Obama shows muscles on taxes

President Obama has signaled to Democrats and Republicans on both sides of the Capitol that he wants a serious attempt at tax reform next year.

Obama has also signaled he intends to play a big role in those negotiations.

{mosads}But lawmakers and aides on both sides of the aisle have deep reservations that the effort will be successful, particularly after a couple of potential lame-duck deals blew up at the White House’s hands.

Senior Democratic and Republican aides in the Senate and House blame the White House for killing several attempts to pass a two-year extension of a package of expiring tax breaks.

They argue the White House’s motivation was to put pressure on Congress to review the tax code again in 2015.

The lame-duck Congress approved a one-year extension of the package, which sets up a new debate for next year.

In doing so, the White House partnered with Senate Finance Committee Chairman Ron Wyden (D-Ore.) but against Senate Democratic Leader Harry Reid (Nev.) and retiring House Ways and Means Committee Chairman Dave Camp (R-Mich.), who had been closing in on a longer deal.

Wyden and the White House argue the longer deal would have been too favorable to business, but aides think Obama was also eyeing tax reform in 2015.

“The White House played Wyden to get a one-year deal,” said one senior Democratic aide.

Besides working with Wyden to kill the Reid-Camp deal, Obama also struck dead a two-year-plus deal Wyden hastily tried to put together in early December.

White House officials insist they would have accepted a two-year deal if it would have treated working-class families fairly.

White House press secretary Josh Earnest told reporters that proposals that left out the earned income tax credit, which benefits primarily lower-income Americans, were too tilted toward business.

“Obviously last week we made it known to all of you and to all of them that the president took a pretty dim view of proposals that would shower significant tax benefits on well-connected corporations without providing much relief to working people in this country,” he told reporters in an early-December press briefing.  

The Reid-Camp proposal would have indefinitely extended the research and development tax credit, as well as an expensing provision for small business, two high priorities for Camp. It also would have similarly extended the deduction for state and local sales taxes and the American Opportunity Tax Credit for college tuition, important items for Reid and his deputy, Sen. Charles Schumer (D-N.Y.).

The death of the deal, and of subsequent legislation Wyden proposed, shows how serious Obama is about imposing his will on the tax talks. They also leave a bitter taste in some lawmakers’ mouths, raising the degree of difficulty next year.

Those arguing that Wyden was manipulated say the White House told the Oregon Democrat to work on a proposal that was designed to fail because they knew it would be unacceptable to Camp.

The proposal included the creation of a permanent earned income tax credit for childless adults.

“EITC was a nonstarter for a week,” said a senior GOP aide referring to the earned income tax credit. “It was the White House putting Sen. Wyden up to making that offer knowing it had already been rejected and knowing the outcome would be a one-year bill, which is what the White House ultimately wanted. I think the White House maneuvered him into getting that for them.”

“They want to do corporate tax reform [next year] as a legacy piece,” the senior Democratic aide said of White House officials.

The aide said the White House used liberal lawmakers in similar fashion by marshaling them to support Obama’s veto threat against the emerging Reid-Camp deal.

“Even before we started our negotiation with the Senate, the White House was shopping the idea of one-year bill to create momentum for tax reform,” said the senior GOP aide. “I don’t think anyone took that idea seriously because no one thinks it actually creates momentum for tax reform.”

Obama signaled he was serious about tax reform during a speech this month to the Business Roundtable. While he remains open to future extensions of expired tax provisions, they should be done as part of tax reform, he said.

Wyden’s allies think Reid and Camp are to blame for the collapse of lame-duck tax talks because they were too eager to win a legacy item for themselves. Reid will lose the majority and Camp will retire at year’s end.

After the Reid-Camp deal fell apart, Wyden assembled Democratic members of the Finance Committee the Monday after Thanksgiving to salvage a two-year extension.

Wyden said his colleagues were opposed to the Reid-Camp proposal and the modest one-year extension of tax breaks.

“With respect to the two-year bill, all my colleagues in the entire caucus and Finance — the whole caucus — clearly wanted that, which was called the Expire Act,” he said. “After that evening I talked with Sen. Reid who was I thought very constructive about trying to force a reconsideration of the Expire Act that had gone down.”

But Camp, who had just been burned by a veto threat in his talks with Reid, demanded that Wyden get assurances from the White House.

The president’s senior advisers signed off on a two-year extension of expired tax provisions plus making permanent the research and development tax credit and a new version of the earned income tax credit that would have covered childless adults.

Republicans say the White House knew it would fail.

“It was not discussed previously,” a senior GOP aide said of the earned income tax credit. “It was an expansion of EITC to childless adults. That’s not currently on the books. It’s a new policy. Everyone in the negotiations had known that EITC policies were effectively off the table for about a week.”

In a last-ditch bid to pass something other than a one-year fix, Wyden then proposed two-year tax extenders package combined with a permanent extension of the research tax credit and tax breaks for charitable giving. The White House rejected that proposal, setting the stage for a one-year bill.