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12.02.10

The GOP's Fiscal Time Bomb

Call it the revenge of George W. Bush: The GOP's temporary tax cut has exploded nine years later, forcing Democrats to duck and cover. Howard Kurtz talks to the Bush aides behind the plot.

George W. Bush set the trap just over nine years ago, and the Democrats are still trying to extricate themselves.

In a largely symbolic vote designed to score political points, the House voted Thursday to extend the Bush tax cuts for 98 percent of Americans, and Harry Reid plans to follow suit with a similar Senate vote, plus one on extending the tax breaks for everyone.

The Democratic move, which will vanish into Senate quicksand, infuriated Republicans and triggered a round of partisan nastiness that made the pledges of cooperation at President Obama’s sit-down with GOP leaders this week seem like a distant memory.

But in Washington, where anything beyond last week’s news cycle is considered ancient history, the jury-rigged nature of the Bush plan—and the fiscal sleight-of-hand involved—have been all but forgotten.

“We knew that, politically, once you get it into law, it becomes almost impossible to remove it,” says Dan Bartlett, Bush’s former communications director. “That’s not a bad legacy. The fact that we were able to lay the trap does feel pretty good, to tell you the truth.”

As the vote approached in the summer of 2001, the Senate had just flipped to Democratic control when Jim Jeffords defected from the GOP. Had the tax breaks been made permanent—or even extended beyond Sept. 30, 2011—the fledgling Bush administration would have had to muster a 60-vote Senate majority under the so-called Byrd Rule, named for master parliamentarian Robert Byrd. (The final version, cutting taxes by $1.35 trillion, garnered 58 votes.) And by moving up the expiration date by nine months, the Bush team saved $100 billion and made the bill’s deficit-busting impact appear smaller.

As an added bonus, the “sunset” provision, in Beltway-speak, was a political time bomb: At some point in the way distant future, Democrats could be accused of raising taxes if they tried to undo the Bush breaks and return to Clinton-era levels of taxation.

“I wish I could tell you I was that smart,” Andy Card, Bush’s former chief of staff, told me. But the approach wasn’t all that “Machiavellian,” he says. Rather, the Bushies wanted the law to be permanent but couldn’t muster the votes to trump the Byrd Rule. “I was doing a lot of shuttle negotiating between offices on the Senate side. There were many late nights.”

“The fact that we were able to lay the trap does feel pretty good, to tell you the truth” – Dan Bartlett

The financial finagling wasn’t exactly secret at the time. Paul Krugman pounced on the sunset maneuver in The New York Times, decrying the “accounting gimmicks” and declaring that “the tax bill is a joke. But if the administration has its way, the joke is on us.”

Tom Daschle, then the Senate Democratic leader, said: “I just know that at some point, that reality is going to come down—crashing down on all of us, and we're going to have to deal with it.”

Another Democratic senator, Kent Conrad, told The Washington Post that the Bush approach “masked the true cost” of the measure and that “he’s going to be out of office when the roof falls in.”

The Democrats were right. The Bill Clinton surpluses disappeared into a sea of red ink (Republicans attribute much of that to the 9/11 attacks, Afghanistan, and Iraq but never raised taxes to pay for the lengthy wars). And the temporary nature of the tax cuts came back to bite Obama, who had explicitly campaigned for allowing the breaks to expire for families earning more than $250,000—before the economy imploded.

A top Senate conservative, Jim DeMint (R-SC), told The Daily Beast he didn't expect the sunset debate to be so favorable to the GOP when he voted for the tax cuts as a House member. “We couldn't have imagined, I think, the problems with the economy, the huge defeats the Democrats have had for their out-of-control spending,” DeMint said. “So I think the Republicans are in a good position to take this through.”

All this has led to a furious game of framing. The Democrats portray themselves as champions of the middle class, trying to hold the line against coddle-the-wealthy Republicans who would blow another $700 billion hole in the deficit to give breaks to people who don’t need the money. Democratic Sen. Chuck Schumer offered to boost the tax-break cutoff to a million bucks, hoping to paint the Republicans as defenders of the seriously rich.

The GOP, meanwhile, paints itself as sticking a finger in the dike of massive Obama spending. Republicans say the other party is determined to raise taxes—on “small business,” not the wealthy—and is adding to a climate of economic uncertainty, which it would end by making all the tax cuts permanent. And there’s the old standby: Attempts to end tax breaks only for the top bracket is class warfare.

Unlike most congressional budget battles, with their eye-glazing abstractions about the out-years, this one comes with an instant dose of shock therapy: If the Hill does nothing by Dec. 31, everyone’s taxes will go up. The deadline has produced a political game of chicken, with Senate Republicans, for instance, vowing to stop all legislation until Reid gives them a tax-cut vote.

Obama has public sentiment on his side, with only a third of Americans in recent polls supporting an extension of tax breaks for the $250,000-and-up crowd. But White House officials seem to have concluded that they don’t want to risk a wide-ranging tax hike—which could further depress the economy—to prove a political point.

All but lost amid the posturing was how Bush and his first budget director, Mitch Daniels, now the governor of Indiana, shifted the terms of the debate.

The Democrats’ default position is now to preserve the overwhelming bulk of W.’s massive tax cut, which most of the party opposed at the time as fiscally irresponsible. Lower tax rates are politically popular, of course, but they also starve the government beast and create more pressure for spending cuts—a distinctly Republican priority.

In 2001, John McCain voted against the Bush tax breaks, saying: “I cannot in good conscience support a tax cut in which so many of the benefits go to the most fortunate among us, at the expense of middle-class Americans who most need tax relief.” He voted against a second round of reductions in 2003. But in a more conservative party, McCain now wants to make the tax cuts permanent, saying no one's taxes should be hiked in the deepest recession since the Great Depression.

Some Democrats are openly frustrated at finding themselves in this box. “It would be different if they were sort of on the side of the angels, and they had 80 percent of the American people with them. But they don't,” Sen. Tom Harkin said. “And yet we're going to cave? I just don't understand it, I don't get it.” And if the two parties compromise on a temporary extension, said Harkin, “Of course we're going to face the same issue in a couple of years.”

Timing is everything in politics. The Democrats just lost their House majority after a campaign in which saving the Bush tax cuts became a rallying cry for the opposition. “They are definitely on the defensive,” Card says. “The fact that the 10-year clock ran out now had a big impact on the election.”

The Daily Beast’s Benjamin Sarlin contributed to this report.

Howard Kurtz is The Daily Beast's Washington bureau chief. He also hosts CNN's weekly media program Reliable Sources on Sundays at 11 a.m. ET. The longtime media reporter and columnist for The Washington Post, Kurtz is the author of five books.