gains and dividends and not ordinary earned income. If you really want to rebalance it, you should tax money that comes from profits on accumulated wealth.”

“My druthers is to extend the tax cuts for everybody,” said Nelson. “What I could support is extending the tax cuts for everybody earning under a million dollars a year if it has to come to that.”

Republicans are staunchly opposed to extending the tax cuts only for income earners below $1 million, so it’s unlikely Democrats will get to choose between extending all the tax rates and extending current rates only for people below the $1 million threshold.

More likely, they will have to choose between temporarily extending all the income rates and letting them all expire.

Sen. Claire McCaskill (D-Mo.), who has faced a deluge of attack ads by outside groups in her reelection campaign, said she is willing to consider a temporary extension of all Bush tax cuts in the spirit of compromise.

Sen. Bill Nelson (D-Fla.), another vulnerable incumbent, likewise would not rule out an extension of all the tax rates.

All seven Democratic senators voted to extend the Bush-era income tax rates at the end of 2010, persuaded by arguments that the economy was too fragile to risk a tax hike on wealthy families and small businesses.

The quandary these Democrats now face has changed little from two years ago and by some indicators has actually gotten worse.

The Commerce Department reported in late November of 2010 that the gross domestic product grew at a rate of 2.5 percent in the previous quarter.

Last month, the Commerce Department revised GDP growth for the first quarter of this year down to 1.9 percent.

The unemployment rate, however, has dropped from 9.8 percent in November 2010 to 8.2 percent last month.

Republicans say the struggling economy will put pressure on Manchin, Tester, McCaskill and other centrist Democrats to support a one-year extension of the Bush tax rates, which McConnell and House Speaker John Boehner (R-Ohio) called for earlier this month.

“I was in the middle of the negotiation in December of ’10 with the vice president over extending the current tax rates for two years. The argument the president made in agreeing to do that two years ago was that the economy needed it,” McConnell said at a recent press conference. “The growth rate is actually slower than it was in December of ’10.”

A senior Senate Republican aide said centrist Democrats would be under strong pressure from constituents to support a one-year across-the-board extension.

“If the economy is even slower, there’s even more incentive to extend all the rates,” the aide said. “They’re probably hearing from people in their states concerned about this fiscal cliff.”