Tax Cut Timing Is Proving Problematic for Democrats

Political Memo
By JACKIE CALMES
Published: November 8, 2010

WASHINGTON — When one party controls the White House and Congress, it controls the calendar for what gets done and when. So how is it that Democrats ended up in such a fix over what to do about the expiring Bush-era tax cuts?

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Jim Wilson/The New York Times
Senator Harry Reid, the majority leader, was urged not to push for debate on the Bush tax cuts before the midterm elections.

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Times Topic: Bush-Era Tax Cuts

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That is what many Democrats are asking.

By dint of calculation and miscalculation, after mixed messages and missed signals, President Obama and Congressional Democratic leaders delayed debate until before the midterm elections. They dared Republicans to fight for extending the tax cuts for the rich and, in so doing, “hold hostage” those for the middle class. But it was Democrats who blinked as their ranks splintered in the heat of a worsening electoral climate, and they delayed any vote until after the elections.
Now, with the tax cuts due to expire Dec. 31, the debate finally commences next week in a lame-duck session, with Democrats weakened, Republicans emboldened by the election results and the tepid economy continuing to provide some argument against letting rates rise even for the highest income levels.

For every election since the Bush tax cuts became law in 2001 and 2003, a central plank of Democrats’ campaign platforms has been to repeal them for high-income brackets — to pay for other programs, like expanded health care, or to reduce budget deficits.

By Mr. Obama’s election, however, the financial system had nearly collapsed and the economy was in recession. He and Congressional Democrats quietly decided to let the Bush tax cuts remain in place for income above $250,000 for couples, and $200,000 for individuals, until their scheduled expiration at the end of 2010.

The economy’s continued slow growth largely explains why ending those tax cuts, which apply to about 2 percent of Americans, proved easier said than done for Democrats. But other factors also explain their vacillation this year, including a crowded legislative agenda, the worsening political headwinds and, perhaps most of all, Democrats’ chronic insecurity about dealing with tax issues.
A year ago this month, political and economic advisers at the White House first held a series of meetings on what to do about the tax cuts in the coming year. There was no consensus; advisers would shift positions with time and circumstances.

And a vicious circle took hold, according to interviews over past months with Democrats in the administration and Congress: Mr. Obama largely deferred to Democratic leaders — the Senate majority leader, Harry Reid of Nevada, was among those in tough re-election races — while Democrats looked to the president to take the lead and make the case against extending the tax cuts for high incomes.

Mr. Obama’s budget early this year called for permanently extending the tax cuts except on high incomes, but administration officials signaled to Democrats that he could support a short-term extension of one or two years. That would reduce deficit projections and, the officials reckoned, provide an impetus for overhauling and simplifying the tax code before the middle-class tax rates expired again.

In February, Democrats believed the issue was effectively settled when they passed and Mr. Obama signed the so-called pay-go law, for “pay as you go,” requiring that the cost of new spending or new tax cuts be offset by spending cuts or tax increases of equal value to avoid adding to annual deficits.

Among the law’s major exceptions: The tax rates for income up to $250,000 could be extended without offsetting savings, at a cost of roughly $3 trillion over 10 years. Not so for rates on higher income. The fiscally conservative Blue Dog Democrats persuaded liberals to support the pay-go bill partly by arguing that Republicans could not find the $700 billion needed to offset a long-term extension of top rates.

The tax issue remained on a backburner month after month as Democrats were preoccupied with the health care law, the overhaul of financial regulations and other issues. Still, the administration remained confident that the House, led by Speaker Nancy Pelosi, ultimately would block any extension of the top rates.

But by summer, with the recovery stalled and more of them on handicappers’ endangered lists, House Democrats refused to vote on the tax cuts before the Senate did. They feared they would endure Republicans’ charge that they had voted to raise taxes on some small businesses, only to see the legislation languish in the Senate like other bills had.

Ms. Pelosi informed the White House of the House Democratic position. At a meeting before Congress recessed for August, to the surprise of others, Mr. Reid assured her and Mr. Obama that the Senate would vote in September to extend only the middle-income rates.

But when Congress returned, party pollsters and consultants battled over the right course, each side interpreting polling data to its advantage.

One camp believed, as Stan Greenberg and James Carville wrote in a Sept. 15 memorandum, that “Democrats Should Want This Tax Cut Debate.” They argued that it would define the election as a choice between Democrats for the middle class and deficit reduction, against Republicans for Wall Street and more debt.

Another camp countered that in an already bad year, Democrats were especially vulnerable to the “tax and spend” label. As the pollster Mark Mellman summed the argument in an interview, “An election that’s dominated by the tax issue is a bad election for Democrats everywhere, anywhere and always.”

By then several moderate Senate Democrats who were not up for re-election — Evan Bayh of Indiana, Ben Nelson of Nebraska and Kent Conrad of North Dakota — had expressed opposition to letting the top rates expire because of the economy’s fragility. That suggested Senate Democrats could not muster the 60 votes to overcome a Republican filibuster, further unnerving Democrats struggling for re-election.

Several, including Senators Barbara Boxer of California and Patty Murray of Washington, implored Mr. Reid not to force the debate. He agreed. All three won re-election.

The day after the election, Mr. Obama said he was open to compromise with Republicans.

A version of this article appeared in print on November 9, 2010, on page A24 of the New York edition.