By Jay Heflin - 09/11/10 10:00 AM EDT
Democratic leaders returning to Washington next week will confront the daunting task of extending Bush-era tax cuts, which could haunt them if handled incorrectly.
Failure to act on the Bush tax cuts before next year will cut take-home-pay in every paycheck across America.
“If Congress was to fail to extend [the tax cuts], that would be close to disastrous,” Clint Stretch, managing principal for tax policy for Deloitte Tax, told reporters this week. “I don’t see how these folks can fail to extend the middle-class tax cuts.”
Voters are already fed up with Washington. “People would be angrier than they are now,” if Congress does not extend the tax cuts, Stretch said.
Still, Stretch and other tax experts say it’s not impossible that Congress would fail to extend middle-class tax breaks.
“The reason I hesitate is I said they’d do the estate tax,” he said.
Stretch is hitting upon a sore spot for lawmakers, who last year vowed to fix the estate tax before January of this year, but then blew past the deadline.
Over 9 months have passed since then and Democratic leaders have still not resolved the issue, putting the tax liability of estates across the country in limbo.
The estate tax is emblematic of how Congress can procrastinate in dealing with tax policy issues. It is not uncommon for the routine extension of expiring tax cuts to be done retroactively, sometime a full year after they have expired.
But inaction on the Bush tax rates would be a much bigger problem.
The American Payroll Association says inaction will cost every worker at least $400 in new taxes. The lowest tax rate of 10 percent, ushered in with the Bush tax cuts, would disappear without an extension, pushing all taxpayers back into the 15 percent bracket.
Rates would also rise on additional wages. It the tax rates expire, the 25 percent, 28, percent, 33 percent, and 35 percent tax rates will revert in January to 28 percent, 31 percent, 36 percent, and 39.6 percent, according to the Tax Policy Center.
“The IRS has to put the new withholding rules in place and employers have to follow them,” Roberton Williams, senior fellow at the Tax Policy Center, told The Hill. “So the withholding tables will take more money out of everybody’s paycheck starting January first.”
President Obama and most Congressional Democrats want to extend tax rates for individuals making less than $200,000 and families with incomes below $250,000. Tax rates for people making more money would revert back to the higher rates under Obama’s plan.
Republicans want to extend all of the lower tax rates.
Democratic lawmakers in August promised to extend them for the middle-class before November’s election, but so far no proposal has been put forth. Sen. Jack Reed (D-R.I.) on Thursday said that action on the matter is now likely to slip until after ballots are cast this fall.
“We’re going to get into a serious debate about the extension of the Bush tax cuts,” he told reporters. But he said he isn’t sure it will get done soon.
“Being honest, I think given the time constraints, and the fact that there is a campaign season afoot, that the ability to do anything major is going to be very limited beyond [passing the small business jobs bill],” he said.
The severity of the recession has Republicans and a growing number of rank-in-file Democrats calling to extend all the Bush tax cuts while Democratic leaders and President Obama are unyielding in wanting to continue only those breaks benefiting the middle-class.
Some worry this division could persist after the election, no matter who wins control of the House and Senate.
“The real question in my mind is whether they come to loggerheads and not do anything because they can’t agree on a compromise,” Williams said. “They’ve already [shown] they can’t agree on anything.”
One bright spot in failing to extend the tax cuts is the deficit. The Congressional Budget Office shows annual deficits would eventually drop to under $500 billion.
But with fiscal responsibility would come great political cost as every worker would take a tax hit. Economists have also warned that such a large tax increase could be disastrous for an economy slowly recovering from recession.
“If they don’t do anything before January, the first paycheck in January will be smaller for everyone in the country,” Williams said. “I don’t think anybody wants to see that happen in the current environment because that really would be a damper on the economy. It would drop take-home-pay by a huge amount.”
Senate Democrats need the support of at least one Republican in order to pass any sort of extension before the end of the year. Reed hopes that at least one conservative breaks from the pack to support their plan.
“It’s much easier to say ‘no,’ in some cases for the Republicans than say ‘let’s go ahead,’” he said, adding, “We have to get one or two…Republican colleagues who are willing to step up and say ‘let’s help.’”
Ian Swanson contributed to this story.