By Alexander Bolton - 03/31/11 10:00 AM EDT
Senate Democrats are discussing plans to introduce tax policy changes that they say would raise federal revenues and broaden the budget debate beyond discretionary spending cuts.
Democrats feel they have been boxed by Republicans into a debate over cutting discretionary spending, which accounts for a mere 12 percent of the federal budget.
Democrats want to take the offensive and propose higher tax rates for millionaires, companies that move factories overseas and wealthy people who make charitable contributions.
Senior lawmakers say the debate over spending levels for the rest of 2011 is too far along to begin insisting that a six-month stopgap include tax increases to reduce the $1.6 trillion deficit.
But they say tax policy changes should be part of the debate over the 2012 budget. That debate will kick off next week when House Republicans are expected to introduce their 2012 spending plan.
“I’m picking up that the administration will take its stand on the 2012 budget. The 2012 budget will have to have revenue raisers and mandatory cuts and hold the line on discretionary spending,” said a senior Democratic senator.
Democratic lawmakers said they will be in a stronger position to offer tax increases after agreeing to between $30 billion and $61 billion in discretionary spending cuts for the rest of 2011.
“We Democrats have demonstrated that we’re willing to make these cuts; we’ve gone over halfway. Are they being so unreasonable to say we can’t raise any revenues?” said the senator.
One proposal that has gained early support is a surtax on millionaires.
Liberals such as Sens. Bernie Sanders (I-Vt.) and Carl Levin (D-Mich.), who still chafe over an $858 billion deal President Obama struck with GOP leaders to extend the George W. Bush-era tax cuts for the wealthy, favor a surtax.
“There’s no reason why we should not have a surtax on millionaires,” said Levin. “The upper 1 percent has doubled their share of national income. They’ve gone from 8 percent to 17 percent, and middle-income people have taken a big hit.
“It’s fair that there’s a surtax on millionaires or that we not extend the upper brackets that the Bush administration got [for wealthy families],” Levin added.
Senate Democratic aides say it will be difficult to pass a surtax on millionaires because it would undercut the deal Obama struck with Senate GOP Leader Mitch McConnell (R-Ky.) in December to extend the Bush-era income tax rates.
Pushing the surtax, however, will force Republicans to defend millionaires while they are pushing for cuts to programs that help low-income families and the recently unemployed, say Democratic aides.
Democratic strategists hope that by pummeling Republicans with a proposed surtax on millionaires, they can soften the opposition enough to pass other targeted tax increases.
One such proposal, sponsored by Sens. Robert Menendez (D-N.J.), Bill Nelson (D-Fla.), Charles Schumer (D-N.Y.) and other Democrats, would eliminate tax breaks for oil and gas companies, raising about $40 billion over 10 years.
“We have to look at corporate welfare and where we’re doing lavish subsidies like to the oil and gas industry,” Sen. Barbara Mikulski (D-Md.) said. “I’d like to start with the oil and gas industry. They make $75 billion in profits.”
Senate Democrats note the five biggest oil companies made $75 billion in profit even after BP reported $17 billion in losses following the Gulf of Mexico spill.
Another idea that Democratic senators have floated in private discussions is a reduction of the tax breaks that top-bracket income earners can gain from charitable deductions. In his 2010 budget plan, Obama proposed allowing income earners in the 35 percent tax bracket to claim only a 28 percent deduction on charitable contributions.
A third proposal would require hedge-fund and real-estate managers to pay taxes on earnings at the income instead of the capital gains tax rate. The proposal would change the rates for so-called “carried interest,” which is investment profit that hedge-fund and real-estate managers claim as compensation in addition to the 2 percent they typically collect as a standard fee.
No Democratic senator has yet publicly sponsored the proposals to shrink charitable deductions for the wealthy or raise tax rates on carried interest in the 112th Congress.
Another plan under discussion is to eliminate tax breaks for companies that close divisions and move factories to foreign countries.
“You have those incentives to offshore jobs,” said Levin. “We need to end the incentive right now to close your plant.”
Levin said companies earn tax breaks for the cost of shipping factories to other countries and the interest they pay on funds borrowed to build new facilities in foreign countries.
Schumer, Senate Democratic Whip Dick Durbin (Ill.) and former Sen. Byron Dorgan (D-N.D.) pushed legislation late last year to strip tax breaks from companies that transferred operations overseas. The portion of the bill sponsored by Dorgan would have forced companies that move overseas but export goods to U.S. markets to pay domestic income taxes.
Democrats also want to eliminate tax breaks for transfer pricing. Under current tax law, companies can make paper transactions with their foreign subsidiaries to shift income to countries with low tax rates, avoiding the 35 percent corporate tax rate in the U.S.