Bush Tax Cuts Battle Heats Up

Washington is preparing to do battle over the decade-old question of whether income tax cuts should be extended to taxpayers at the upper income scales.

With the 2001 and 2003 tax cuts about to expire by the end of this year, Congress is under pressure to extend them before they slip away. But Congressional Republicans and the White House are digging in their heels when it comes to extending the tax cuts to those making over $250,000 a year.

So far President Obama has been standing by his campaign pledge to let taxes go up for high earners. Meanwhile Republicans and some Democrats in Congress warn that allowing taxes to rise in the aftermath of a recession and in the midst of a dicey recovery could plunge the economy into a tailspin.

Republicans introduced legislation this week to freeze taxes at their current rates, while Obama reiterated his intention to allow the tax cuts to lapse for households making over $250,000 a year. With an estimated $700 billion at stake over the next 10 years in either tax savings or deficit reduction, the difference is not exactly negligible.

The two laws in question were the Economic Growth and Tax Relief Reconciliation Act of 2001, also known as EGTRRA, and the Jobs and Growth Tax Relief Reconciliation Act of 2003, also known as JGTRRA. Back when they were the majority party, Republicans managed to squeak the bills through the Senate using the same budget reconciliation tactics they tried to fend off for the health care reform bill this year. The budget reconciliation strategy required the tax cuts to sunset by Dec. 31, 2010, after which they were supposed to revert back to prior levels, in part to make up for the budget shortfalls they would inevitably cause.

The bills contained not only adjustments to the marginal income tax rates, as well as expansions of popular tax breaks like the Child Tax Credit and Earned Income Credit, but also more advantageous capital gains and dividend rates. CCH has compiled a handy report on the various provisions of the two bills and the impact of them disappearing at the end of the year.

Election year politics is going to play a large role in whether the tax cuts get extended or not, and who will continue to benefit from them. Democrats and Republicans have already begun trading charges over the tax cuts, with Democrats accusing Republicans of holding the middle class hostage if Republicans insist on blocking any extension that doesn’t include high-income earners. Republicans, for their part, also accuse Democrats of waging class warfare.

Still, Democrats are increasingly nervous about the prospect of taxes going up for their constituents in an election year. Some are already calling on President Obama to allow an extension of the tax cuts for all income brackets for at least another year so they won’t return to the top level of 39.6 percent from the current high of 35 percent. Extending the tax cuts for another year for high-income earners would cost the Treasury about $39 billion.

On Tuesday, Congressional Democratic leaders and members reportedly met behind closed doors from lunchtime until evening to decide what to do, according to the Associated Press. Senate Majority Leader Harry Reid, D-Nev., has already said that Congress is likely to hold a lame duck session after the elections.

Democrats are not yet saying, however, whether they will schedule a vote on the tax cuts before the mid-term elections on Nov. 2, although Republicans are practically daring them to do so. The results of the primaries may be one signpost for Democrats. On Tuesday evening, the more conservative Republicans seemed to be winning races, including those backed by the Tea Party.

That’s the same Tea Party, of course, that got its start protesting against higher taxes.

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