Lame Ducks Will Take the Plunge on Bush Tax Cuts
Policy + Politics

Lame Ducks Will Take the Plunge on Bush Tax Cuts

Alex Ivey/The Fiscal Times

The lame-duck Congress returns today from Thanksgiving recess with its plate piled high with tax and budget leftovers.

The president's fiscal commission meets later this week in a last-ditch effort to unite its coalition of the unwilling behind a plan to tackle the nation's long-term budget deficit. And, just ahead in the new year, a divided Congress will be at loggerheads over issues like raising the debt ceiling and passing a budget. The iceberg on the horizon: a government shutdown.

It's enough to give taxpayers, and everyone who benefits from government largesse (and let's face it, that's everyone), heartburn. So rather than guzzling a bottle of Maalox or taking an overpriced Nexium pill, here's a simple guide to what's at stake between now and Christmas as your elected representatives (including the 63 Democrats heading out the door) grapple with the fiscal fate of the nation.

Bush Tax Cuts — They expire Dec. 31. Most economists agree that restoring federal income tax rates next year to their 2000 level (a time when there was full employment) would deal a devastating blow to an economy where one in 10 are without work and nearly that number have sharply lower incomes compared to a few years ago.

Not everyone needs the cuts, say President Obama and the Democrats who still control both Houses of Congress for a few more weeks. They oppose extending the tax cuts for families earning over $250,000 a year, but may unite behind a craftily crafted plan by Sen. Charles Schumer, D-NY, to only eliminate tax breaks for families earning over $1 million a year. The Republicans, on the other hand, want to permanently extend them for higher income households, too. If the Republicans succeed in peeling off a few “Blue Dog” Democrats in the Senate, look for the president to settle on a compromise that extends all the tax cuts for a year or two.

From a federal budgetary standpoint, this form of economic stimulus doesn't come cheap. Doing nothing, which would also eliminate lower rates on capital gains and dividends, would increase tax collections by $95 billion next year, according to a Joint Committee on Taxation report issued earlier this year.

The Extenders — That's inside-the-Beltway jargon for tax loopholes inserted in the tax code by Gucci Gulch lobbyists representing dozens of special interests. Research and development tax credit? About $7 billion a year. Ethanol? $3.6 billion a year. Motorsports entertainment complexes? $29 million. The list goes on and on.

Extending them all — probably about the only thing that can happen when legislative time is in short supply — would cost about $25 billion a year. The best guess is that rather than cut off politically sensitive extenders like the ethanol subsidy, everything will go along for the ride.

Unemployment Insurance — No one wants to cut off extended insurance benefits for the jobless, which is like mainlining cash into the economy. People with good work histories who have been out of work for more than 26 weeks spend every dime they can get their hands on. Democrats will have this high on their agenda, and most Republicans support it, too. Another $12 billion carries the program through the end of February.

Low-Income Worker Tax Credits — There will be losers in the lame duck session — the nation's hard working yet still poor citizens. Low-wage workers received a special "make work pay" tax credit in the 2009 stimulus plan, which expires at the end of this year. No one except Sen. Bernie Sanders, I-Vt., is talking about extending it.

That will increase taxes on families in the lower half of the income scale by about $60 billion next year. Yes, it reduces the deficit, but it's like unemployment insurance. Failure to re-enact this credit will directly detract from economic growth, since low-income folks tend to spend every penny. It's also worth pointing out that the savings are in the same ball park as the cost of extending the high-income tax cuts, which are much less efficient as a short-term economic stimulus, since rich people tend to save or invest their tax cuts.

Alternate Minimum Tax — The AMT, a complicated formula that limits tax breaks for higher income households, hit about 5 million tax returns last year. That will rise to 23 million if the inflation-adjustment factor in its formula isn't renewed for another year. This is a biggie, too. It could reduce the deficit by $66 billion next year — or raise taxes on the upper-middle class by that amount, depending on how you look at it. Look for Congress to get this one done for that well-off demographic, which tends to vote in extremely high numbers.

Estate Tax — Remember the death tax? It's back after a one-year hiatus that saw the heirs of at least five billionaires get off without having to pay the Internal Revenue Service a dime. The tax reverts back to 2000 levels (55 percent on everything over $1 million) unless Congress adopts some other formula.

During the Bush years, it was 45 percent on everything over $3.5 million, which hit about 0.25 percent of all estates, according to the Center on Budget and Policy Priorities. The House already passed an extension at that level. The millionaires club in the Senate will probably find time to go along.

 A Kind Word for the IRS — Imagine what it's like over at the Internal Revenue Service this holiday season. It takes time to construct tax tables and write those indecipherable tax booklets. The same holds true for the software writers at firms that offer computer-based tax preparation services. Most Americans simply fill in the blanks and let computers do their taxes these days. The longer Congress waits, the longer you will, too, for their products.

That's the near term. As for the long-term budget woes facing the nation:

Fiscal Commission — The National Commission on Fiscal Responsibility and Reform, headed by Erskine Bowles, President Clinton's former chief of staff, and Alan Simpson, a former Republican Senator from Wyoming, must report by Dec. 1. They need 14 votes to send a plan to the president's desk. The chairmen's mark, released earlier this month, won high praise for putting all the central questions on the table — taxes, entitlements, national defense and a cap on spending — but drew sharp criticism on the left for relying on budget cuts for 75 percent of its savings.

Compromise doesn't seem likely. Every special interest group reacted according to script. The Republican right rejected higher taxes; liberals vowed to defend Social Security and Medicare; and Secretary of Defense Robert Gates questioned the wisdom of deep cuts in the military.

An alternative proposal from the Bipartisan Policy Center, chaired by former Office of Management and Budget chief Alice Rivlin, who sits on the commission, and former Republican Senator Pete Domenici, who does not, tried to address some of those concerns. It relied on taxes as much as on cuts for its deficit reduction; endorsed a national sales tax; and rejected the rigid spending cap offered by Bowles-Simpson in favor of a formulaic approach to Medicare that makes room for the growing number of older Americans.

But their proposal to transform elder care — which is the core problem driving long-term deficits — into the capped voucher program won no new converts. It had previously been proposed by Rep. Paul Ryan, R-Wis., a budget hawk member of the Fiscal Commission and incoming chair of the House Budget Committee. "The problem with the plan is that it doesn't stop the rise in health care costs; it just stops the government's share of it," said commission member Andy Stern, former president of the Service Employees International Union.

Rep. Jan Schakowsky, D-Ill., offered her own plan with higher taxes on the rich and bigger defense cuts. But Republicans, bolstered by election returns, appear dug in on their pledge not to raise taxes by a single dime. It's hard to imagine conservatives on the commission endorsing any plan that increases revenues through higher taxes.