Democrats in Disarray over Tax Cuts as Midterms Loom
Policy + Politics

Democrats in Disarray over Tax Cuts as Midterms Loom

Congressional Democrats, having postponed a showdown with Republicans over the Bush tax cuts until after the elections, find themselves in disarray with only days left before they head home to campaign. On Tuesday, Democratic leaders offered fumbling explanations about why they had decided against forcing a vote on what they had viewed as their best issue going into the elections — ending the tax cuts for the wealthy.

The move deflated many liberals, who had been spoiling for a fight as recently as two weeks ago. Democrats had been happily accusing Republicans of “holding middle-class tax cuts hostage” in order to preserve tax cuts for the “millionaires and billionaires.” Rep. George Miller, D-Calif., said on CNBC’s “Squawk Box” that he still wants the vote before leaving this week: “I happen to believe that that's a vote that should take place. I think we should support a tax cut for those families up to $250,000. I think that would be an important signal, but we'll just have to see where the votes are.”

Unrest within the Democratic Ranks
But such a vote could hurt some Democrats in the election, and Democratic leaders are facing increasing unrest in their own ranks. In the House, a group of 47 Democrats – enough to swing the vote – broke ranks and called on their leaders to extend current capital gains tax rates—part of the so-called Bush cuts that expire at the end of the year.

Making matters worse, Senate Democratic leaders were trounced on Tuesday when they tried to pass a hastily drafted substitute tax bill aimed at discouraging American companies from “offshoring” jobs to foreign countries. “This is politics before an election, but I think the substance is not on their side in this debate,” said Sen. Judd Gregg, R-N.H.

Though the bill was supposed to address an issue of concern to many red state voters, Democrats didn’t come close to getting the 60 votes they needed to overcome a Republican filibuster. Four Democrats and one independent joined Republicans in voting 53 to 45 on a procedural motion to take up the bill. The Democratic opponents included the chairman of the Senate Finance Committee, Sen. Max Baucus of Montana, whom Senate leaders had bypassed in drafting the bill.

The upshot is that Democrats will head home discouraged about the tax battle and with very little new to stir excitement in voters. Democrats had originally hoped to campaign on the passage of health care reform earlier this year, but polls show the new law is unpopular with about half of all voters. And with unemployment still stuck at 9.6 percent, Democrats are not getting much political mileage out of the $787 billion economic stimulus program they passed last year.

Sen. Al Franken, D-Minn., said on Tuesday that the word “stimulus” had become so unpopular that President Obama had been right to avoid using it. “Frankly, the word 'stimulus' has gotten a bad rap," Franken said in a speech on the Senate floor. “It’s a reputation that it does not deserve.”

Meanwhile, Republicans have blocked most other big initiatives, from bills to reduce greenhouse gas emissions to Obama’s recent proposals for more infrastructure spending and tax cuts.

Until recently, Democratic strategists had thought the best way to highlight their contrast to Republicans was on the Bush tax cuts of 2001 and 2003, which are scheduled to expire at the end of the year. Democrats want to extend all the Bush tax cuts for families earning up to $250,000 a year, which would add more than $3 trillion to the accumulated federal debt over the next decade, and let them expire for the top 2 percent of income-earners above that level. Republicans want to extend the tax cuts for those at the top as well, which would add $700 billion more to the accumulated federal debt.

CBO Numbers Give Boost to Dems
 The Congressional Budget Office provided fresh support for the Democratic position on Tuesday. Douglas Elmendorf, director of the nonpartisan budget agency, told the Senate Budget Committee that action on income taxes such as extending the current rates would provide less short-term stimulus to the economy than other measures, like a temporary cut in payroll taxes.

Budget Committee Chairman Kent Conrad, D-N.D., also seized on new analysis from Elmendorf that showed extending the Bush cuts would hurt the economy in the long run, because the extra government borrowing from larger deficits would drag down income more than the extra work effort or savings that would be generated by the lower tax rates.

“So that really creates a conundrum, because we have two things that kind of work against each other here," Conrad said. “I think it’s incredibly important testimony that you’re giving us here today.”

Judd Gregg, the top Republican on the committee, used the same analysis to point out that when it comes to deficit reduction, tax increases would have a much more negative economic impact than spending cuts. "That's very important testimony," he deadpanned.

Gregg also noted that extending the Bush-era tax cuts to all but the wealthiest Americans would still cause three-fourths to four-fifths of the $4 trillion deficit increase that would come from extending all the cuts. “This debate over taxes is really a bit of a straw dog debate," Gregg said. “We should be focusing on the growth of this government from 20 percent to 24 percent [of GDP], and how do we get that back under control?"

On Tuesday, House and Senate Democrats repeatedly skirted questions about why they had decided to postpone a vote and floor fight over the Bush tax cuts.

The House majority leader, Steny Hoyer of Maryland, said only that he and House Speaker Nancy Pelosi, D-Calif., were committed to passing an extension of the middle-class tax cuts by the end of this year. “The Speaker and I are in absolute agreement,” Hoyer said. “There should be nobody in America confused about where Democrats stand.”

Hoyer blasted the Republicans’ tactics on the tax cut issue, saying that House Minority Leader John Boehner, R-Ohio, had been forced to renege on a recent statement on national television that he might support the Democrats’ approach if he had no alternative. “He was excoriated by his party,” Hoyer said.

Another Idea Stalls
In the Senate, Democratic leaders tried to shift gears by bringing up a grandly-named bill called the “Create American Jobs and End Offshoring Act.”

The bill would provide companies with a two-year reprieve on paying the employer share of payroll taxes for every foreign job they move back into the United States. It would also block companies from getting tax deductions for the costs of shutting down factories and moving jobs overseas.

Democrats tried to portray the bill as an important measure to prevent the outflow of American jobs. Business groups and Republicans denounced the measure, warning that it would damage American competitiveness and ultimately lead to fewer American jobs.

In reality, the bill would have probably had a negligible impact. According to the congressional Joint Committee on Taxation, the payroll tax benefits would have only totaled $1 billion over 10 years – a minuscule fraction of corporate payrolls. The new penalties would have totaled less than $400 million over ten years.

But the bill never had a chance. Democrats needed two Republican votes to block a filibuster, and they lost five votes instead.

Meanwhile, the overarching issue of the Bush tax cuts remained unresolved. Senate Majority Whip Richard Durbin, D-Ill., said he doubted there would be a big political downside to postponing the issue until after the election. “I think people know where we are as a party,” Durbin said. “Not every member, but most members, [favor limiting the tax cuts to families making up to $250,000 a year] ... and it does not expire till the end of the year so we still have time to work on it.”

But Durbin conceded that if the Republicans make a strong showing in the Nov. 2 election, as many pollsters and political experts are predicting, it might be difficult for the Democrats to push through a tax bill to their liking in a post-election session. “It is conceivable that returning [Republican] senators will say, well ... let’s wait till January, till we have more forces. If that’s the case, it would argue against any progress in the lame duck” session.

Eric Pianin of The Fiscal Times contributed to this report.

Related Links:
Midterm Elections Run-up Shows Democratic Desperation, Says GOP (Christian Science Monitor) 
Democrats Delay Vote on Extending Bush Tax Cuts (CBS News)
Obama Is Against A Compromise on Bush Tax Cuts (The New York Times)