Expiring tax cuts sparking battle in Washington

WASHINGTON — A fight is brewing over what Congress and President Barack Obama should do about the expiring Bush tax cuts.

Democratic leaders, including Obama, say they are intent on letting the tax cuts for the wealthy expire as scheduled at the end of this year. But they have pledged to continue the lower tax rates for individuals earning less than $200,000 and families earning less than $250,000 - what Democrats call the middle class.

Most Republicans want to extend the tax cuts for everyone, and some Democrats agree, saying it would be unwise to raise taxes on anyone while the economy remains weak. If no action is taken, taxes on income, dividends, capital gains and estates would all rise.

The issue will move to the top of the agenda when lawmakers return to Washington in September from their summer recess - set to begin Aug. 9 - just as the midterm campaign gets under way in earnest. In recent days, intense discussions have begun at the Capitol.

“It has enormous ramifications for the fall and clearly will be one of the dominant issues,” said Sen. Ron Wyden, D-Ore. “This is code for the role of the federal government, the debate over the size of government and the priorities of the nation.”

At a private meeting of the Senate Finance Committee on Thursday, participants said Democrats were clearly divided while Republicans wanted assurances that any bill would be developed openly, allowing them to propose amendments.Sen. Max Baucus, D-Mont., the committee’s chairman, has so far refused to make that commitment.

At the meeting, in a testy exchange described by several witnesses, Sen. Orrin G. Hatch, R-Utah, pushed for developing the bill openly in committee rather than having Democrats bring it straight to the floor.

In a statement, Hatch lambasted Democrats and the White House for their plan to let some of the tax cuts expire.

“They can talk about the wealthy all they want, but this is about stopping a job-killing tax hike on small businesses during tough economic times,” he said.

Both parties are still charting strategy, but some lawmakers, congressional aides and administration officials said Democrats must try to pass a bill before the election and not wait for a lame-duck session. “You can’t play chicken with this much of the tax system,” said a senior Republican Senate aide, who spoke anonymously because he was not authorized to comment on talks.

If no tax legislation is passed, all the major tax reductions passed under President George W. Bush in 2001 and 2003 would expire, withrates reverting overnight on Dec. 31. The top marginal income-tax rate, for example, would go back to 39.6 percent from 35 percent now, with corresponding increases in rates for lower income brackets. The estate tax, which lapsed last year, would automatically be reinstated effectively at a 55 percent rate on Jan. 1 for estates larger than $1 million.

Some Democrats wantObama to keep his promise to raise taxes on the rich, and the White House’s budget forecasts rely heavily on rolling the top income-tax rates back to their pre-2001 levels. Some fiscal hawks warn that extending the tax cuts would add more than $2 trillion to the federal budget deficits at a time when the national debt is becoming an economic concern and a political issue.

Political economists are fiercely divided.

So are Democrats. In recent days, fiscal conservatives like Sens. Kent Conrad of North Dakota and Evan Bayh of Indiana expressed support for extending the tax cuts at all income levels, at least temporarily.

Senior administration officials said there was no interest in such a plan at the WhiteHouse, which intends to have Treasury Secretary Timothy Geithner lead an effort to forcefully make the case that continuing tax breaks for the rich will not help lift the economy, but eliminating them will help reduce the deficit.

“We do not buy into the theory that because the economy is still recovering, extending tax cuts for the highestearners is a necessary or effective policy response,” said Gene Sperling, counselor to Geithner.

“While we are supporting measures like small-business lending and tax cuts to spark growth,” Sperling added, “it is also important to show the world that we are following through on our commitment to long-term fiscal discipline.”