Sen. Schumer gets the last laugh over President Obama on tax rates

Sen. Charles Schumer (D-N.Y.) is getting the last laugh over President Obama on tax policy.

Schumer and Obama’s senior advisers argued over tax strategy at several meetings last year before the president went his own way, striking a deal with Senate Republican leader Mitch McConnell (Ky.) to extend virtually all of the Bush-era tax rates through the end of 2012.

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A picture taken during one of the White House meetings showed Schumer with a gloomy, intense expression, and the senator was tight-lipped about what Democratic leaders discussed with the president.

Now the tables have turned, and Senate Democrats are siding with Schumer on the critical question of what qualifies as the middle class.

In recent days, Schumer has signaled that Democrats are open to compromise on a tax repatriation holiday that would allow businesses to bring profits from overseas back to the U.S. at a discount. The Treasury Department has raised concerns about the legislation, which is strongly supported by House Majority Leader Eric Cantor (R-Va.). 

Obama has long held the tax increase line should be drawn at families earning $250,000 and above a year, but Schumer decided in the fall of 2010 that the line should be drawn at $1 million and up.

Senate Democrats made their preference clear Tuesday when most of the entire caucus voted to advance a jobs package paid for with a 5.6 percent surtax on annual income over $1 million. That came after Democrats jettisoned Obama’s plan to pay for his stimulus plan by curbing tax deductions for families earning more than $250,000.

Schumer, the chairman of the Senate Democratic Policy Committee and messaging guru for the caucus, first floated his idea for setting $1 million as the tax threshold in a September interview with Newsday, a publication covering Long Island and New York City. He took it to the national scene during a November appearance on CBS’s “Face the Nation.”

His first discussion on the subject with the president took place during a Democratic leadership meeting at the White House on Nov. 18. Schumer pressed his case again in a one-on-one meeting with Obama on Nov. 22. 

Schumer argued to the president that setting the threshold at $1 million made for a crisper political message, and said not even a majority of Tea Party Republicans would support preserving big tax breaks for millionaires and billionaires.

Obama and his senior advisers said the cut-off should stay at $250,000, according to sources familiar with meetings between the president and Senate Democratic leaders at the end of last year.

Schumer wanted to give Senate Republicans an ultimatum: accept an extension of the Bush tax cuts for all families except those earning above $1 million or there would be no deal on extending any of the breaks.

Schumer was sure Democrats could take their case to the public and win it by arguing that Republicans cared most about protecting millionaires and billionaires.

Public polling has shown raising taxes on millionaires is winning issue for Democrats. An ABC News/Washington Post poll taken this month showed 57 percent of Republicans surveyed voiced support for raising taxes on income above $1 million, as did 55 percent of Tea Party supporters. 

But Obama and his advisers did not want to risk a standoff that would result in taxes lapsing to Clinton-era levels and imperil a fragile economic recovery.

“They had disagreements on two fronts. The administration worried the $1 million threshold ceded too much revenue,” said a Democratic source familiar with the meetings.

When it became clear that Democrats would either have to take a stand at repealing the Bush tax rates for millionaire families or give Republicans virtually everything they wanted, Obama still resisted.

“Schumer argued that we should draw the line at $1 million and not blink. The administration said ‘If we don’t blink and they don’t blink, everybody’s taxes go up and that’s dangerous for the economy.’ They wanted to put the economy first,” said the source.

The intra-party disagreement received little attention because Schumer refused to talk to reporters in the run-up to the tax deal with Senate Republicans.

Ten months later, Senate Democrats have decided $1 million should be the line in the sand that Democrats should hold in tax battles with Republicans.

A Senate Democratic aide said it would likely be introduced several more times as a revenue-raising proposal to pay for jobs legislation.

Two Senate Democrats, Ben Nelson (Neb.) and Jon Tester (Mont.), voted on Tuesday against advancing a $447 billion jobs package that included the millionaires’ surtax. A third, Sen. Jim Webb (Va.), voted to begin debate on the bill but said he opposed raising income on ordinary income.

But otherwise, Democrats were largely united behind the millionaire’s surtax. Even Sen. Joe Lieberman (I-Conn.), who said he would vote against the jobs bill because he doesn’t think it’s worth the money, is not opposed to raising taxes on millionaires, per se.

An important tipping point came in July, when Senate Democrats embraced a budget drafted by Senate Budget Committee Chairman Kent Conrad (D-N.D.) that set $1 million as the threshold for raising taxes. The $1 million proposal was able to unite the ideologically diverse members of his panel, including centrist Sens. Bill Nelson (D-Fla.) and Mark Warner (D-Va.) and liberal Sens. Bernie Sanders (I-Vt.) and Sheldon Whitehouse (D-R.I.).

“Senate Democrats believe Obama is moving toward them on the idea of limiting tax increases to families earning more than $1 million a year.

As evidence, they point to the so-called “Warren Buffett rule” Obama introduced last month in the framework he proposed for deficit reduction. Citing the billionaire investor from Nebraska, who has met with Senate Democrats to discuss tax inequality, Obama said millionaires should not pay a lower tax rate than middle-class workers.

But administration officials say the president intended the Buffett rule to be a guiding concept, not as an offset to cover the cost of his jobs bill.

“We always said that we would be open to working with Congress on the specific pay-fors for the American Jobs Act as long as any changes fall in line with our principles of making sure that there is a balanced approach and that the wealthiest also pay their fair share,” said a White House official.