It appeared as though the White House and Republican leaders in Congress had made a deal. But House Democrats voted Thursday against considering a tax package President Obama had negotiated with Republicans.
Earlier in the week, President Obama agreed to extend the Bush-era income tax cuts (which are set to expire at midnight on Dec. 31), and the GOP agreed to extend benefits for the unemployed.
Democrats feel betrayed
A number of Democrats expressed outrage over the compromise, particularly because it extends tax cuts for the highest-earning Americans.
While campaigning prior to the midterm elections, Obama said he’d work to limit the availability of income tax cuts to those making $250,000 or less. Now some Dems feel he’s caved on the tax issue.
Obama’s reasoning for extending the existing tax breaks: Any bickering in Congress over the issue would easily run into 2011, resulting in the expiration of tax cuts for everyone — not just the wealthy.
If the agreement were to make it through Congress as is, here’s what will happen:
- The expiring Bush tax cut law will be extended for two years. That means the 10%, 25%, 28%, 33% and 35% tax rates will all stay the same. If the tax cuts were to expire the new rates would jump to 15%, 28%, 31%, 36% and 39% — costing taxpayers an estimated $150 billion.
- The Making Work Pay tax credit will be replaced. Instead a one-year, two-percentage point reduction in the payroll tax will be put in place. Ordinarily, the payroll tax is divided evenly between employers and workers, but this tax cut is on the employee side only. That’ll bring payroll taxes down to 4.2% on wages up to about $107,000.
- Tax credits could get extended. Rumor has it that as part of the deal, Congress will consider extending the American Opportunity Tax Credit, Child Tax Credit and Earned Income Tax Credit.
- Unemployment benefits extended. Aid for the long-term unemployed will be extended for 13 months.
Far from dead
While the White House faces an uphill battle to push the compromise through Congress, it responded to the House Dems’ actions with a statement saying it remains confident “that the major components” of the tax deal will pass, according to CNN.com.
White House Press Secretary Robert Gibbs said he expected the package to pass, because failing to extend the tax cuts by the New Year would lead to higher taxes for everyone.
In addition, one White House adviser said Senate Democrats are working on a plan to pass the tax bill and then “jam the House” with that legislation.
We’ll keep you posted.