Democrats' plan for millionaire surtax intended to soften up GOP

Senate Democrats are using their proposal to raise taxes on millionaires as a stalking-horse to force Republicans to accept other tax increases.

Democratic officials privately acknowledge that raising personal income tax rates on the wealthy has little chance of passing this Congress. However, the politically popular idea is a key part of the Democrats’ strategy to attack the deficit and gain concessions from Republicans. 

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Democrats are mulling two proposals to include in their budget plan: ending the George W. Bush-era tax cuts for families earning more than $1 million a year or imposing a surtax of 3 percent or 5.4 percent on millionaires and billionaires. 

Senate Budget Committee Chairman Kent Conrad (D-N.D.) included a 3 percent surtax in a draft budget plan he circulated last week. That plan also called for a relatively even split of spending cuts and tax increases to reduce the deficit, according to Senate Majority Leader Harry Reid (D-Nev.), who described the breakdown as 50-50. 

But Democrats say both positions are primarily intended to bolster the party’s negotiating leverage with Republicans. They see the proposed surtax on millionaires as more of a rhetorical weapon than a proposal likely to be included in any broad bipartisan compromise. 

“I don’t think it’s realistic that would ever pass; I think we’re trying to find a negotiating point,” Sen. Claire McCaskill (D-Mo.) said of a budget proposal with an even ratio of spending cuts to tax increases and a surtax on millionaires. 

A Democratic senator on the Finance Committee said Republicans are more likely to agree to ending corporate loopholes than allow a surtax on millionaires. 

The senator, who requested anonymity, said that “the politics is going to be difficult” to pass a millionaires surtax. “The Republicans will really fight this. They believe in maintaining low rates for high-income people.”

Despite the Democrats’ having polls on their side during the debate on tax cuts during the 2010 lame-duck session, Republicans had the political winds at their backs. Obama eventually agreed to extend all the Bush tax rates, including for millionaires, for two years. 

Six months later, the Democratic playbook has changed, with a key goal: get Republicans to violate the Americans for Tax Reform (ATR) pledge not to raise taxes, which most congressional Republicans have signed.

Democratic strategists hope that after the GOP officials receive a pummeling over millionaires’ tax rates, they’ll be more willing to accept ending tax breaks for major oil conglomerates and companies that relocate factories to foreign countries. ATR says both proposals would violate the pledge. 

In a letter to lawmakers ahead of Tuesday evening’s vote, ATR President Grover Norquist argued that deductions that oil companies claim are not subsidies, stating, “Every deduction or credit [the bill] proposes to revoke or limit has a specific purpose common throughout the tax code.”

Forty Senate Republicans have signed the ATR pledge to oppose “any and all” increases to personal and business marginal income tax rates, as well as “any net reduction or elimination of deductions and credits” unless it is matched by other tax-rate decreases.

The Taxpayer Protection Pledge, Democrats charge, is standing in the way of a grand bargain on raising the nation’s debt ceiling. 

On Tuesday evening, Senate Democrats urged passage of their bill aimed at repealing tax subsidies for oil companies. The roll call fell mostly along party lines as the measure fell short of the necessary 60 votes. 

Sen. Robert Menendez (D-N.J.), a lead sponsor of the measure, said late last week that Democrats will “insist” on addressing the oil tax issue in broader budget talks. And Sen. Charles Schumer (N.Y.), a member of the Democratic leadership team, said Menendez’s view is widely held in the conference.

Reid said Tuesday that he expects a final agreement on the debt ceiling to include repeal of tax breaks for major oil companies.

GOP leaders have signaled more willingness to accept the elimination of niche tax breaks, which Democratic critics frame as spending through the tax code. But they have drawn a clear line against raising broad income tax rates on classes of earners. 

“In terms of tax rates, Republicans agree with the president that we need tax reform in order to eliminate loopholes so that we can reduce rates. But you don’t want to raise tax rates in order to try to raise revenues,” Senate Republican Whip Jon Kyl (Ariz.) said on “Fox News Sunday.”

On Tuesday, Kyl even squeaked opened the door to the possibility of using the revenue from ending niche tax breaks for deficit reduction. He added that he would prefer to use all the money to lower other tax rates. 

Kyl said he would look at closing so-called tax loopholes as part of a comprehensive approach to reforming the tax code. He ruled out tax increases as part of a deal to increase the national debt limit, which the federal government hit Monday. 

Ben Geman contributed.

Correction: Forty Senate Republicans and one Senate Democrat have signed the ATR pledge to not raise taxes. Incorrect information appeared in an earlier version of this story.