WASHINGTON — In the back of every Washington politician's mind is this sobering fact: Unless Congress acts, the temporary tax cuts it passed when George W. Bush was president will expire at the end of next year.
If the Democrats who control Congress do nothing and let the tax rates on the highest income brackets return to their pre-2001 levels, their Republican rivals and many Americans will slam them as tax hikers.
If they prevent the legislation from expiring, however, they and any Republicans who support this approach will add $2 trillion to the already-growing federal budget deficit over the next decade. The news media and influential watchdog organizations will slam them for that.
The 2001 and 2003 tax reductions are the big gorilla in the room that everyone's ignoring. By the end of 2010, a year of midterm congressional elections, Congress must address this key economic issue, though.
"I think the easier course for both sides of the aisle to take is to extend at least most of the Bush tax cuts before you get to the end of 2010," said Diane Lim Rogers, the chief economist for the Concord Coalition, a nonpartisan budget watchdog group.
By passing a temporary extension of temporary tax reductions, the Obama administration and Democrats in Congress can buy time, she said, and the likely outcome is the formation of a study group to examine the kinds of extensive tax revisions that many experts argue are needed.
"There's not enough time to do serious tax reform before the Bush tax cuts expire," Lim Rogers said, adding that lawmakers are likely to be too bruised from the health care battle to pursue significant tax restructuring next year.
President Barack Obama has said that he expects to retain most of the Bush tax reductions, letting them expire only for individuals or couples who earn more than $250,000 annually in taxable income. This would apply to income taxes and to capital gains on investments, making Bush's tax cuts Obama's tax cuts.
Under Obama's plan, high earners no longer would fall into a 35 percent top tax bracket, but into new 36 percent or 39.6 percent brackets. Capital gains taxes would rise from the current 15 percent to 20 percent for long-term investments, and up to 39.6 percent for gains from short-term investments.
Businesses would like an early signal from lawmakers and the administration about what might happen, but they're not expecting one.
"That would be the best thing to do, but they're not going to do that. They've got way too much on their plate," said Martin Regalia, the chief economist for the U.S. Chamber of Commerce. "They will talk about tax reform, but I don't see them getting around to doing tax reform in an election year. They'd have to do it before March."
As part of the economic recovery efforts, Obama created a panel to look into ways that tax restructuring could boost the economy. However, the panel failed to issue a planned report in December, Lim Rogers said, and was given very little room to work. It was prevented from recommending tax increases for individuals or couples who earn less than $250,000 annually.
'There's not a very meaningful goal for that advisory panel," she said, expecting lawmakers to begin looking at a more fundamental revamp of the tax system in 2011.
