First in a series on tax policy.
When George W. Bush was sworn into office as president in January 2001, he inherited a record budget surplus. Five weeks later, he addressed a joint session of Congress, urging lawmakers to act swiftly on his signature campaign promise: $1.6 trillion in tax cuts.
"I hope you'll join me in standing firmly on the side of the people," the president said. "See, the growing surplus exists because taxes are too high and government is charging more than it needs. The people of America have been overcharged, and on their behalf, I'm here asking for a refund."
Republicans cheered. But Democrats were deeply skeptical of a tax cut based on projections of a $5.6 trillion surplus over 10 years that, in fact, never came about. At the time, North Dakota's Kent Conrad was the ranking Democrat on the Senate Budget Committee.
"The tax cut is simply too big," he said. "No. 2, it is unfair. It goes primarily to the wealthiest among us. Forty percent of the benefit goes to the wealthiest 1 percent in this country."
And House Democratic Leader Richard Gephardt of Missouri had a dire warning: "This is a mistake that we will pay for for years to come!"
Nonetheless, Republicans pushed two big tax packages through Congress in 2001 and 2003. The measures cut marginal rates on personal income taxes. They gradually reduced the estate tax so it disappeared altogether this year. In 2003, they slashed taxes on dividends and capital gains. But to comply with budget and procedural rules, Republicans had to let all those cuts expire, most of them after 10 years. And that is why the clock is now ticking down to Dec. 31 — when tax rates will return to pre-tax cut levels unless Congress acts.
Brown University congressional expert Wendy Schiller says that has put the Democrats in a tough position. If the tax cuts expire, the nation's fiscal outlook takes a great leap forward. "But if you let them expire," Schiller says, "then you're absolutely vulnerable to a charge of raising taxes."
Democrats are facing tough midterm elections. Republicans are already saying Democrats will let the biggest tax hike ever take place Jan. 1. "They seem proud to be raising taxes," said South Carolina Sen. Jim DeMint, "so we just need to make sure that America knows that."
But here's what the White House wants America to know: President Obama is sticking to his campaign promise to permanently extend tax cuts on all household income below $250,000. The president underscored that commitment while speaking in the Rose Garden last week.
"As Congress prepares to return to session," the president said, "my economic team is hard at work in identifying additional measures that could make a difference in both promoting growth and hiring in the short term, and increasing our economy's competitiveness in the long term — steps like extending the tax cuts for the middle class that are set to expire this year."
Extending those so-called middle-class tax cuts would cost the Treasury about $3 trillion over the next decade. Extending them for the top income tax brackets would cost another $700 billion. But Democrats say those cuts, which affect about 2 percent of taxpayers, should not be extended. Last month on ABC's This Week, House Speaker Nancy Pelosi defended letting those tax breaks lapse.
"I don't see any reason why we should renew a tax cut that only gives a tax cut to the wealthiest people in America, increases the deficit, and doesn't create jobs," she said.
Republicans say that's a recipe for disaster.
"The question is, should you be raising taxes?" says the Senate's No. 2 Republican, Arizona's Jon Kyl. "The answer is no! And so if the answer to that is no, then leave the tax rates where they are."
More and more congressional Democrats are also taking that view. One of them is that earlier tax cut critic Kent Conrad, who now chairs the Budget Committee.
"Because the economy continues weak, I would prefer to continue all the tax cuts, including those for the top end," he said, "but to sunset those for the top end at a time certain."
That time, Conrad says, could be 18 months from now if the economy is stronger. But with Republicans poised to pick up seats in the midterm elections, other leading Democrats prefer using the clout they still have to let the tax cuts for the wealthiest lapse. When asked last month whether tax breaks for the wealthy should be extended, Finance Committee Chairman Max Baucus said no: "I think not at this point. It's not necessary, frankly."
Baucus says the Senate will take up the expiring Bush tax cuts later this month. That could present Republicans with a tough choice: They could reluctantly back a partial extension of the tax cuts as proposed by Democrats, or they could block it, and risk also being blamed if taxes go up Jan. 1.