Republicans will gain greater leverage in Congress now that they have won control of the House and captured more seats in the Senate, giving them more influence over tax policy and financial regulation.
Democratic congressional leaders left some important issues like the question of what to do about the Bush tax cuts and the estate tax for the lame duck session that starts later this month, but those issues may now be punted to the next Congress. So far, President Obama has stood firm on his 2008 campaign pledge to allow the tax rates to rise for those making over $250,000 a year. But the midterm election results give Republicans more clout in forcing at least a temporary extension of the current rates for both middle-class and upper-income taxpayers.
There has already been talk in Washington of decoupling the tax rates so that middle-class taxpayers would get a permanent extension of the Bush tax cuts, while upper-income taxpayers could enjoy a temporary extension of a year or two of the current tax rates until the economy improves (see Decoupling Strategy Could Provide Tax Cut Compromise).
However, if lawmakers wait until the next Congress to settle the question of what to do about the tax rates, the rates will rise by default next January for practically everybody, putting a dent in voters paychecks and fueling constituents anger back home. If that happens, there will be even more pressure on lawmakers to act quickly and make the tax cuts retroactive. The Internal Revenue Service would have to scramble to produce the necessary withholding tables. Payroll departments and payroll service bureaus would also have to implement them in a hurry, and there would be additional confusion next tax season.
The alternative minimum tax patch also needs to be passed once again, or an estimated 29 million more taxpayers could be subject to the AMT, up from 4 million or so today.
When they return to the Capitol for the lame duck session this month and then for the reconfigured Congress in January, lawmakers will have to deal not only with the problem of the income tax rates, but also with the estate tax, which is scheduled to return next year at the pre-Bush rate of 55 percent with a $1 million exemption.
During her concession speech Tuesday night, Republican nominee Christine ODonnell of Delaware said she had told her victorious opponent Chris Coons in her phone call to him earlier that evening that he needed to fight the reinstatement of the so-called death tax and the hike in income taxes on the top 2 percent of earners when he starts his Senate term in Washington. Its not clear that Coons plans to take his former opponents parting words of advice, though.
Still, there will be pressure on Democrats and Republicans alike to deal with the estate tax, as well as other pending tax hikes on capital gains and dividends as a result of the soon-to-expire Bush tax cuts. President Obama has also been pushing Congress to extend and expand the already expired research and experimentation tax credit.
Republicans will be taking control of some key House committees, including the tax-writing Ways and Means Committee. Although former chairman Charles Rangel, D-N.Y., and acting chairman Sander Levin, D-Mich., both won re-election, they will have to give up leadership of the committee to a Republican. Dave Camp, R-Mich., is in line to take over the chairmanship of the committee in the next Congress, keeping the state of Michigan in control of tax policy for the rest of the country.
Leadership of the House Financial Services Committee will pass from Barney Frank, D-Mass., who also won re-election and will become the ranking member on the committee. The likely successor to the chairmanship is ranking member Spencer Bachus, R-Ala., who will be in a key position to determine what happens with the financial regulatory reform overhaul in the Dodd-Frank law and how agencies like the Consumer Financial Protection Bureau are funded.
We can expect to see more sparks flying in the halls of Congress in the lame duck session and next term, assuming there isnt complete gridlock over the outcome of these and other crucial issues.
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