Tax Battle Will Be Tough for Democrats to Lose: Albert R. Hunt

Democrats have a good hand, politically and substantively, in the big tax-cut fight; they could screw it up.

The two parties have staked out hard positions in a battle that may help define the U.S. elections this autumn. Democrats want to extend the tax cuts for the middle class; Republicans insist that’s not possible unless tax cuts for the highest earners are extended, too.

“Public-opinion polling shows strong support across the electorate for making permanent the middle-class tax cuts that otherwise would expire at the end of this year,” Geoff Garin, a leading Democratic polltaker, advised congressional leaders in a memo last week. Voters, he added, would direct “anger and agitation” against anyone “who stood in the way” of these middle-class cuts.

Moreover, if necessary, Democrats have a viable backup: extend the upper-income tax cuts for one year -- countering Republican charges that you can’t raise any taxes with the unemployment rate at 9.6 percent -- while making the middle- class tax cuts permanent. Decoupling the tax cuts would ultimately require the upper-income provisions to stand on their own.

Nevertheless, lacking a skilled legislator on this issue or a well-considered White House strategy, the Democrats, who desperately need a legislative victory, may blow it. A number of senators, including Nebraska’s Ben Nelson and Connecticut’s Joseph I. Lieberman, who often side with upper-income taxpayers, have insisted all the tax cuts be extended.

Blue Dog Democrats

And in the House, 31 Democrats wrote Speaker Nancy Pelosi of California a letter calling for some extension of all the Bush-era tax cuts, which are slated to expire at the end of the year because of sleight-of-hand budgetary gimmicks the Republican-controlled Congress put in place when passing them. Ironically, 23 of those Democrats are so-called Blue Dogs, members of a coalition dedicated to reducing deficits. Extending the upper-income tax cuts would add more than $700 billion to the federal budget deficit over the next decade.

And Peter Orszag, President Barack Obama’s former budget director, handed the Republicans a gift when he recently called for extending all the tax cuts for two years, then letting them expire. Orszag says the long-term fiscal situation is so dire that the nation can’t afford the middle-class tax cuts, either. Thus, he argues for a “34-vote strategy” that would extend all tax cuts for two years and then count on the president to veto any subsequent extension.

Election-Year Tax Rise

That assumes that in 2012, a presidential election year, Obama would veto a bill that would prevent a tax increase for all Americans, breaking a pledge he made in his first campaign. There’s a better chance he’ll tap Sarah Palin to be Treasury secretary.

The other huge miscalculation would be if timid Democrats, or those who think the tax debate is a good campaign issue, decided to postpone any action to a lame-duck session after Election Day, Nov. 2. Republicans are certain to make major gains this year. Some of their candidates will likely win seats of appointed senators and take office immediately, thus enabling them to participate in a lame-duck session.

The political climate will be far less conducive; Texas Representative Pete Sessions, who heads the House Republicans’ campaign committee, says he relishes the prospect of dealing with the tax cuts in a lame-duck session. This, he predicts, would assure passage of the measures for the wealthier.

Least Stimulus Effect

On the substance, the Democrats have the better of the arguments, according to many detached analyses. The Congressional Budget Office, for example, determined that of all the measures Congress could adopt, the upper-income tax cuts would be among those that would provide the least stimulus for the economy.

In addressing the budgetary costs of the upper-income tax cuts, Republicans say instead they will focus on spending reductions. House Minority Leader John Boehner proposes to freeze all discretionary spending, other than for defense, homeland security and veterans, at 2008 levels.

That would amount to a 21 percent cutback in these programs, the liberal Center for Budget and Policy Priorities has calculated, and would represent “the deepest cut” in such funding ever. One example: The Boehner proposal would slash spending for the National Institutes of Health to conduct research on cancer, Alzheimer’s, diabetes and other diseases by $6.5 billion in the 2011 fiscal year.

‘Excessive Government Spending

The Ohio Republican says this is necessary because “excessive government spending is crowding out the private economy.” If that were the case, it would be reflected in the financial markets; instead, interest rates remain near historic lows.

Further, the claim that these upper-income cuts, which affect less than 3 percent of all taxpayers, would cripple small businesses is a Trojan Horse, most tax experts say. The higher rates are those that were in effect during the 1990s, when more than 22 million jobs were created, or tenfold more than under the lower top rates during President George W. Bush’s administration.

Also involved are taxes on dividends, capital gains and estates, all of which would go to exceptionally high levels without some kind of action by Congress this year. The White House has proposed a moderate course that would avoid that; many congressional Republicans are demanding more.

Budget Rules

A problem for the Republicans, however, is that under the budget rules, they have to offset any of these more generous tax provisions that disproportionately benefit wealthy Americans with tax increases or spending cuts. Those would almost surely disproportionately hit working-class Americans. Or, they could vote to waive all the budgetary rules -- after making the deficit a centerpiece of this year’s campaign.

If a fallback is necessitated -- a scenario the Obama White House hasn’t adequately considered -- passing only a short-term extension of tax cuts for the wealthy is feasible. For instance, Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, has been depicted as belonging to the Nelson-Lieberman camp favoring extending all tax cuts. In an interview, he said that he wants only a short-term continuation of upper-income tax cuts, that no extension on these is preferable to a permanent one, and that if a bill only includes a middle-class tax cut, he would vote for it.

A victory for the Democrats -- forcing the Republicans to back down or fashioning a reasonable bill in which the opposition is seen as stymieing middle-class tax cuts -- would provide a much-needed boost. Conversely, if they botch this, their already dismal November prospects may get worse.

(Albert R. Hunt is the executive editor for Washington at Bloomberg News. The opinions expressed are his own.)

To contact the writer of this column: Albert R. Hunt in Washington at ahunt1@bloomberg.net

To contact the editor responsible for this column: Max Berley at mberley@bloomberg.net.

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