Tax Deal Passes Senate, House Democrats Next Hurdle

The Senate passed the Tax Relief Act on Tuesday with a strong bipartisan vote of 81-19.

The bill will now go to the House for debate and vote this week. House Democrats want to amend the package to raise taxes on the upper income brackets and change the estate tax to hit more American families.

Senate Minority Leader Mitch McConnell (R-Ky), who negotiated the legislation directly with President Obama, said that if the House Democrats alter the bill, it will not pass the Senate.

“In regards to the tax issue, let me reiterate once again, this agreement is not subject to being reopened,” said McConnell on Tuesday evening.

“I hope that our friends in the House will understand that it’s the best way to go forward. Pass the Senate bill and get it down to the President who supports the understanding,” said the GOP Senate Leader.

Democrats have a majority in the Senate, but McConnell has leverage to filibuster the bill. McConnell has said that his goal was to get a deal that prevented tax hikes on all Americans, which are schedule to hit on January 1.

Some conservatives are opposed to the tax deal because the tax cuts are not made permanent, the unemployment spending is not offset, and the business credit extenders are not good tax policy.

Senate Minority Whip Jon Kyl (R-Ariz.) addressed the compromise issue on the floor debate on Tuesday night.

“Political circumstances will not allow either party to dictate its perfect bill. So, while neither party got everything it wanted, there are provisions in the package to appeal to both sides of the aisle. And most of us agree it would be very bad for Americans to allow taxes to be increased,” said Kyl.

Two Senators, Tom Coburn (R-Okla.) and Jim DeMint (R-S.C.), offered conservative alternatives to the deal. The conservative amendments were made using a procedural motion that requires 67 votes for passage, which neither got. Both Coburn and DeMint voted against final passage of the tax legislation.

Coburn filed an amendment which “pays for the costs of extending unemployment insurance payments by reducing unnecessary and duplicate spending.” The Coburn amendment would have cut spending by $156 billion over five years to pay for the increase in spending.

According to a GOP aide, the Coburn amendment specifically included a three-year federal employee pay freeze, 10% reduction in the federal workforce, selling excess federal property, cuts to NASA, and a 15% reduction for Department of Defense procurement. The final vote on the Coburn spending cut amendment was 47-52.

In negotiations with the President, McConnell tried unsuccessfully to get the unemployment spending offset.

“There are parts of this agreement I don’t like, such as the Democrats’ insistence that we borrow the money we need to pay for a further extension of unemployment insurance. In my view, if both parties agree that the debt is a serious problem, we shouldn’t be writing checks that we don’t have the money to cover,” said McConnell on Monday.

DeMint voted against the tax deal. An aide to DeMint said that he opposed the bill because it has “deficit spending, a death tax hike, and objectionable tax subsidies to special interests (ethanol, rum, Hollywood).” His aide points out that DeMint “believes we can get a better deal – clean extension of tax cuts without deficit spending-  in just a few weeks, in the next Congress.”

DeMint’s motion on Wednesday was a bill which he and Rep. Mike Pence (R-Ind.) introduced in November to make permanent all the Bush-era tax cuts. The bill removes any expiration date on all the 2001 and 2003 tax cuts, zeroes out the death tax, and puts a permanent patch on AMT.

“If we take this compromise, almost all of the tax rates are either one year or two years and then people can expect them to go up or to change. we cannot operate the world’s largest economy in this type of environment,” said DeMint during debate.

The amendment failed to pass the Senate by a vote of 37-63.

The final tax package which passed the Senate keeps all current tax rates the same for two more years and extends federal unemployment benefits for 13 more months.

All the current individual tax rates, which President Bush established in 2001 and 2003 will stay the same. The Alternative Minimum Tax (AMT) will be adjusted for inflation for 2010 and 2011 so that 21 million families are not hit with a $2,000 tax this year.

The estate tax — also known as the death tax — was suspended in 2010, but scheduled to go to 55% for estates valued over $1 million on January 1. The tax compromise sets the death tax at 35% and applies to estates valued over $5 million.

The Congressional Budget Office (CBO) projects the cost of the bill will be $857 billion over 10 years. Of that total, $721 billion is considered “revenue loss” by keeping taxes at the current rates.

The rest of the $136 billion cost from from various refundable tax credits ($77.1 billion) and the only new government spending program, Obama’s unemployment benefits ($56.5 billion.) The federal unemployment extension is not offset by government spending cuts.

The House Democrats will try to amend the tax package to raise upper-income and small businesses’ tax rates and increase the death tax rate. The lame-duck Democrats control the Rules Committee, which will determine the amendments allowed to be voted on the floor.

House Majority Leader Steny Hoyer (D-Md.) indicated that the Democrats will try to change the death tax to the rates which they passed last year, which would be 45% tax on estates over $3.5 million.

“There continues to be great concern about the treatment of estates,” Hoyer told reporters on Tuesday.

“The President and Republicans reached an agreement, which Republicans demanded, that the estate tax go to Lincoln-Kyl, which is $5 million per individual, $10 million a couple, and a 35% rate,” said Hoyer. “We will have to see, first of all, what the final bill is that comes to us. And then, secondly, what action we will suggest after that.”

Hoyer predicted that the bill would pass in some form by the targeted adjournment date of Friday. However, if the House changes the bill with amendments, then the Senate will have to pass it again. And, McConnell threw down the gauntlet on Tuesday, saying that he would not allow changes to the agreement.

The back and forth over death tax is a risky political maneuver for the Democrats. If the legislation is not signed into law by December 31, every American will have a tax hike on January 1, which will deal considerable damage to an already faltering economy.