Friday, November 12, 2010

Tax cut extension likely by year's end

Federal tax-cut deal gains steam
2-year extension seems likely, but it won't come easy
Friday, November 12, 2010  02:50 AM
By David Lightman and Kevin G. Hall


WASHINGTON - The Bush-era tax cuts scheduled to expire on Dec. 31 are expected to be extended by the lame-duck Congress, with a two-year extension the most promising compromise.
But the path to approval is going to be bumpy, and there's fear that if the debate gets unusually ugly, the extension won't be approved at all this year. No action would mean that tax rates will jump next year and return to pre-2001 and 2003 rates.
Nonetheless, there's reason for optimism that the Dec. 31 deadline will be met: The key players are sending strong signals that they're willing to accept a temporary fix. And the Internal Revenue Service is warning lawmakers that the later they wait to change 2011 tax law, the more likely it is that consumers and businesses could face confusion and delays in getting refunds.
President Barack Obama said last week that he was ready for a "serious conversation" on a compromise, despite his long-standing insistence that he wants the cuts continued only for individuals with an adjusted gross income of less than $200,000 and for couples earning less than $250,000.
On the Republican side, Sen. Orrin Hatch of Utah, who's slated to become the top Republican on the tax-writing Senate Finance Committee, said this week that a temporary extension "would garner support from Democrats and Republicans alike. That path forward is an extension of all the tax relief well past the next election."
Some Republican leaders in the House of Representatives also have signaled that they're open to a vote on a two-year fix. But others in the GOP are digging in. Ohio's John Boehner, who's set to become House speaker, said Wednesday that he wants a permanent extension.
But the temporary extension is gaining momentum because it would allow both parties to use the issue in the 2012 campaign. And making the tax cuts permanent wouldn't require a vote until a lame-duck session after the 2012 presidential election.
All this logic and leadership firepower, though, might not persuade the rank and file in Congress to move ahead.
Most Democrats have been adamant that there should be no more tax breaks for the wealthy. The current top rates, now 33 and 35 percent, would return to pre-Bush levels of 36 and 39.6 percent for the richest Americans.
Many also think that continuing the tax cuts is too costly.
Letting the tax cuts for the wealthiest expire would reduce the deficit by about $700 billion over 10 years.
Extending all the cuts adds to the deficit - the shortfall between what government collects and what it spends - by an estimated $2.5trillion over a 10-year period.
Democrats aren't eager to fight only for the middle-class tax cuts because many moderates made it clear before the election that they wanted all the cuts extended. They don't want to be accused of raising taxes during the economic slump.
In the Senate, with at least four Democrats expressing such reservations, it seems nearly impossible to get support for cuts only for the middle class.
Robert Bixby, the executive director of the Concord Coalition, a bipartisan budget watchdog organization, called extending the tax cuts "just the tip of the iceberg."
Congress also must extend a fix to the alternative minimum tax, a creeping tax that was never indexed to inflation and thus threatens to snare 21 million taxpayers if it isn't patched. A bipartisan group of senators this week voiced support for raising the AMT limit in 2010.
Should that limit continue to expand, "You're really talking about $4 trillion to make them permanent over 10 years. The expectations of getting a balanced budget anytime soon are quite exaggerated," Bixby said.
Boehner has pledged to cut spending by $100 billion a year, but Bixby thinks that's hardly a serious solution.
"If you are extending tax cuts that cost more than $100 billion a year, and entitlements (Social Security and Medicare) are growing at more than $100 billion a year, you are really not improving the situation dramatically," Bixby said.
Hard choices about cutting the sacred cows of government spending are needed, he said.
But allowing even some rates to return to pre-Bush levels, other Democrats argue, means taxes are going up during a serious economic slump.
"Most economists predict that our nation will face continued economic weakness for the next 18 months to two years," said Senate Budget Committee Chairman Kent Conrad, D-N.D. "The general rule of thumb is that you do not raise taxes or cut spending during an economic downturn. That would be counterproductive."

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