Extension of Bush tax cuts could test Republicans' deficit reduction resolve

After Senate Republicans used the increasing deficit as an excuse to shoot down Democratic attempts to extend unemployment benefits, Democrats are questioning if that commitment to fiscal discipline will continue when it comes time to extend the Bush tax cuts.

“I will be curious to see if their new found fiscal religion that everything must be paid for is something they stick to as long as debt and deficits are a problem,” a leadership aide told The Hill. “Or is [it] just an election-eve conversion and will be dropped as soon as convenient.”

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Congress passed the Bush tax cuts in 2001 when Republicans controlled both chambers -- much to the chagrin of many Democrats. Those tax breaks, which benefit a large swath of the economy, are slated to expire in January.

Democrats want to extend the cuts that benefit the middle-class, as well as protect them from the alternative minimum tax.

The estate tax is also an issue. The estate tax lapsed on Jan. 1 after the Senate failed to extend it last year. If lawmakers do nothing, the tax will resume in 2011 with a 55 percent rate on estates above about $1.2 million, which is much higher than rate paid under the Bush tax cuts. Democrats want an estate tax but not as high as the 55 percent level.

Following through on this goal will be expensive. A permanent extension of these tax breaks would easily surpass the $1 trillion mark over a 10-year period.

“There’s a very real possibility now that they’ll only extend [them] temporarily in order to buy some time to figure out how to reform the overall budget,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

But even a temporary extension of these tax breaks is fiscally daunting. Sources estimate that a two-year extension of the tax cuts Democrats deem a priority would cost more than $250 billion.

Budget writers have protected these measures from pay-as-you-go rules, which means their cost will not be offset by tax increases or spending cuts and will add hundreds of billions of dollars to the deficit.

Republicans on Thursday refused to support an extender bill that added a mere $33 billion to the deficit. The Congressional Budget Office predicts the deficit will hit $1.5 trillion this year.

Some Republicans contend there is a distinction between opposing legislation that extends spending measures, like the extender bill, and voting against tax increases that would negatively affect working families, even if both proposals add to the red ink in Washington.

“Allowing Americans to keep more of their money through tax rate reductions is an entirely separate issue,” said Ryan Patmintra, a spokesman for Senate Republican Whip Jon Kyl (Ariz.). “If our hope is to get Americans back to work, wouldn’t it make sense to leave capital with the small businesses and taxpayers who actually create jobs?”

Sen. Joe Lieberman (I-Conn.), who joined the Republicans in opposing two of the three extenders packages that were presented before the Senate, sees things differently. He suggests that before moving forward on the tax cuts Democratic leaders take a hard look at how their extension will affect the deficit if they are not paid for.

“Senator Lieberman has made it very clear that the national debt is unsustainable and it must be reduced both by curbing spending and considering additional revenues, which would include re-examining the tax cuts that were implemented several years ago,” said Marshall Wittman, Lieberman’s communication director.

Sen. Ben Nelson (D-Neb.) joined Republicans in opposing all three of the extenders bills. His spokesperson told The Hill that his boss would comment on the Bush tax cuts after he sees how Democrats intend to extend them.

There’s no formal time frame for voting on the extension but Rep. Chris Van Hollen (D-Md.), who runs the House Democrats' campaign arm and serves as an assistant to Speaker Nancy Pelosi (D-Calif.), told The Hill earlier this year he expects the vote to come before the November election.

Diane Lim Rogers, chief economist with the Concord Coalition, believes Republicans will look hypocritical supporting the Bush tax cuts, but the strong political will to extend them will overpower any pushback for making a paradoxical vote.  

“Just because we’re seeing a lot of difficulty in passing the extenders bill because of sensible concern for the deficit doesn’t mean that we’re going to see the same kind of script play out for the Bush tax cuts,” she told The Hill.

“I think an extension of the tax cuts have been given a free pass already because President Obama has said we don’t have to pay for their extension,” she said, adding, “It’s sort of like everybody in charge has said it’s okay to not pay for [them].”