Setting the Stage for Debate on the Bush Tax Cuts
Sept 7, 2010

Members of Congress are set to return mid-September for a final three week session before the November elections and they have a full agenda. Democrats are interested in revitalizing the stalled small-business lending bill, while Republicans are focusing attention on the impending expiration of the Bush tax cuts (Dec. 31, 2010), which they say would hurt small businesses.

In the early 2000s, President George W. Bush signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. Those tax breaks are set to expire at the end of this year, and a battle is starting to brew over what will happen to them.

President Barack Obama and Democrats in Congress have proposed extending those tax cuts for individuals earning less than $200,000 each year and couples earning less than $250,000, while letting the tax cuts for individuals and couples above the designated income bracket expire. The Congressional Budget Office (CBO) reports that extending all of the 2001 and 2003 tax cuts would cost $2.7 trillion over the 2011-2020 period (excluding AMT patches and added interest payments.) Their plan is to permanently extend tax cuts for taxpayers falling in the 10, 25 and 28 percent tax brackets. Taxpayers falling in the 33 percent bracket would move up to 35 percent if they make over $250,000 as a family. The 35 percent bracket then goes up to 39 percent.

Meanwhile, the Republicans are calling for an extension of all the tax cuts and argue that increasing tax cuts for the upper income tax brackets will hurt small businesses who are still suffering from the recession. If no action is taken, taxes on income, dividends, capital gains and estates would all rise.

Senator Charles Grassley (R-Iowa), ranking member of the Committee on Finance, Senate Republican Whip Jon Kyl (R-Ariz.) and other committee Republicans have called on the committee to hold a mark-up of an extension of current individual tax rates and other current tax provisions, which will expire in less than five months without legislative action. The senators wrote to Sen. Max Baucus (D-Mont.), chairman, urging a mark-up as soon as possible to bring some certainty of continued tax relief in a struggling economy. 

Meanwhile, House Majority Leader Steny Hoyer (D-Md.) is calling for extending only those provisions for taxpayers making less than $200,000 per year and couples making less than $250,000. The sluggish economic recovery has some Democrats—notably Sens. Kent Conrad (D-N.D.) and Evan Bayh (D-Ind.) calling to extend all the Bush tax cuts for at least an additional year.

How the debate will play out during the midterm campaign season is still an unknown. Democrats plan for the Senate to tackle the issue first when Congress returns from the summer recess in September, and House Democrats have indicated they want to vote on the extension before the elections. Given the partisan gridlock of recent months, there is a chance that the battle could go down to the last minute, or even — in the face of a stalemate — that the tax cuts could be allowed to expire completely.