By Bernie Becker and Peter Schroeder - 12/26/12 10:00 AM EST
The failure of House Speaker John Boehner’s “Plan B” could create chaos for taxpayers across the income spectrum.
With a slew of tax provisions scheduled to expire in less than two weeks, a dive off the "fiscal cliff" could also complicate the chances for a fundamental rewrite of the tax code — something top officials on both sides have said they want.
“People have certainly been told,” said Sen. Kent Conrad (D-N.D.), who is retiring at year’s end and has spent much of the last two years pushing for a broad deficit deal.
“It’s always hard to know how people process what they hear, how much they really understand,” Conrad, the chairman of the Senate Budget Committee, told The Hill. “Clearly the committees that deal with this, they understand.”
On Friday, President Obama called on Congress to pass a pared-down deficit-reduction deal, extending tax rates for all but the highest income levels and extending unemployment benefits. At the same time, Obama added that policymakers could build off that measure with additional tax-and-spending measures.
That statement came a day after Boehner (R-Ohio) declined to put his proposal to lock in rates for annual incomes up to $1 million to a vote, after acknowledging that he didn’t have the support in the GOP Conference to pass such a deal.
The Urban-Brookings Tax Policy Center has said that, all told, taxpayers would face more than $500 billion in larger bills in 2013 if Washington does nothing, from higher payroll taxes to increased individual tax rates to a broader estate tax.
All income tax rates, for instance, will rise on Jan. 1, with the top rate going from 35 percent to Obama’s preferred level of 39.6 percent. The top dividend and capital gains rates, now at 15 percent, would shoot up to 39.6 percent and 20 percent, respectively.
The exemption for the estate tax would also shrink significantly, from roughly $5 million a person to $1 million, and the rate would rise from 35 percent to 55 percent.
Democrats, meanwhile, are fighting to keep stimulus-era expansions of tax breaks like the Earned Income Tax Credit, meant to help the working poor. Several other targeted tax incentives are also scheduled to expire.
Figures from across the ideological spectrum have suggested many or all of those provisions could be dealt with retroactively, if it came to it.
But some changes would have an immediate impact on taxpayers. Obama’s most recent offer to Boehner, communicated before the Speaker shifted to “Plan B,” did not ask for an extension of the current 2-percentage-point cut in the payroll tax.
Wall Street economists and the Congressional Budget Office have said that allowing that tax cut and expanded unemployment insurance to expire would drag down economic growth.
The IRS has also said that roughly two-thirds of 2012 tax returns could be delayed if Washington fails to roll back the reach of the Alternative Minimum Tax, a system meant to ensure that the wealthiest can’t legally evade paying taxes.
Congress did not patch the AMT for inflation when it was enacted, forcing lawmakers to routinely pass a “patch.” But the last patch expired at the end of 2011, and some 30 million more households could be hit by the tax for 2012 without congressional action.
With all that in mind, Sen. Olympia Snowe (R-Maine) said that, despite how the situation looks now, she doesn’t believe Congress and the White House would allow the economy to totally fall off the cliff.
“If you can’t do it now, how difficult is it going to be January 1st?” Snowe, who did not seek reelection this year, told reporters on Friday.
“You’re dealing with a new Congress, newly elected senators, members. It’s a whole new equation. It’s not going to be that easy to put the genie back in the bottle here.”
But top lawmakers on both sides of the aisle have expressed concern that politics could trump policy in the coming days.
Boehner, after being asked at a Friday news conference, declined to rule out bringing up a fiscal-cliff measure that House Democrats would need to carry over the finish line.
Democrats in the chamber, meanwhile, urged Boehner to follow in the footsteps of House Minority Leader Nancy Pelosi (D-Calif.), who as Speaker relied on Republicans to pass an Iraq War spending bill.
“It's important that the Speaker put the good of the country above Republican House Caucus politics,” Rep. Chris Van Hollen (D-Md.) said at a separate Friday news conference.
For their part, Boehner and other Republicans have said that, after “Plan B” went down, the burden was on Obama and Democrats to put together a deal that could make it through Congress.
"We all know it's a disaster. We would like to solve it," said Sen. Orrin Hatch (Utah), the top Republican on the Finance Committee. "Somehow, the president's got to get in and say, 'Yea, I'll take this, I'm not going to veto this.' ”
"I think they really want to go over the cliff, I really do. That's pretty apparent to me," Hatch added.
Allowing current tax policies to lapse would also underscore the challenge of tax reform, in which popular tax breaks and some supported by powerful lobbies would be put on the table as policymakers look for ways to streamline the code and lower rates.
But Sen. Ron Wyden (D-Ore.), a longtime fan of the last comprehensive tax revamp, from 1986, shot down any concerns that the late breakdown of deficit talks could complicate efforts to pursue broad tax reform in the coming year.
"We're not doing tax reform bills in four days, but I think what's going to happen between now and the end of the year positions us well for next year," he said. "It's obvious that both sides are going to keep searching for common ground and that's the way it ought to be."