White House Might Seek Extension Of All Current Rates

The Obama administration might seek a temporary extension of all current tax rates, including for the nation's wealthiest earners, beyond their scheduled Dec. 31 expiration, congressional and private-sector sources said.

The move would be coupled with an extension of current tax rates for the middle-class as planned, but only temporarily unless Congress can come up with additional revenues, according to sources familiar with the White House's thinking. Administration officials declined to comment in advance of the budget's release, set for early February. But the potential moves appear designed to defer major decisions on tax policy changes until after the November elections -- and perhaps after the 2012 elections.

While no final decisions have been made, such steps would mark a significant departure from President Obama's first budget request that reflects worsening economic and budgetary conditions that were not initially expected this far into his first term.

In his first budget request, Obama proposed to make most of the expiring 2001 and 2003 tax cuts enacted under former President George W. Bush permanent.

At the same time, taxes on individuals earning more than $200,000 and households making more than $250,000 would have expired as scheduled. That means the existing 33 percent and 35 percent income tax brackets would have reverted to the pre-2001 levels of 36 percent and 39.6 percent. Tax rates on long-term capital gains and dividends for those wealthier earners would have risen from 15 percent to 20 percent.

Add in a permanent fix for the alternative minimum tax so it does not hit more families each year because of inflation, and the total cost would have run north of $2 trillion despite the lapse in rates for the richest 2 percent of taxpayers. Under a budget deal worked out last year with the Blue Dog Coalition, that cost would not have to be offset provided the Senate agrees to enact statutory pay/go rules.

Nonetheless, the huge numbers involved at a time when the deficit is projected to hit $1.5 trillion for FY10 are giving lawmakers pause. At the same time, the prospect of a major tax increase in an election year, even on the wealthy -- which includes many small-business owners who file individual tax returns -- is making some lawmakers jittery, including freshmen Democrats.

"I'm one who believes this is not the right time to raise taxes on anyone, when we're still in the throes of this recession and as we see light on the horizon. So it sounds to me like an approach that makes sense," said Rep. Michael McMahon, D-N.Y.

Under a plan to temporarily extend all the tax cuts -- an exact timeline was unavailable, but one or two years have been suggested -- Democrats could avoid responsibility for such a tax increase heading into the November elections. And even factoring in the extensions of tax cuts for the wealthy, the administration and Congress could keep the cost of an overall tax package well under $2 trillion, perhaps costing only a few hundred billion dollars.

"It makes perfect sense," said one Democratic lobbyist. "Democrats are not going to want to face the voters and be held responsible for a massive tax increase."

Others weren't so sure. Congressional aides noted there is a broad swath at least in the House Democratic Caucus that is opposed to extending the upper-income tax cuts, even temporarily, unless they are offset. Aides said even if Obama proposes extending the top rate brackets, Democrats might decide to let them lapse, while keeping the middle-class tax cut extensions temporary to reduce the budgetary impact.

Some House Democrats cast doubt that Obama would choose to extend tax cuts for the wealthy. "I'd be very skeptical," said Ways and Means Rep. Sander Levin of Michigan, whose panel discussed the expiring provisions at a meeting Tuesday. He and other panel members said Democrats would surely extend the middle-class tax cuts, but that deficit-financed extensions of the top rates would be a tough sell.

U.S. Chamber of Commerce President Thomas Donohue, speaking Tuesday about his group's 2010 legislative agenda, said keeping all the tax cuts in effect beyond Dec. 31 was a top priority. "The impact on deficits is a worthy consideration. But remember, we are not talking about cutting income taxes below where they are today," he said. "We are talking about deferring a massive tax increase in a very weak economy -- a tax increase whose clearly intended purpose is not to reduce the deficit, but to pay for more spending."

At the same time, some in the business community are wary that in the hunt for additional revenues, corporations will increasingly be targeted -- the administration's recent proposal to slap a fee on bailed-out banks, for example. Tax preferences for profits earned overseas are likely to return to the chopping block as well.

People familiar with the idea are debating the duration of a temporary extension of existing tax policy. On one hand, anything longer than one year would take the steam out of efforts to overhaul the tax code for the first time since 1986, a top priority of House Ways and Means Chairman Charles Rangel, who is turning 80 this year. On the other, a two-year extension would allow sufficient time for debate and hearings on a tax code rewrite, given that the economy and jobs are likely to dominate as issues for the foreseeable future.