The Lame Duck Congress and the Fate of the Bush Tax Cuts

By :: November 4th, 2010

What will Congress do about the Bush-era tax cuts when it returns for a lame duck session in a couple of weeks? It is increasingly likely that the answer is: Nothing. And that will hardly be an auspicious start for the relationship between President Obama and newly resurgent congressional Republicans.
The returning Congress has only two must-do jobs. It needs to pass a stopgap spending bill to keep the government functioning into next year, and it must address a slew of expiring tax cuts. These include the Bush-era tax cuts of 2001 and 2003, as well as President Obama’s Making Work Pay tax credit—all of which expire on Dec. 31. The lawmakers also must deal with the Alternative Minimum Tax “patch,” and a passel of business tax cuts that actually expired at the end of last year but which almost everyone simply assumed would be extended before 2010 comes to an end.
Since he came to the White House, Obama has insisted he would permanently extend the 2001 and 2003 tax cuts for those making $200,000 or less ($250,000 for couples filing jointly) and let them expire for higher-earners. But when Democrats had the chance to do just that before the election, the Senate blinked. In the face of objections from moderate Democrats, Majority Leader Harry Reid put off the vote.
Now, of course, the political environment has completely changed. Republicans are taking an increasingly hard line against Obama’s plan and demanding that all the Bush-era tax cuts be permanently extended. Obama says he is ready to talk. But knowing they will control the House and a half-dozen more seats in the Senate next year, some GOP lawmakers are already threatening to put off a decision on the tax cuts until after January unless Obama capitulates.
So what will happen? Here are the options:
Adopt Obama's tax hike on high earners. It is dead. Even the President now says he is willing to compromise.
Permanently extend the tax cuts for those making $200,000/$250,000 or less but only temporarily extend them for high-earners. Republicans will never go for it since they’d lose all their leverage when the time comes to extending them again. They know it will be much easier for Congress to continue tax breaks for those high-earners as long as their fate remains tied to the fate of middle-class taxes.
Permanently extend the tax cuts for those making $1 million or less. What about retaining the tax cuts for those making up to $500,000 or even $1 million, while raising taxes for higher-earners? My Tax Policy Center colleagues Jim Nunns and Rachel Johnson have looked at several options that would make up the lost revenue, but they’d result in a new top rate for $1 million+ earners ranging from 41 percent to 50 percent. Not likely to pass muster with Republicans.
Pass the GOP Plan: Even with 47 Republicans, the Senate won't vote to permanently extend all the tax cuts. This is a non-starter, though the GOP may not quite be ready to admit it.
Temporarily extend all the tax cuts--including the AMT patch, the business tax cuts, and Making Work Pay--for a year or two. This increasingly looks like the deal, but are Obama and the resurgent Hill Republicans prepared to sign on? Will angry House Democrats agree, especially as they hear more talk of a government spending freeze?
Kick the can down the road. It is hard to imagine Congress simply leaving town without addressing the tax cuts in some way. Both parties risk a huge backlash if they don’t act. That’s why I’m betting Congress extends the tax cuts for just a few months so they can resume their bickering again next spring. This is execrable tax policy, but it just might serve everyone’s political needs

9Comments

  1. Anonymous  ::  2:52 pm on November 5th, 2010:

    Yes, the deal will be a temporary extension for everything. The two mini-battles will be over Obama's expiring cuts (MWP and education credit) and over the new expiration date. I expect that Republicans will prefer an election year (like 2012), but Democrats will want an odd numbered year.
    If Republicans toss in an extra $250 for seniors, the Tea Party people will revolt.

  2. Anonymous  ::  8:17 pm on November 5th, 2010:

    I think the GOP will raise Hell if this issue were solved during the Lame Duck session, but will privately be glad it is done – just as they denounce the stimulus bill but delight in announcing the reward of Recovery Act projects.
    Obama would be an idiot if he waited to act, since he'll get his best deal out of the Lame Duck Session.
    While it would be fun to let the Republicans stew in their juices about extending the tax cuts without having to compromise – I would rather not have Congress play chicken with tax policy just now, since I am in the cohort of people for whom the tax breaks make a bit of a difference. $1200 per year in tax benefits means a change in my withholding of $100 per month if they go away. I can't really eat that much of a hit right now.
    Of course, I could probably adjust, but spending will go down – or maybe debt repayment (like maybe student load debt owed to the Dept. of Education).
    It will take 60 votes after January 1 to make these changes in the Senate – at least as far as the taxes on the rich go. That won't happen, ever. A part of me says that it would be good to teach the GOP a lesson and announce that the tax cuts will expire, period – just so that the GOP can look bad to their supporters. It would also help stabilize the debt. Not extending the tax cuts at all and cutting the Pentagon budget to 1998 levels would balance the budget rather quickly.

  3. Anonymous  ::  5:16 pm on November 6th, 2010:

    The economy would run more efficiently if we knew in ADVANCE what the tax rates were going to be, and the rates and rules didn't keep changing from year to year (besides adjusting thresholds for inflation).
    Because of these delayed decisions on tax laws:
    1) I am forced to gamble on the decision that congress will make.
    2) Money is delayed going into the economy because of excess tax withholding.
    3) I waste a lot time researching, planning, and reading articles like this trying to figure out what I should do.
    My wife and I are going to be in the 15% bracket this year and will have > $10,000 of capital gains taxed at the 0% rate. If we had waited until next year when the capital gains rate will be 15% (assuming they don't change it), we would pay $1500 in additional taxes. If they don't patch the AMT for this year we will get clobbered, and those capital gains will be taxed at 25% ($2500). If we had waited until after they pass the tax laws to sell, we would risk a bad sale price, especially if everyone decided to do that.
    If I don't withhold from my paycheck as if I'm going to pay the high taxes, and the AMT isn't patched, we could get penalized. I haven’t spent the time yet to figure out exactly how bad it could be, so if AMT isn’t patched I may be over or under-withholding at the moment (just enough to match the tax I owed last year and avoid any penalties). If I withheld based on the assumption that AMT would get patched, the additional cash during the year would be significantly more than what we received from any of the stimulus plans over the last few years.

  4. Anonymous  ::  3:46 pm on November 8th, 2010:

    No brief with the subject, but I tried to get here from a link at Joe Kristan's page, and got “access from http://www.rothcpa.com/taxupdates.php has been denied”
    (I eventually just copied the link, opened a new page and pasted to get here)
    Am I missing something?
    Henry Stern
    insureblog.net

  5. Anonymous  ::  7:20 pm on November 8th, 2010:

    Sounds like a browser problem.

  6. Anonymous  ::  4:15 pm on November 9th, 2010:

    “browser problem”
    No, I don't think so: same issue regardless of browser (IE and FF) and even ISP (home and office). Plus, the referring post points out the problem – I'm not the only one experiencing it.
    Just seems odd.

  7. Anonymous  ::  5:15 pm on November 9th, 2010:

    It was hardly a secret in Congress over the past two years that all the tax issues would manifest now. Congress’s ability, or rather inability, to act is also not a surprise. What is even more troubling though is the proposition that Congress will act in the next month to solve the issues at hand. While it is almost always overshadowed by the ordinary tax rate debate, as that is much less complex at the surface, I think the most troubling problem in the current mess that needs to be solved before the session ends is the Alternative Minimum Tax issue. The AMT exemption needs to be renewed immediately at 2009 levels if not greater. As it stands now, an unpatched AMT would affect the most citizens currently and it is in line to put a very steep tax burden on the middle class during what are unequivocally hard economic times. Delaying the vote in Congress any more only makes the matter worse as it limits the amount of planning that individuals and their tax professional are able to do before the year comes to a close with time being more limited with each passing day. Politicians are always talking about how they want to get consumers to spend more in order to stimulate the economy, however, their lack of action makes that an increasingly hard task as employers are forced to keep withholding rates high on paychecks to protect employees from paying penalties in the future because their tax bill spiked. In the end this limits the amount of money that can be currently funneled back into the economy and the cycle perpetuates itself. Another solution that I have for Congress is to stop enacting tax legislation that expires in an election year. Over the past several election cycles Congress has routinely come to a standstill on important issues, especially regarding tax, as no Congressman or woman wants his or her campaign to fall apart because of a misconstrued tax policy. I feel this simple solution could help mitigate future problems that are bound to occur as new tax regulations and rules are slowly stitched and sewed into the tax code and set to expire themselves in the coming years.

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