The Wall Street Journal
written by Janet Hook and John McKinnon
Friday December 17, 2010
WASHINGTON—Congress passed the most far-reaching tax bill in a decade late Thursday, averting across-the-board tax increases, enacting new breaks for individuals and businesses and laying a marker for how Washington might work in an era of divided government.
The bill goes to the White House for President Barack Obama's signature after the House overcame persistent liberal opposition and passed it with an unexpectedly large bipartisan majority of 277-148. The measure passed the Senate earlier in the week also with an overwhelming majority.
The bill reaches deeply into the life and economy of the U.S., more so than might have been expected when Congress first started tackling the matter. Wage-earners will get a new payroll tax break; wealthy heirs get a lower estate-tax rate; and businesses gain an unexpected plum—a big tax write-off for new equipment purchases.
The $858 billion bill breaks a stubborn political impasse prompted by the Bush-era tax cuts, which were due to expire at the end of this year. The bill provides a two-year extension for all income brackets, kicking the issue into the next Congress and into the middle of the 2012 election. Lawmakers, especially Republicans, said the current economy was too weak to withstand a tax increase.
In the bill's sweep, Congress signaled a return to tax cutting as a principal engine of driving economic growth, especially compared with Mr. Obama's 2009 stimulus bill, which put more emphasis on government spending. Coming after the Democratic losses in November's midterm elections the playbook this time was more in keeping with Republican orthodoxy.
"The fact that President Obama has moved toward recognizing that a pro-growth economic policy has direct ties to the level of taxation…is a positive sign," said Rep. David Dreier (R., Calif.), a member of the House GOP leadership. "I believe that moves him in the direction of being a better president."
Democrats were resigned after resisting what for weeks had seemed an inevitable outcome. "There is probably no one on this floor that likes this bill," said House Majority Leader Steny Hoyer (D., Md.). "Therefore, the judgment is: Is it better than doing nothing? This is a jobs bill in my view, which is why I'll vote for it."
Both parties splintered in the vote. Voting for the bill were 139 Democrats and 138 Republicans; voting against it were 112 Democrats and 36 Republicans.
The tax deal—a rare moment of bipartisan action after two years of bitter inter-party rivalry—started as a compromise between the White House and congressional Republicans, notably Senate Minority Leader Mitch McConnell of Kentucky. It's an alliance Mr. Obama may have to rely on with Republicans poised to take control of the House and gain strength in the Senate.
Indeed, the White House is already pondering other areas of potential compromise with the GOP, including education, transportation and even Social Security, White House officials say. That makes the tax deal a potential model for future action, a template that will infuriate Democrats in Congress, especially liberals who dominate the House and yet are declining in power.
The biggest winners, at least in dollar terms, are individual taxpayers, whose tax benefits account for roughly $700 billion of the bill's total $858 billion 10-year price tag.
The measure includes retention of the Bush-era tax rates and breaks for all earners for two years, as well as protection through 2011 from the Alternative Minimum Tax for more than 20 million mostly middle-class households. It includes a new payroll-tax credit for virtually all workers, as well as a 13-month extension of benefits for the long-term unemployed. The wealthy won a lowered estate tax rate for the next two years of 35% on estates of more than $5 million.
Middle-income Americans fared best from the deal, due in large part to the new payroll-tax holiday, according to the nonpartisan Tax Policy Center. Those with the largest average gain in after-tax income, compared with current tax policies, earn between $35,000 and $64,000. They gain about $613, or 0.9% of their income.
Lower-income earners will benefit from continued expanded availability of the child credit and other breaks. But the substitution of Mr. Obama's Making Work Pay break—a tax subsidy for lower income people—with a payroll-tax holiday will be a net loser for them.
Higher-income people took the most cash from the deal. The average gain for households with $500,000 to $1 million in income was $3,859 compared to current tax levels. Democrats had wanted tax rates for this group to rise.
Businesses gained a number of provisions Congress usually extends for a year or two, including a big research credit, a range of subsidies for alternative energy and a slew of targeted breaks for motor-sports tracks, restaurant buildings, railroad maintenance and corporate donations of food and other items.
Despite this litany, many corporate executives worry about the short expiration dates that now litter the U.S. tax code, and the lack of predictability it affords. In 2010 there were 141 tax provisions that were either expiring or just expired, including all the Bush-era individual rates. With this week's votes to extend most of those provisions for just a year or two, many of the predictability problems could continue beyond the 2012 presidential election.
Some of this week's debates will begin in 2011 when several provisions including the payroll tax holiday and the alternate minium tax fix expire again.
The bill also adds to the deficit just as policy makers in Washington are beginning to develop proposals to cut spending. A $1.2 trillion Democratic spending bill collapsed just before the tax vote Thursday night. Political observers on both sides said the bill sets the stage for a series of clashes over taxes.
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