Bloomberg News

Senate Democrats Still Filling Blanks in Obama Tax Plan

July 12, 2012

Senate Democrats rejected a Republican offer for a quick vote on President Barack Obama’s tax plan in part because they haven’t turned Obama’s idea into a bill or made clear how they want to handle the tax rate on dividends, the estate tax and the alternative minimum tax.

Senator Richard Durbin of Illinois, the Senate’s No. 2 Democrat, said yesterday that Democrats are focused on language extending expiring tax cuts for income up to $250,000, adding that they still must figure out whether to include -- and how to treat -- the estate tax and AMT extensions in the measure.

“Whether they will be included; I don’t know that there’s been a decision made on that, that they’ll even be considered,” Durbin told reporters after a White House meeting between Democratic congressional leaders and Obama. “I wouldn’t get too far ahead here.”

Income tax cuts first enacted under President George W. Bush are scheduled to expire at the end of 2012. Obama said July 9 that Congress should act now to extend the cuts through 2013 for income of less than $250,000.

“So, my message to Congress is this: Pass a bill extending the tax cuts for the middle class; I will sign it tomorrow,” Obama said. “Pass it next week; I’ll sign it next week.”

Republican Proposal

Senate Republicans called Obama’s bluff, asking for votes yesterday on Obama’s plan and on a Republican proposal to extend all the expiring cuts for a year and begin a comprehensive rewrite of the tax code.

“If the president has a proposal, we’ll be happy to send an intern down to the White House to pick it up,” said Senate Minority Leader Mitch McConnell, a Kentucky Republican. “But we can’t vote on a speech.”

Senate Majority Leader Harry Reid objected, saying that the Senate should focus on the narrower small-business tax bill currently on the floor. The $28.5 billion measure would allow full expensing of some business investments and offer a 10 percent tax credit for companies expanding their payrolls. Procedural votes on that bill are scheduled for today.

Reid of Nevada said Democrats would vote on the broader tax issue before Congress leaves for its August recess. He said today that the plan would include “no big changes” to the estate tax and that it wouldn’t address miscellaneous tax breaks such as the research and development tax credit that expired at the end of 2011.

Obama’s Campaign

Senator Charles Schumer, a New York Democrat, said Democrats were confident they could win the public debate over the tax cuts for the next few weeks by tying their efforts to Obama’s continued campaign on the issue.

Late yesterday, Reid offered to set up competing votes on Democratic and Republican bills on the expiring cuts. McConnell rejected that proposal, arguing that he couldn’t agree to a vote at an uncertain time on a bill he hadn’t seen.

In making his counteroffer, Reid acknowledged that Democrats don’t yet have a bill ready to consider. Even agreement on the ordinary income tax rates may leave issues that need to be resolved as they turn Obama’s idea into legislation.

Obama’s budget this year calls for taxing dividends as ordinary income for high earners at rates of up to 39.6 percent, compared with 15 percent now. His previous budgets had called for the top tax rate on dividends to be 20 percent, matching the proposed capital gains rates.

Estate Tax

On the estate tax, Obama wants to return to 2009 policy, with a $3.5 million per-person exclusion and a 45 percent top rate. Some Democrats prefer the current parameters, which include a $5.12 million exclusion and a 35 percent top rate.

The alternative minimum tax, a parallel tax system designed to prevent high-income taxpayers from legally dodging taxes, includes an exemption that isn’t indexed for inflation. If Congress doesn’t act, millions more middle-income families will face the tax.

That so-called patch lapsed at the end of 2011, meaning that Democrats have to decide whether to continue it for one or two years.

Reid also signaled another likely difference between the Democratic and Republican approaches. He criticized Republicans for failing to offer extensions of tax credits for college tuition and low-income families and workers. Those provisions were created in the 2009 stimulus law and extended through 2012 in the same 2010 law that extended the income tax cuts.

Tax Increase

Failure to extend those provisions, Reid said, would mean a tax increase on 25 million families.

Senator Max Baucus, a Montana Democrat and chairman of the tax-writing Finance Committee, wouldn’t say what he plans to propose on dividends and the estate tax. “That’s getting ahead of yourself,” he said. “We’ll see.”

Baucus, who warned last month against votes before the election that harden the parties’ positions, said there is plenty of time to resolve these issues.

“It would be premature to say anything specific,” he said.

Republicans, meanwhile, said Reid’s objection to scheduling a vote stemmed from concern about exposing divisions in Democratic ranks. Some Democrats don’t want to allow tax increases and others want to set the threshold for high earners at income of $1 million rather than $250,000.

“It’s pretty pathetic when they won’t even vote on what the president has asked them to vote on,” Senator Orrin Hatch of Utah, the top Republican on the Finance committee, said in an interview. “And the reason they won’t is that they know they will lose a lot of Democrats.”

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Kathleen Hunter in Washington at khunter9@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net


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