Debt Woes Make Bush Tax Cuts Hard To Extend

Published Jun 21, 2010. By Richard Rubin. In Congressional Quarterly.
Debt Woes Make Bush Tax Cuts Hard to Extend

The midpoint of 2010 is just days away, but lawmakers are still gazing backward, working through an excruciating debate over extending tax policies that expired at the end of 2009. When they start looking forward at the rest of the year, they will find that the tax work ahead is much larger and much more daunting.

The broad tax cuts enacted in 2001 and 2003 (PL 107-16, PL 108-27) all expire at the end of this year. So far, despite general agreement on the goal of permanently extending most of the current rate structure, Democratic tax writers have not started moving a bill.

If the past few weeks and months are any indication of Congress’ ability to move tax legislation, such a bill might not pass any time soon. Instead, lawmakers may opt for a temporary measure that staves off the day of reckoning for a year or two.

The “extenders” bill (HR 4213) affecting the 2009 policies, which has morphed into a $118 billion package of tax cuts and social safety-net spending, has been bedeviled by pay-as-you-go rules, House-Senate discord and lawmakers’ heightened sensitivity to the politics of budget deficits. A bill to reinstate the estate tax (HR 4154) has not moved either, and even if the extenders bill gets enacted, most of its tax provisions will expire again in December.

In this climate, with little floor time left until the election, a permanent extension of the 2001 and 2003 tax cuts would seem impossible, said Republican tax lobbyist Kenneth J. Kies of the Federal Policy Group.

“It’s just too ambitious. It’s not just possible,” he said.

Broad Support

At first glance, a bill to extend the income tax cuts might seem easier to move than the extenders legislation. The pay-as-you-go law (PL 111-139) enacted earlier this year allows the tax cuts for individuals making less than $200,000 (and married couples making less than $250,000) to be extended permanently without offsetting spending cuts or revenue increases elsewhere in the budget.

The income tax rate cuts also enjoy broad bipartisan support, and the political price of inaction would be much higher than the failure to continue the collection of business and individual tax provisions in the extenders package. Both President Obama and his Republican rival, Sen. John McCain of Arizona, campaigned in 2008 on extending most of the tax cuts permanently. They differed only on whether all or most of the Bush-era tax policies should continue.

“The American people think it’s status quo, so it’s very different from the extenders and the extra stuff attached to the extenders,” said Diane Lim <Rogers>, chief economist at the Concord Coalition, which advocates fiscal restraint.

But the extenders debate shows that lawmakers are spooked by the upcoming election and the fear that voters will punish them for the federal government’s growing budget deficits. In that context, a bill with a price tag north of $2 trillion might be a difficult sell, even though it would simply preserve the current tax code for most people.

Furthermore, fiscally conservative “Blue Dog” Democrats in the House have indicated — at least on spending to prevent doctors’ Medicare reimbursement rates from plummeting — that they see the exceptions in the pay-as-you-go law not as automatic policy choices, but as maximums.

If applied to tax policy, that line of thinking and the paucity of easy-to-pass offsets could lead lawmakers to the easiest way to shrink the cost of a bill: Give it an expiration date, instead of making it permanent.

“Watching them get tied in a knot over 30 or 40 or 50 billion dollars in this extenders bill suggests that they may not honor that free pass they gave themselves,” said Clint Stretch, managing principal of tax policy at Deloitte Tax LLP.

Kies, too, pointed to the House’s frantic paring of the extenders bill before the Memorial Day recess as a turning point that signaled the heightened attention to the deficit.

“Up to that point, it was rhetoric and no action. And all of a sudden you started seeing substantive policy decisions motivated by people waking up and saying, ‘Holy crap. This deficit is really bad,’” he said. “For the foreseeable future, that will be as important a factor driving congressional decision-making as any other.”

In addition to the concerns from moderates, more liberal Democrats who opposed the tax cuts in 2001 and 2003 as being fiscally irresponsible during a time of budget surpluses will have a hard time explaining why extending them amid budget deficits makes sense. The answer, said <Rogers of the Concord Coalition, may be a temporary extension of the cuts that avoids raising taxes during an economic downturn and does not carry such a big price tag.

“An easier position for them to defend is maybe insisting that any extension of the Bush tax cuts be only temporary, but not permanent,” she said. “It’s not like they’re opposing the tax cuts. They’re opposing the fiscally irresponsible part of the tax cuts.”

Plotting Strategy

Even though they have not devised a legislative plan yet, Democrats are beginning to marshal their arguments.

Richard E. Neal, D-Mass., who chairs the Ways and Means Subcommittee on Select Revenue Measures, said he wants to link the expiration of the tax cuts for top earners to the cost of the war in Iraq as a way to pay for the conflict.

Even though that expiration would not generate money against the current law baseline or the one in the pay-as-you-go law, Neal’s approach would set up a contrast between Democrats and Republicans, who generally want to extend all of the tax cuts.

For their part, Republicans will also face a series of dilemmas when the big tax bill comes forward: Do they ultimately vote for the Democrats’ approach or oppose it because not all of the tax cuts would get extended? Do they continue arguing that extensions of tax cuts should not be offset, or do they propose large spending cuts?

Beyond the substance, it is unclear when Congress might act.

Democrats might want to pass the bill before the election, to stave off arguments from Republicans that a tax increase is imminent amid Democratic inaction.

But they also have reasons to wait until a potential lame-duck session. The political pressure will not be as fierce then, and a Republican takeover of one or both houses could prompt Democrats to push final action off to the 112th Congress.

“I want to get it done,” Neal said. “And whether it’s before the election or after the election, the most important thing is that we have a substantive discussion about it.”