GOP Blocks Hike on Income, AMT, Death Taxes

President Obama conceded to Congressional Republicans’ demands to stop the pending tax hikes on income, AMT and estate. The final package will voted on in the Senate, and then the House.

The GOP leaders used their leverage from the successful Midterm Elections to draw a line in the sand on tax hikes.

As a result, Obama was forced to retract his long-standing promise to only allow an extension of Bush tax cuts for the middle class.

“We have arrived at a framework for a bipartisan agreement.  For the next two years, every American family will keep their tax cuts — not just the Bush tax cuts, but those that have been put in place over the last couple of years that are helping parents and students and other folks manage their bills,” said Obama on Monday night.

The central success in the agreement for Republicans is a two-year extension of the income tax rates for all Americans. The current tax rates, which have been in place since President Bush cut taxes in 2001 and 2003, are set to expire on December 31, and revert to higher levels. The income tax rate extension will keep income taxes at current levels through 2012.

“I appreciate the determined efforts of the President and Vice President in working with Republicans on a bipartisan plan to prevent a tax hike on any American and in creating incentives for economic growth,” said the gracious McConnell after Obama’s concession speech on Monday night.

Obama acknowledged on Monday night that, “ever since I started running for this office I’ve said that we should only extend the tax cuts for the middle class.” Thus, by folding to the Republicans on tax cuts, Obama was forced to break his promise to his liberal base that he would only extend some tax rates.

The President showed an awareness that the liberal Democrats were going to be angry at his decision. “I know there’s some people in my own party and in the other party who would rather prolong this battle, even if we can’t reach a compromise,” he said.

Since the elections, the Republican Congressional leaders have insisted that tax cuts be extended for all Americans, which forced Obama and the Democrats to give into their demands. Obama said that “what is abundantly clear to everyone in this town is that Republicans will block a permanent tax cut for the middle class unless they also get a permanent tax cut for the wealthiest Americans.”

Obama and the Democrat leaders call those making over $250,000 a year “the wealthy”, but approximately half of them are small business owners who file individual tax returns. Republicans believe that if these small business owners had to pay higher taxes, they would not create new jobs, which are worsen the current 9.8% unemployment rate.

“According to the strange logic of Democrat leaders in Congress, the best way to show middle-class Americans that they care about creating jobs is to slam some of America’s top job creators with a massive tax hike,”  said Senate Minority Leader Mitch McConnell on Sunday, after the Democrats forced a token vote on partial tax extensions.

The estate tax – otherwise known as the “death tax” – is also set to expire on December 31. The death tax was suspended for 2010, but is set to automatically rise to a jaw-dropping 55% for estates valued over $1 million.

Obama agreed to McConnell’s bipartisan compromise position which will be in place through 2012. In the plan, estates worth less than $5 million will be exempt from the death tax. Estates worth more than $5 million will be taxed at a 35% rate.

Also, the Republicans won an agreement to fix the Alternative Minimum Tax (AMT). As the Democrat-controlled Congress did not adjust the AMT limits for inflation in 2010, as many as 21 million families were going to get hit with an extra $2,000 tax. The framework agreement will include a “patch” on the ATM for 2010 and 2011 to prevent the tax hike on middle class families.

The President has touted that, in exchange for the tax cuts in the negotations, he got a 13-month extension of federal unemployment insurance programs for those who have been jobless for 99 weeks. Actually, the Senate has voted three times this year to extend unemployment benefits and would have the votes to pass it now. Alas, Obama used this as his political cover for passing the tax cuts which his party opposed.

The Congressional Republicans have insisted that the unemployment benefits be offset with spending cuts, but Obama did not say last night how to pay for this additional cost.

The Republicans also gave Obama extensions for the tax credit items that were in his stimulus bill, the Recovery Act.

  • The Child Tax Credit of $1,000 child tax credit will be extended for two years, including the $3,000 refundability threshold.
  • The Earned Income Tax Credit expansion from the stimulus bill which gives on average of $600 to families with three or more children will be extended for two more years.
  • The American Opportunity Tax Credit for education, which provides a partially refundable tax credit of up to $2,500 for college tuition, will also be intact for two years.
  • The agreement also includes a 2% payroll tax credit for workers (in lieu of the refundable Making Work Pay credit) and 100% business expensing, both for one year.

The agreement between Congressional Republicans and Obama is a framework for assembling the final bill. Both parties agreed that nothing new would be inserted in the process of drafting legislation.

The final bill will be brought up first in the Senate. McConnell said on Tuesday that he is, “very hopeful and optimistic that a large majority of members of the Republican conference will find this a proposal worth supporting, and I’m hopeful that the Democratic leaders will be able to convince their members, as well, that this is the way to go forward.”

Majority Leader Harry Reid (D-N.V.) said on Tuesday that he will leave each Democrat to make his or her own decision on how to vote, and refused to answer if he would vote for it.

In the House, the lame-duck, Democrat majority will require Democrat votes to pass the bill. Speaker of the House Nancy Pelosi (D-Calif.) and Majority Leader Steny Hoyer (D-Md.) met with Obama at the White House right before he announced the final deal. Presumably, the President called the meeting with Pelosi to line up her support and her help in getting Democrat votes. Since the meeting, Pelosi has not said publically whether or not she will help passage of the tax cuts which she has fought so hard to stop. 

“I am optimistic that Democrats in Congress will show the same openness to preventing tax hikes the administration has already shown,” said McConnell.