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Democrats, Too, Face Risks in Fiscal-Cliff Talks Democrats, Too, Face Risks in Fiscal-Cliff Talks

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Magazine / ANALYSIS: BUDGET

Democrats, Too, Face Risks in Fiscal-Cliff Talks

They have incentives to reach a budget deal, too. Seemingly small-bore items such as the AMT could mean big headaches for taxpayers.

(AP Photo/Pablo Martinez Monsivais)

photo of Nancy Cook
December 13, 2012

To hear Democrats tell it, they’re convinced they have a fiscal-cliff compromise in the bag. If a deal doesn’t happen, they like to warn, they’ll simply sit on their hands while the country takes the plunge. They insist that the pressure is on the GOP, not them.

Democrats have reason to be cocky: Exit polling from the presidential race showed that 60 percent of voters favor raising taxes on the rich (which happens automatically if no deal is struck). And if the Republicans don’t go along, then polling also indicates that a majority of the American public will blame them for a failure to reach a deal.

Those numbers have Democrats believing that an agreement in their favor will come before the end of the year. “I’m pretty confident that Republicans would not hold middle-class taxes hostage to trying to protect tax cuts for high-income individuals,” President Obama told  Barbara Walters in an ABC News interview earlier this week. “I don’t think they’ll do that.”

 

Maybe, maybe not. The Democrats’ swagger may look impressive, but it’s also a gamble—more of one than they publicly admit. Behind closed doors on Wednesday, House Republican leaders told members not to make any plans for the holiday week between Christmas and the New Year, a sure sign that the fiscal-cliff drama will have a second act. And, if it drags out, the Democrats’ confidence will be tested, because they face clear risks as well. Going over the fiscal cliff could spook markets and slow economic growth. Politically, it could also push the tax and spending fight into February or March, just as the federal government may bump up against the debt ceiling again, encouraging Republicans to demand deeper spending cuts.

Much of the fiscal-cliff rhetoric has surrounded big-ticket issues such as spending cuts and taxes on the wealthy, but the failure to pass a patch for the alternative minimum tax would subject 28 million taxpayers to a tax originally intended to hit only the wealthy. The tax bill for new AMT payers would average about $2,250, according to the nonpartisan Tax Policy Center. There goes some family’s winter trip to Florida.

“No one seems to be talking about this stuff, except for the [Internal Revenue Service], which keeps putting out dire warnings about how terrible this process would be,” says Bruce Bartlett, a domestic-policy adviser to President Reagan and a Treasury official under President George H.W. Bush. “The debate is so simplistic: ‘Should we raise taxes on the rich?’ ”

That simplicity ignores the massive To Do list for avoiding the fiscal cliff. In addition to the AMT patch, it includes dealing with the business tax extenders; the “doc fix” (payments to Medicare providers); the extension of unemployment insurance; the payroll-tax holiday; and, of course, the Bush tax cuts and the massive spending cuts in the sequester.

Democrats may be discounting the burden this brinkmanship places on the IRS. Yes, the Treasury Department can ask the agency to tweak its withholding tables to prevent huge tax hikes on everyone starting in January. But the failure to reach a deal (at a time when the IRS is also struggling to sort out the new taxes from the Affordable Care Act) raises the possibilities of a disastrous filing season for Americans come April—as if people need more reasons to loathe the taxman.

Former IRS Commissioner Doug Shulman says that the question marks surrounding the AMT patch are a recipe for disaster. “If those aren’t fixed, it’s going to be real chaos, with the American people trying to interact with the IRS,” he said at a luncheon sponsored by Politico on Tuesday.

The tax-collecting agency also must contend with more basic tasks, such as printing forms or adjusting software to prep for a filing season that starts in January. “The tax system is a fragile thing, and this is adding an incredible amount of risk,” says Jeff Trinca, the former chief of staff for the National Commission on Restructuring the Internal Revenue Service, a panel set up in the late 1990s. “It’s hard to even picture all of the things that could go wrong.”

The alternative minimum tax certainly would come as a surprise to many upper-middle-class Americans, who typically avoid paying the extra money, thanks to congressional passage of those incremental patches. If the AMT isn’t addressed, the federal government would collect $120 billion from the levy next year, up from $34 billion, according to the Tax Policy Center. Those who already pay the AMT would see their bills rise by an additional $5,500.

“I think anyone who watches things happening here understands the risk of this can being kicked down the road,” says Democratic Sen. Kent Conrad of North Dakota, the retiring chairman of the Senate Budget Committee. “On the alternative minimum tax, what happens? You go from 4 [million] or 5 million people who are affected to 30 million people. That’s not good for the economy, and that’s not fair.”

While the IRS’s woes seem like just a bureaucratic headache for now, the AMT would hit millions of new people who live in Democratic-leaning states. Just think of them as current or potential campaign donors, suddenly faced with an oddly named, outdated tax that both parties wildly dislike yet have never undone. A new report from the Congressional Research Service shows that failing to fix the AMT would primarily rope in taxpayers on both coasts, hitting hardest in California, Connecticut, Massachusetts, Minnesota, New Jersey, New York, and Virginia.

Line items such as fixing the AMT sound like nitpicks amid larger questions of tax rates and entitlement cuts, but they will play a pivotal role in a final deal. They will also provide needed motivation for both sides to find common ground before the end of the year. If negotiators don’t get it done, Democrats could find that postelection glow fading before they know it.

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