Divided Democrats threw in the towel last week and temporarily put off plans to repeal George W. Bush’s top income tax rate cuts until a post-election lameduck session of Congress.
Their postponement has deepened uncertainties throughout the country as businesses delayed investment decision-making, fearing higher taxes next year would send the economy into another nose dive. There was also the prospect of revenge-minded Democrats returning to Washington after Nov. 2, toppled from power by the voters, but still maneuvering to let the Bush tax cuts expire at the end of this year which would push the top marginal income tax rate to a job-killing 40%.
“For now, taxpayers confront a number of worrisome scenarios, including the possibility Congress might deadlock on the issue in the post-election ‘lame duck’ session, resulting in across-the-board tax increases,” the Wall Street Journal warned ruefully last week.
Democratic leaders blamed Republican opposition for their abrupt retreat from the centerpiece of their class warfare campaign to raise taxes on individuals and businesses making more than $250,000 a year, as well as capital gains, dividends, estate taxes, corporate tax credits and the Alternative Minimum Tax.
But the real opposition that forced them to delay their anti-growth, job killing tax plan, in the midst of what most people still believe is a recession, came from within their own party.
In the House, nearly three dozen Democrats have signed a letter to Speaker Nancy Pelosi urging her to extend the Bush tax cuts for top income earners until the economy has recovered. Insiders say another half dozen or more fence-straddling Democrats are reluctant to vote for any tax increase –enough to kill any bill Pelosi brought to the floor.
“In recent weeks, we have heard from a diverse spectrum of economists, small business owners, and families who have voiced concerns that raising any taxes right now could negatively impact economic growth. Given the continued fragility of our economy and slow pace of recovery, we share their concerns,” the Democrats said.
In the Senate, nearly half a dozen Democrats want all the tax cuts extended a year or two, if not permanently. Still others were warning Majority Leader Harry Reid that any vote to raise taxes before the elections would further endanger Democrats in tough races where taxes have become a big issue.
These Democrats were not opposed to raising taxes on the top 2 percent of all income earners, just not before a tough election when it could result in steeper Democratic losses.
“I actually believe that voting on taxes right before the election is a mistake, California Sen. Dianne Feinstein told the Wall Street Journal last week just as Democrats began caucusing on their strategy. Her home state colleague, Sen. Barbara Boxer, is in a tight battle with Republican businesswoman Carly Fiorina who has made lower taxes a major issue in the race.
Other Democrats have straddled the issue, but with exceptions. Virginia’s two Senate Democrats support lettting the Bush tax cuts expire, but Mark Warner wants more tax cuts for businesses. Jim Webb said last week that the $250,000 tax hike threshhold is too low and wants it raised.
All of this means that even if Pelosi and Reid decided to bring the issue to a vote before Nov. 2, their odds of getting the tax increases passed in the House or even considered in the Senate were unlikely.
“The reality is, we are not going to pass what needs to be passed to change this, either in the Senate or the House, before the election,” said Illinois Sen. Richard Durbin, the No. 2 Democrat in the Senate.
The larger reality is that polls show there is no national majority supporting the Democrats on this issue. Most show voters are split in general, but key voting groups that will decide this election voice strong opposition and that was enough to force the Democrats last week to back off for now.
About three-fourths of Democrats support raising taxes on upper income Americans, according to an Associated Press-Gfk Poll, but at least half of all independents and most Republicans oppose the idea.
However, perhaps no poll speaks more strongly to the Democrats weakness on this issue than their decision to postpone bringing it up for a vote because they fear what the voters will do to them on Nov. 2 if they were to raise taxes in a deaccelerating economy.
Economists say that postponement is hurting the economy. “The uncertainty of not knowing what tax rates will be just a few months from now is adding to the collective nervousness,” chief economist Mark Zandi of Moody Analytics wrote last week.
But it’s also keeping a politically lethal Republican economic issue alive in the final weeks of the midterm elections that are shaping up to be a blood bath for the tax happy Democrats.