08.02.11

Obama’s Tax Hammer

Obama is perceived to have lost to Republicans in the debt deal, but the expiring Bush tax cuts could give him the upper hand in round two of the negotiations, says Patricia Murphy.

President Obama may have gotten rolled in the debt-ceiling negotiations with House Speaker John Boehner, but the president may still have his most powerful weapon at hand in future negotiations as the Bush-era tax cuts tick toward expiration at the end of 2012. 

Unless Congress acts and Obama signs another extension into law, tax rates for all Americans will automatically revert to 2001 and 2003 levels. Liberal Democrats say that’s fine with them, arguing that taxes, especially for the wealthiest Americans, are at historic—and unfair—lows, at a time when important federal programs are falling to the budget ax.

But Republicans say letting the tax cuts expire would be disastrous and could lead to another, deeper downturn if Americans and small businesses face steeper taxes just as the country is climbing out of recession.

And therein rests Obama’s opportunity. With Republicans so focused on keeping the Bush tax cuts alive, the president could use another extension to protect Democrats’ most cherished programs when the congressional super-committee created by the debt deal starts its work in the fall. If he commits to extending some or all of the Bush cuts, Obama not only could gain significant leverage to influence the outcome of the committee, he also could position himself for the 2012 elections as the honest, moderate broker between the extremes of both parties.

And that’s what Obama’s fellow Democrats are afraid of. In the wake of the debt-ceiling fight, which saw major gains for Republicans and Tea Party interests and huge cuts to discretionary spending that liberals cherish, Capitol Hill Democrats describe a caucus that is bitterly disappointed in the outcome of the debate and deeply skeptical of the president’s ability, and even interest, in protecting their most important priorities.

So deep is the distrust that Vice President Biden went out of his way in a meeting with House Democrats this week to assure them that the president is committed to fighting for tax increases and tax reform in the future.

“Having tax cuts as a political fight is fine with [Obama], and it will be a big part of the 2012 campaign,” said one senior Democratic aide briefed on the meeting. “With that said, the White House said that before and then they rolled.”  

Although Republicans will absolutely fight to keep the Bush tax cuts alive, conservatives may have been so emboldened by the debt-ceiling debate that they may not think they need to negotiate with the president on the issue at all.

“Of all the things I’m worried about, the idea that the Republican House of Representatives will pass a tax increase is not on my list of things to worry about,” Grover Norquist told The Daily Beast. Norquist is the president of Americans for Tax Reform and a powerful voice on the tax issue for Republicans. He declared himself “peachy keen” on Tuesday after the Senate vote. He noted that with 23 Democrats up for reelection in 2012, including several in conservative states, Republicans will drive the debate, even without control of the White House or Senate, for now.

The first test of the tax battles will come in the next two weeks, when each of the congressional leaders appoints three members to the 12-member super-committee created by Congress this week to find $1.5 trillion of additional cuts to the federal budget. All sides agree that the politics of the people appointed will determine the outcome of the effort before it even gets started. 

Having tax cuts as a political fight is fine with [Obama] and it will be a big part of the 2012 campaign.

Senate Minority Leader Mitch McConnell made it clear this week that he won’t be appointing anybody who could be a “maybe” on the tax-increase issue, where only a “Hell no” will do. “Our first step will be to make sure those Republicans who sit on the powerful cost-cutting committee are serious people who put the best interests of the American people and the principles that we've fought for," McConnell said.

Harry Reid, no surprise, declared McConnell dead wrong. 

“We've had too much talk the last few days of Republican leaders in the Senate saying there will be no revenue," Reid said. "That's not going to happen."

With Obama’s reelection, and control of the Senate, on the line, the president will have to thread a needle on the budget that only seems to grow smaller every day—one that allows him to protect the entitlements his base is demanding, while also shrinking the budget deficit that independent voters are criticizing, all while avoiding the blame for a tax increase the weeks and months before an election. 

To complicate matters, Norquist says Obama is unlikely to find a partner across the negotiating table willing to help him achieve a victory before 2012.

“Whatever happens in this next election, the Democrats will be weaker. The Republicans don’t need to negotiate anything with them,” Norquist said. “Why would you sit down and negotiate with someone who will have less clout in 18 months than they do now?”