Calls to extend Bush tax cuts face difficult pay-as-you-go reality

Democrats who are seeking to extend tax cuts for the wealthy enacted by President George W. Bush might be creating a “Sophie’s Choice” scenario when it comes to paying for their cost.

Pay-as-you-go rules stipulate that extending tax breaks for individuals making more than $200,000 annually or couples earning more than $250,000 cannot add to the deficit. 

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But in the limited universe of politically palatable offsets, lawmakers will have to choose between paying to extend these tax breaks or using the revenue for another initiative that might be nearer and dearer to the hearts of their constituents.  

“To extend the tax breaks above 200[K] and 250[K], it has to be paid for under statutory PAYGO, and that takes money from other purposes,” said House Ways and Means Chairman Sandy Levin (D-Mich.).

House Majority Leader Steny Hoyer on Friday said extending the so-called Bush tax cuts for the wealthy would require $676 billion in offsets.

Levin argues that revenue would be better spent offsetting initiatives that help stimulate the economy.

“We have to pay for further job stimulus and we have to pay for extending the high income tax cuts. So the question is: How do we best use the money?” he said. “Extending the tax cuts for the very wealthy and paying for them is not the best way to create jobs.”

Hoyer and Speaker Nancy Pelosi (D-Calif.) also say the tax cuts for the wealthy should expire on schedule at the end of the year.

Chuck Marr, director of Federal Tax Policy at the Center on Budget and Policy Priorities, told The Hill that allowing the upper brackets to reset at higher rates could provide revenue for programs to stimulate the economy.  

“You sunset those tax cuts and lock in the long-term savings, but use the short-term savings and dedicate that money to policies that are a more efficient [stimulus],” he said.

Marr said additional tax relief for small businesses or increased support to state and local governments would be a good use of the revenue that would be captured by allowing the top-end tax rates to expire.

“Those things are much more efficient than extending the high-end tax cuts,” he said.

However, concerns over the economy have added considerable political pressure to Democrats seeking reelection who wish to avoid the “tax increaser” label in the run-up to November. That pressure might force Democratic leaders to rethink their position on extending the upper brackets, at least temporarily.

A one-year extension of the top two brackets would cost approximately $40 billion, according to some estimates, and would be much easier to offset than Hoyer’s $676 billion figure.

Lawmakers could also circumvent pay-as-you-go rules procedurally if 60 senators agree that, because of the slowdown, paying for a temporary extension of the upper brackets would create a drag on the economy.  

“If the idea is to have some sort of stimulus, you wouldn’t want to pay for it,” Marr said.

The Tax Relief Coalition on Friday blasted the idea of enforcing the PAYGO rule in the context of extending tax cuts for the wealthy.

“Unyielding adherence to PAYGO virtually ensures that every discussion of tax policy becomes mired in the rhetoric of class warfare,” it stated in a letter sent to Congress. 

It also warned that small-business owners would bear the brunt of a tax increase on the top two rates.

“Despite the importance of these small businesses to the U.S. economy and American jobs, they will bear a substantial portion of the higher tax rates,” the letter states. “About one-quarter of taxpayers who derive at least 50 percent of their income from a flow-through business will be subject to the higher tax.”

A growing chorus of Democratic lawmakers in both chambers wants to extend the top rates until the economic crisis subsides. Senate Budget Committee Chairman Kent Conrad (D-N.D.) is chief among them.

“The general rule of thumb would be you’d not want to do tax changes until the recovery is on more solid ground,” Conrad said.

An economic rebound also does not appear in the offing, according to several reports.

Fannie Mae’s July 2010 Economic Outlook reduced its projection for economic growth this year to 2.8 percent from 3.2 percent, and remains on guard for additional downgrades.

The report states that concerns about the global economic recovery, including lingering worries regarding European sovereign debt, and increasing caution domestically among private employers and consumers has had a chilling effect on economic activity.  

“We have shifted into a lower gear in the economic expansion, due in no small part to the increase in financial-market volatility in recent months,” said Fannie Mae Chief Economist Doug Duncan in prepared remarks. “As a result, private-sector employers are tentative about hiring decisions; businesses are building cash, but generally are investing in capital rather than labor. That reluctance to hire has had a knock-on effect on consumers, who are spending less as the deleveraging process continues.”

Former Federal Reserve Chairman Alan Greenspan recently said that wealthy individuals have helped propel the economy forward. Some lawmakers have suggested a tax increase on this sector could worsen the economic outlook.

Levin doesn’t buy it.

“You’ve got various reports including that the wealthy have reduced their spending,” he said. “I’ll read all the economic reports and I’ll look at all of the various arguments. But we need to strengthen job creation. And my own view is that the high income brackets should be allowed to expire.”