Bloomberg News

Senate Passes Democrats’ Plan to Extend Most Tax Cuts

July 26, 2012

Senate Passes Democrats’ Plan to Extend Most Bush-Era Tax Cuts

Senate Minority Leader Mitch McConnell of Ky., following a political strategy session, as from back left, Sen. John Barrasso, Sen. John Cornyn, and Senate Minority Whip Jon Kyl. Photographer: J. Scott Applewhite/AP Photo

The Senate’s vote to extend most George W. Bush-era tax cuts while letting them expire for top earners gave Democrats a political victory without resolving the stalemate over U.S. fiscal policy.

The 51-48 vote yesterday, mostly along party lines, shifts the focus to the Republican-controlled House, where lawmakers plan to vote next week to extend the tax cuts for 2013 for taxpayers at all income levels.

“The House can either pass these middle-class tax cuts like we did, or it will be clear they are putting millionaires first,” said Senator Charles Schumer, a New York Democrat.

The competing House and Senate proposals leave little room for compromise, especially before the Nov. 6 election. In the presidential and congressional campaigns, the parties will seek to draw contrasts on the tax issue for voters.

After the election, Congress will have less than two months to act before the tax cuts expire and automatic spending cuts take effect at the beginning of 2013. Yesterday’s votes on the Democratic plan and a Republican counterproposal show where the two sides stand, said Senator Orrin Hatch, a Utah Republican.

“I doubt that it gets us any closer, but the point is you could make an argument that at least both sides have had the vote,” he said.

Higher Rates

The bill passed yesterday would extend through 2013 the tax cuts for individual income up to $200,000 a year and income of married couples up to $250,000. Above those thresholds, taxpayers would face higher rates for ordinary income, capital gains and dividends.

The result would be a tax increase averaging $35,451 for about 1.4 percent of U.S. households, according to the Tax Policy Center, a nonpartisan group in Washington. The tax increases for high earners would generate about $50 billion in 2013 to reduce the budget deficit.

Senator Mitch McConnell of Kentucky, the Republican leader, said Democrats should return to the logic they had at the end of 2010, when they agreed to continue the same tax cuts in a weak economy. “We know this is not about the economy,” he said. “We know this is about the election.”

Democrat Jim Webb of Virginia and Connecticut independent Joe Lieberman joined all of the Republicans present to vote against the Democrats’ plan. Senator Mark Kirk, an Illinois Republican, was absent while recovering from a stroke.

‘98 Percent’

“With the Senate’s vote, the House Republicans are now the only people left in Washington holding hostage the middle-class tax cuts for 98 percent of Americans and nearly every small business owner,” Obama said in a statement after the vote. “The last thing a typical middle-class family can afford is a $2,200 tax hike at the beginning of next year.”

Vice President Joe Biden, who can vote in the Senate to break a tie, was in the chamber for the vote yesterday.

The Constitution requires that tax bills originate in the House. That means the Senate measure can’t become law and Senate Republicans could use procedural maneuvers, which they decided not to use yesterday, to stop Obama’s plan in the future.

“This is not a serious piece of legislation, because it’s not going anywhere,” McConnell said. “And thank goodness it’s not going anywhere.”

Fiscal Cliff

The tax provisions are part of the $607 billion so-called fiscal cliff of automatic spending cuts and tax increases scheduled to take effect in January 2013. If Congress doesn’t act, the combination of those fiscal changes would probably push the U.S. economy into a recession, according to the Congressional Budget Office.

Republicans say no one’s taxes should rise in a weak economy and that the tax increase would fall especially hard on those who report business profits on their personal tax returns. Their plan would extend current income tax rates and estate tax rules through 2013.

The Senate, on a 45-54 vote, defeated that proposal offered by Republicans as an amendment to the Democratic bill.

“I hear from small business owners in Nebraska every day and they tell me if faced with a more expensive tax bill, they will be forced to cut costs elsewhere,” said Senator Mike Johanns, a Nebraska Republican.

Mark Pryor, an Arkansas Democrat, voted for the Republican proposal. Susan Collins of Maine and Scott Brown of Massachusetts were the only Republicans to vote against it.

Next week the Republican-controlled House plans to vote on two tax bills. One would extend the expiring income and estate tax cuts for all income levels for one year, and the other would set up a process for overhauling the tax code in 2013.

House Vote

“The House will vote next week to stop that tax hike, and until the Senate does the same, the threat to our economy remains,” House Speaker John Boehner, an Ohio Republican, said in a statement.

In the legislation that passed yesterday, the top tax rate on ordinary income would increase to 39.6 percent from 35 percent. The top rates on capital gains and dividends would rise to 23.8 percent from 15 percent.

In addition to the income tax cuts, the Senate Democrats’ bill would prevent the alternative minimum tax from affecting more taxpayers when they file their 2012 returns, though it is silent on the AMT for 2013. The Republican plan would prevent the AMT from expanding in 2013.

The AMT accounts for much of the difference in the two proposals’ cost. The Republican plan would cost the government $404.9 billion in lost revenue, compared with the effect of doing nothing, according to the nonpartisan Joint Committee on Taxation. The Democratic plan would cost $249.7 billion.

Tax Credits

Democrats also want to extend expiring tax credit provisions that benefit college students and low-income families. Republicans haven’t proposed extending those expanded credits, and Democrats have labeled that stance a tax increase for the middle class. According to the Tax Policy Center, the Republican plan would mean higher taxes for 15.4 percent of households.

Because of divisions among Democrats, the Senate bill didn’t address the estate tax. If Congress doesn’t act, the tax in 2013 will have a $1 million per-person exemption and a 55 percent top rate, compared with the current $5.12 million per- person exemption and 35 percent top rate.

Some Democrats who had said they were undecided, including Bob Casey of Pennsylvania and Ben Nelson of Nebraska, ended up voting for the Senate bill.

“We vote on a lot of things that are DOA in the House,” said Nelson, who is retiring after this session. “The House votes on a lot of things that are DOA in the Senate.”

The Senate Democrats’ bill is S. 3412. The Senate Republicans’ bill is S. 3413. The House bills are H.R. 8 and H.R. 6169.

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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