(Bloomberg) — Democrats delayed a congressional vote on extending Bush-era tax cuts until after the Nov. 2 elections, setting up a showdown with Republicans as the reductions near expiration at year's end.
The two parties are locked in a dispute over who should be covered by a tax-cut extension. Democrats want to continue the lower rates for individual income up to $200,000 and up to $250,000 for couples filing jointly, which accounts for about 97 percent of taxpayers, according to Internal Revenue Service data.
Republicans want to keep the cuts for those in the higher income brackets as well, saying that would help sustain a U.S. economy still struggling to grow after the longest recession since the end of World War II.
"The reality is we're not going to pass" the tax cuts before the election, Illinois Senator Richard Durbin, the chamber's No. 2 Democrat, said yesterday. Blaming politics, he said, "We are so tightly wound up in this campaign" that Democrats and Republicans won't be able to reach an agreement.
All of the tax cuts enacted in 2001 and 2003 during President George W. Bush's administration, including lower rates on wages and investments for all Americans, are scheduled to expire Dec. 31. Goldman Sachs Group Inc. said in a research note released Sept. 22 that even a temporary failure by Congress to extend the cuts may erase U.S. economic growth in the first half of next year.
Polls have shown Republicans poised to make significant House and Senate gains in this year's election.
"I suspect the Democratic leadership thinks that wavering members will feel freer" after the election to support legislation that allowed the tax cuts to lapse for higher income brackets, said Henry Aaron, a senior fellow at the Brookings Institution in Washington who studies congressional tax, health, and economic policy. "The risk in that strategy is that the Democrats will emerge from the election shell-shocked and running for the hills."
Senate Democrats said they hit an impasse on whether to hold a vote before the election during a meeting yesterday.
"There's a divided caucus on the issue," said Connecticut Senator Christopher Dodd, who is retiring. Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, said, "It's clear there aren't 60 votes for any proposal, so no proposal is going to pass at this point."
Sixty votes would be needed for a tax-cut extension to advance in the Senate. Durbin and Conrad spoke to reporters as they emerged from a closed-door meeting of Senate Democrats on the issue. "No bill was presented" on the tax cuts, said Senator Byron Dorgan, a North Dakota Democrat.
White House spokeswoman Amy Brundage accused Republicans of "holding middle-class tax cuts hostage in order to borrow $700 billion for tax breaks to the millionaires and billionaires at a time of record deficits."
"The American people will be reminded of that every day," Brundage said.
Don Stewart, a spokesman for Republican Senate leader Mitch McConnell of Kentucky, blamed the delay on division within the Democrats' ranks.
"If anyone can show me where there's a Democratic bill to hold hostage, I'll buy them lunch," he said.
Senator Charles Grassley of Iowa, the ranking Republican on the Finance Committee, called the move to delay grappling with the tax-cut extension a "dereliction of duty" by Democrats.
A vote on the issue will occur before Jan. 1, said Senator Debbie Stabenow, a Michigan Democrat.
"We will have a vote and have the fight before the end of the year," she said. Democrats "are very committed to extending the middle-class tax cuts but not the top rates because that hasn't created jobs," she said.
The Senate "will come back in November and stay in session as long as it takes to get this done," Jim Manley, a spokesman for Majority Leader Harry Reid of Nevada, said in a statement last night.
Chuck Marr, a tax and budget analyst at the Center on Budget and Policy Priorities, a Washington research group that usually sides ideologically with Democrats, said he expected Congress to reach an extension agreement before the year ends.
"There's a very low probability" all of the tax cuts will expire, Marr said. Aaron said he favors keeping all of the reductions in place for a year or two, and then repeal them all. Some Democratic lawmakers, including Conrad, have endorsed a temporary extension of all the rates.
Paychecks May Shrink
Even if lawmakers decide not to let tax rates rise, Americans' paychecks may shrink temporarily if Congress doesn't act soon.
If Congress doesn't vote in November, the IRS will advise employers to increase deductions from paychecks beginning Jan. 1, according to payroll experts. That's because the IRS needs time to prepare and distribute tables used to calculate withholding taxes, and employers need time to implement them.
Alec Phillips, an economist at Goldman Sachs, calculated in this week's research note that the U.S. gross domestic product would be cut by almost 2 percentage points if Congress doesn't extend the tax cuts, as well as temporary tax credits included in the 2009 stimulus bill and relief from the alternative minimum tax.
Even a temporary lapse in the tax provisions "would essentially wipe out most of the modest growth we expect in the first half of 2011," Phillips wrote. He said in a telephone interview that a higher tax rate in 2011's first two months would have that effect.
Dozens of Democrats in the House and at least five in the Senate have backed extending all the tax cuts for one or two years.
House Republicans, who are vying in November's election to gain the 39 seats they need to take control of the chamber, yesterday announced a governing agenda that includes extending all of the tax cuts.
President Barack Obama has called it "irresponsible" for Congress to extend tax cuts for the higher income Americans because it would cost $700 billion in government revenue when lawmakers are looking to rein in deficits.
"I can't give tax cuts to the top 2 percent of Americans" and "lower the deficit at the same time," he said Sept. 20 during a town hall discussion on jobs and the economy on CNBC television.