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Epic clash nearing over tax boosts, spending cuts

By Alan Fram

Associated Press

Published: Tuesday, June 19 2012 2:26 p.m. MDT

Sometime in early 2013, Congress also will need to renew the government's borrowing authority, a chore that nearly triggered a stalemate last summer between Obama and the GOP-run House and a first-ever federal default.

Lawmakers also want to try concocting a long-term debt-reduction plan and overhaul the entire tax code. Both of those tasks rank among the most complex legislators ever face.

As a backdrop, there are annual budget deficits exceeding $1 trillion and a limp economy that created a dismal 69,000 jobs last month as unemployment remained over 8 percent.

"I don't think we've approached anything more difficult," said Sen. Lamar Alexander, R-Tenn., who with Sen. Mark Warner, D-Va., has led informal, bipartisan gatherings of senators looking for a way out of the mess. "None of that's all been done all at once before, and none of it's going to be easy."

Action isn't mandatory by Jan. 1, because the tax cuts could be restored retroactively and the spending cuts would be phased in gradually. But Sen. Orrin Hatch, R-Utah, and others predict that the economy could begin suffering this fall, as defense contractors and other government suppliers prepare for the cuts by laying off workers.

Yet for every lawmaker seeking resolution this year — "We have no choice," Senate Finance Committee Chairman Max Baucus, D-Mont., told reporters Tuesday — others relish a partisan battle.

The noisiest dispute — which will be a repeated theme during this year's political campaigns — is over the Bush-era tax cuts. Arguing that everyone must sacrifice during hard times, Obama and congressional Democrats want to end the reductions for the richest Americans while renewing them for most people. Republicans insist on extending the reductions for everyone, arguing that the wealthy create jobs.

As a result, a deadlock that causes all the tax cuts to expire Jan. 1 is a possibility. The White House has said Obama won't extend them for the highest earners even temporarily, while Republicans say there aren't enough votes in the GOP-run House to renew the reductions unless everyone is included.

Obama "will make the case very clearly that Republicans are holding the entire economy hostage to their obsession of retaining tax breaks for the wealthiest Americans." says Maryland Rep. Chris Van Hollen, top Democrat on the House Budget Committee.

"If he's so fixated on raising marginal tax rates for his sense of equity, that comes at the expense of the economy," House Budget Committee Chairman Paul Ryan, R-Wis., said of Obama.

Senate Republicans released a study Tuesday by Congress' nonpartisan Joint Committee on Taxation showing that 53 percent of business earnings reported by individuals is generated by people paying the two highest tax rates, which Obama wants to increase. It also showed just 3.5 percent of individuals reporting business earnings making enough money to be affected by the president's plans for raising income tax rates on high earners.

Both sides received a May warning from the nonpartisan Congressional Budget Office. It said that if the tax increases and spending cuts occur in January, the economy will shrink at an annual rate of 1.3 percent in the first half of 2013, enough to "probably be judged a recession" before expanding later in the year.

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