Obama Confronts Pushback From Democrats Over Tax Deal

December 07, 2010, 2:30 PM EST - BusinessWeek

Dec. 7 (Bloomberg) -- President Barack Obama confronted pushback from fellow Democrats today as he began selling his agreement with congressional Republicans to temporarily sustain all the Bush-era tax cuts.

After almost a week of negotiations between an administration team led by Treasury Secretary Timothy Geithner and budget director Jack Lew, Obama announced last night he’ll accept a deal that would extend current tax rates for high- income taxpayers for two more years in exchange for extending federal unemployment insurance for the long-term jobless and cutting the payroll tax by $120 billion for one year.

Obama at a news conference today in Washington said his priority was to spur job creation and economic grow.

While Senate Minority Leader Mitch McConnell said he expects the “vast majority” of the chamber’s 42 Republicans will back the compromise, several Democrats said they haven’t committed to the plan and party activists mounted campaigns to kill it.

“House Democrats have not signed off on this deal,” Maryland Representative Chris Van Hollen, a member of the Democratic leadership, said today on Bloomberg Television. “I have some serious reservations.”

House Speaker Nancy Pelosi said Democrats “will continue discussions” with Obama. She criticized elements of the plan demanded by Republicans, including extending the top tax rates and the estate tax, while stopping short of saying she’ll urge House Democrats to reject the deal.

‘Middle Class Hostage’

“Republicans have held the middle class hostage for provisions that benefit only the wealthiest 3 percent, do not create jobs, and add tens of billions of dollars to the deficit,” the California Democrat said in a statement.

Senate Democrats, including Dianne Feinstein of California and Frank Lautenberg of New Jersey, also expressed concern.

“To me, it has a bad aroma, and I don’t like what I see,” Lautenberg said. “It almost has a let ‘em eat cake character” because “the people who don’t need it are going to get tax relief.” Still, Lautenberg said was “not ready” to vote against it.

Feinstein called the deal a “surprise” and said she hasn’t decided whether to back it. She said she would have to weigh the impact on the country of rejecting the deal and allowing middle-class tax rates to go up.

Nation ‘in Trouble’

“To fight just for the sake of a fight isn’t something I think we should do” because “the nation is in trouble” with rising unemployment.” Feinstein said.

Obama said he made the compromise to break the stalemate over taxes to ensure rates don’t rise for middle-income Americans when the current ones, enacted in 2001 and 2003, expire on Dec. 31. He said that while he still believes the nation can’t afford to permanently extend the reduced top tax rates, raising taxes for the rest of taxpayers would damage the fragile economic recovery.

Without the deal, middle-income families would become “collateral damage for political warfare here in Washington,” Obama said in televised remarks yesterday. He criticized Republicans for insisting on permanent tax cuts for the wealthiest Americans “regardless of the cost of impact on the deficit.”

Treasury Department aide Gene Sperling said most Democrats will end up backing the package.

Democrats “are going to want to be on the side of supporting something this strong for working-class families,” Sperling said on Bloomberg Television. “There is no question this package is going to make unemployment lower than what it would have been.”

Biden Meeting

Vice President Joe Biden is being dispatched to the Senate Democratic Caucus lunch this afternoon to lobby lawmakers.

In addition to preserving the status quo on Bush policies, the proposal creates more than $300 billion in new tax cuts for wage-earners, wealthy families and corporations.

Stocks rose and Treasuries fell after word of the agreement, offsetting concern that Europe’s debt crisis will spread further.

The Standard & Poor’s 500 Index jumped 0.6 percent to 1,230.76, reaching its highest levels since September 2008. The Nasdaq Composite Index reached an almost three-year high. The Dollar Index was little changed. Copper rose to a record in London and gold slipped after touching an all-time high of $1,430.50 an ounce.

Obama’s ‘Framework’

Obama met yesterday at the White House with Democratic congressional leaders to outline what he called a “framework” for compromise tax legislation.

Van Hollen characterized those discussions as “lively,” though “not overheated.”

Van Hollen said he understood that the president “doesn’t’ want to play Russian roulette” with the economy. Still, he said, “a number of us think there could have been a better result here.”

House Democrats will meet later today to air some of their concerns, he said. One of the sticking points is the provision that would set the top rate of the tax on estates at 35 percent, which applies after a $5 million tax allowance per individual.

In a letter to Pelosi circulated yesterday, Representative Peter Welch of Vermont and at least five other Democrats urged her not to agree to the administration’s deal.

“We support extending tax cuts in full to 98 percent of American taxpayers, as the president initially proposed,” Welch wrote. “He should not back down. Nor should we.”

‘Very Difficult’ Sell

House Democratic Caucus Chairman John Larson of Connecticut said it will be “very difficult” to sell Obama’s tax deal to House Democrats.

Jim Manley, a spokesman for Senate Majority Leader Harry Reid of Nevada, was noncommittal, saying Reid would discuss it with Democrats.

McConnell, of Kentucky, said in a statement that he was “cautiously optimistic” that congressional Democrats “will have the same openness to preventing tax hikes that the administration has already shown.”

An administration official said the president was happy with the agreement because it would give the economy a boost. Obama won his biggest prize: a 13-month extension of unemployment insurance, the official said, speaking on condition of anonymity.

Tax Credits

The White House also counted as a win an agreement from Republicans to renew a refundable child-care tax credit, the earned-income tax credit and tuition tax credits, among other items, the official said.

The compromise amounts to a couple of hundred billion dollars in tax cuts that no one thought possible just days ago, the official said, adding that the deal will play better across the country than in Washington.

Democratic-leaning groups criticized Obama for compromising. Charles Chamberlain, the political director of Democracy for America, a 1 million-member political action committee founded by former Democratic National Committee Chairman Howard Dean, called the agreement a “failure of leadership.”

The president ran on a platform not to extend the cuts for the wealthiest Americans, Chamberlain said. “Just because Americans elected Republicans to take over the House of Representatives, they didn’t try to make it so Republicans were the new president.”

The Office of Management and Budget said it doesn’t yet have a cost estimate for the package, spokeswoman Meg Reilly said in an e-mail.

Republican Concessions

Lawrence Mishel, president of the Economic Policy Institute, a Washington group funded in part by labor unions, said Obama extracted some concessions from Republicans that may help the accord advance in Congress.

“Economically, if you were going to do a deal, I think this is better than expected and will provide some help to the economy, but we need a lot more help,” he said. “I think people generally wanted to have a fight to show who was for the rich people and who was for the rest of us. That fight now will take place in the 2012 election.”

If Congress agrees, the deal would leave in place the 10, 15, 25, 28, 33 and 35 percent marginal tax rates created in 2001. It would also preserve for two years the 15 percent tax rate on most capital gains and dividends, and would temporarily index the alternative minimum tax for inflation.

In addition, the plan outlined by Obama would extend aid for the long-term unemployed. To help spur hiring, the payroll tax -- which funds Social Security and Medicare -- would be cut by 2 percentage points during 2011.

Payroll Taxes

The payroll tax cut would apply to all wage-earners, an administration official told reporters on a conference call. That would be an $800 savings for individuals with an income of $40,000. Those who earn salaries of more than $106,800 would save a maximum of $2,136. The proposal would cost the government $120 billion, another administration official said.

The payroll tax cut represents a savings of about a third on the 6.2 percent share of the tax workers normally pay. Their employers get no benefit under the proposal.

The unemployment rate rose to a seven-month high of 9.8 percent in November as payroll growth slowed to 39,000 from 172,000, according to the Labor Department.

Estate Tax

The compromise plan would set the estate tax at a top rate of 35 percent, which applies after a $5 million tax-free allowance per individual. That rate would be the lowest since 1931 -- not counting 2010, when the rate was zero and replaced with a complicated capital gains tax that applies when inherited assets are sold.

Obama also endorsed allowing a full deduction for equipment purchases that currently must be deducted over time. The proposal would accelerate $200 billion in tax savings for companies in the first year and benefit 1.5 million companies and several million individuals who run businesses, according to White House estimates.

Total revenue lost from the so-called expensing proposal over 10 years would be $30 billion; companies taking the immediate deductions wouldn’t be able to write off their expenses through depreciation in years to come.

The administration officials said some elements of the plan still have to be negotiated with lawmakers. They include whether to renew dozens of expired or expiring tax provisions. Among them: The Build America Bond program, the fastest-growing segment of the $2.8 trillion municipal debt market.

The subsidy, which expires Dec. 31, was created by Obama’s 2009 economic-stimulus plan. More than $173.5 billion of the taxable securities have been sold, according to data compiled by Bloomberg. The U.S. pays 35 percent of the interest costs on the debt. A Senate bill would cut that rate to 32 percent. Republicans may oppose the measure.

--With assistance from Julianna Goldman, Catherine Dodge, Kate Andersen Brower, Lisa Lerer, Laura Litvan, Peter Cook, James Rowley, and Richard Rubin, Roger Runningen and Jeff Bliss in Washington. Editors: Joe Sobczyk, Robin Meszoly

To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net; Mike Dorning in Washington at mdorning@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net