Deal Struck on Tax Package
WASHINGTON—President Barack Obama reached agreement Monday with Republican leaders in Congress on a broad tax package that would extend the Bush-era income tax cuts for two years, reduce worker payroll taxes for one year and give more favorable treatment to business investments.
Other elements of the deal include a temporary reinstatement of the estate tax at 35%—the level favored by most Republican lawmakers—as well as an extension of jobless benefits for the long-term unemployed.
"We have arrived at a framework for a bipartisan agreement,'' Mr. Obama said on Monday night, capping weeks of negotiations with leaders in Congress.
The outcome of the negotiations is vital, because the current tax levels signed into law by President George W. Bush expire on Dec. 31. Unless Congress acts, tax rates on virtually all Americans who pay income taxes will rise on Jan. 1. That could affect economic growth and even holiday sales.
In reaching the deal, whose details still need to be worked out, Mr. Obama brushed past the demands of many in his own party to curb tax cuts for the wealthy. Some liberal lawmakers and activists were left seething, particularly over last-minute concessions to Republicans on the estate tax. Democratic leaders didn't agree to the deal during meetings on Monday with Mr. Obama and Vice President Joe Biden, according to a House aide.
"I can tell you with certainty that legislative blackmail of this kind by the Republicans will be vehemently opposed by many, if not most, Democrats," said Rep. John Conyers (D., Mich.).
In the Senate, Tom Harkin (D., Iowa) called it "an understatement'' to say he was disappointed. Democrats to back the agreement, but anger on the left suggests that Mr. Obama might need to rely heavily on Republican support to move legislation through Congress.
Republican leaders spoke highly of the agreement. In a statement, House Republican Whip Eric Cantor said, "No one gets everything they want in a deal, but our top priority is to restore certainty to the private sector so that businesses small and large can start hiring again."
Senate Republican Leader Mitch McConnell also praised the deal and asked that Democrats in Congress now "show the same openness to preventing tax hikes the administration has already shown.''
Mr. Obama acknowledged that the agreement marked a significant reversal for him, as he has long argued that income tax cuts for couples earning more than $250,000 should expire. If the political stalemate continued and led to a broad tax increase, Mr. Obama said, "that could cost our economy well over a million jobs.''
The deal would extend a raft of business tax breaks, including credit for spending on research. It would extend current tax rates on capital gains and dividends for two years, including for higher earners. It would also maintain protection for middle-class families from the alternative minimum tax.
As part of the deal, the White House is proposing a provision to encourage more investment in plant and equipment, by letting companies claim deductions on 100% of most kinds of investment.
Under the agreement between the White House and congressional Republicans, the estate tax rate would be set at 35% for two years and would apply only to estates over $5 million. Under current law, the estate tax has lapsed for 2010 and is set to spring next year to 55%.
A program of extended benefits for the long-term unemployed, which lapsed last month, would be revived for 13 months, the White House said. The jobless benefits would be financed by federal borrowing rather than by spending cuts.
For Mr. Obama, reaching a deal with the GOP on taxes could help him score points with moderates and independents, an increasingly important constituency, by underscoring his ability to work with newly empowered Republicans. But the discussions have angered some liberal groups, who say Democrats should engage the GOP in a showdown, even if that risks letting the tax cuts expire for all income levels. In an email to its members, the liberal Moveon.org said, "They've given up on this critical issue without a fight."
The payroll-tax reduction under discussion now would cut the 6.2% Social Security tax levied on a worker's wages to 4.2%. A worker making $40,000 a year would save $800, and some economists say that could help stimulate demand at a time when the economy remains relatively weak.
The employer's half of the tax—also 6.2%—wouldn't be affected under the White House proposal, and thus the cost of hiring new workers wouldn't be directly affected.
The payroll tax reduction would take the place of a $400-per-worker income-tax break that Mr. Obama included in the 2009 stimulus bill. That break, known as Making Work Pay, provides a tax credit of 6.2% on the first $6,450 of a worker's wages. It phases out for workers making more than $75,000.
Some Republicans prefer the payroll tax reduction to the Making Work Pay program because it goes to everyone who works, regardless of income. A senior administration official said that the payroll tax cut would cost $120 billion, twice that of Making Work Pay, and would give bigger benefits to some low-income workers.
Versions of a payroll tax cut have been considered before, and they enjoy a measure of support in Congress. But some Democrats are wary of any change to the payroll tax, which funds the Social Security program.