Democrats and Republicans face a lame-duck dilemma on tax policy, and divisions in both parties are likely to complicate a debate that affects millions of Americans facing higher tax rates on Jan. 1.
The task is large.
The list of unresolved issues includes extending the 2001 and 2003 Bush-era tax cuts, corporate tax extenders, an expensive “fix” for the alternative minimum tax and an elusive bipartisan deal on the estate tax.
The total cost of preserving those policies for just two years could top $500 billion.
Depending on the outcome of the election, Democrats will have an incentive to address the issue in some way this year, given they will likely have more votes in both chambers during the lame-duck session than they will next year.
Republicans also will have a decision to make on whether to act quickly for taxpayer certainty or wait until next year to try to leverage whatever gains voters hand them. If House Republicans win control of that chamber, they may feel the desire to wait and use their power in the 112th Congress, while Senate Republicans may be more circumspect.
But sources on and off Capitol Hill cautioned that letting income tax rates go up — even with the intention of retroactively lowering them — could create havoc for individual taxpayers and for the stock market.
Jeffery Trinca, vice president at the lobbying firm Van Scoyoc Associates, said both parties would be in dangerous territory if they try to push any decisions on tax extensions to the next Congress.
“I don’t think that they can get away with it,” Trinca said. “Both parties are going to lose if they don’t do something” this year.
Indeed, one senior Senate GOP aide said the uncertainty caused by a lack of action might roil the stock market and force both parties to come to an agreement.
The aide said the decision on whether to act during the lame duck will depend partly on how much discretion the Treasury Department uses in setting how much money is withheld from taxpayers’ paychecks as well as “the calculation of who gets blamed if the House doesn’t act until Jan. 4.”
But Democrats may not necessarily make the calculation easy for Republicans.
Two Senate Democratic aides indicated this week that the party is still firmly behind President Barack Obama’s plan to extend only those Bush-era tax cuts that affect households making $250,000 or less ($200,000 for individuals).
“Democrats have been clear that we should put the middle class first when considering these extensions. Even the few Democrats who have also expressed interest in extensions beyond the middle class are united with the caucus in the definitive position that the tax cuts have to be extended for the middle class,” said one Democratic aide, who held out hope that “after the election, the Republicans know that the politics have to end and they have to sit down and have a real conversation with Democrats about how to move forward.”
Another Senate Democratic aide said many liberals in the caucus are unlikely to abandon long-held positions opposing extensions of tax cuts for higher-income earners.
“Who knows what will happen in a post-Nov. 2 environment,” the aide said. “But today, people feel we have the public’s support.”
That could create a situation in which both parties engage in a proverbial game of chicken over the issue, with competing votes to extend tax cuts falling to filibusters in the Senate in particular.
“If [Republicans’] proposal fails, what do the moderates do?” the aide asked.
Still, some aides said Democrats might not have an appetite for a fight over middle-class tax cuts after suffering punishing defeats at the ballot box this year, especially if they lose control of one or both chambers.
Instead, Democrats may want do a simple extension of existing tax rates — save for the estate tax — largely because their internal differences on whether to extend only middle-class tax breaks may be too difficult to overcome.
“Having a vote after the election only increases the likelihood that we would just do an extension of the whole kit and caboodle,” one Senate Democratic aide said. “I just don’t see how the politics [in the caucus] necessarily changes for the better after the election.”