Nancy Pelosi's Unwelcome Christmas Gift

November 30, 2010

After ignoring congressional Republicans for 22 months and 10 days, President Obama hosted a "come together, right now" session with them Tuesday. The topic: the Bush tax cuts—on income, capital gains and dividends—that are set to expire at the stroke of midnight, Dec. 31.

The atmospherics at the White House on Tuesday were good, but the meeting isn't likely to produce a quick agreement on substance. A lot of attention has been paid to congressional Republicans, whose strong desire to preserve the Bush rates is apparent. Less attention has been paid to the Democrats—among whom there is no consensus about what to do.

Thanks to her dogmatic rigidity and unquenchable passion for class warfare, House Speaker Nancy Pelosi continues insisting on extending the Bush tax cuts only for those who make less than $250,000. Mrs. Pelosi doesn't have the votes to pass her proposal using a special House rule, the suspension calendar, which requires a supermajority and does not permit amendments. She might well lose if the bill proceeds through normal House rules—Democrats could join with Republicans to offer an amendment allowing an up-or-down vote on extending all the Bush-era tax cuts, which could pass.

Even if Mrs. Pelosi's measure cleared the House, Senate Majority Leader Harry Reid has apparently signaled it can't pass the Senate. All 42 Republican senators support extending all Bush-era tax cuts, depriving Mr. Reid of the 60 votes needed to invoke cloture. And there are Senate Democrats who also oppose raising taxes.

Since neither Mr. Obama nor Mr. Reid seem willing to force her to back down, Congress could go home without stopping the largest tax increase in the nation's history.

If that happens, every worker will receive a smaller paycheck in the New Year. This will happen regardless of what action the new Congress takes—because the Treasury Department must very soon send employers and payroll processers instructions for 2011 tax withholding. If no bill passes in the next 10 days, the Treasury Department will have to assume the Bush tax cuts expire and order more withheld from everyone's pay.

The impact would be dramatic. H&R Block's Tax Institute, for example, has estimated that a married couple earning $80,000 will receive $221.48 less in each bimonthly paycheck starting in January, just when Christmas bills show up.

Then there are the households—as many as 27 million—that the Congressional Budget Office says may get walloped by the Alternative Minimum Tax if it is not adjusted to exempt middle-class earners.

Congress normally enacts a so-called patch to the AMT early in the calendar year. But this year Mr. Obama and the Democratic Congress dawdled. Even if the new Congress patches the AMT in January, Internal Revenue Service Commissioner Douglas H. Shulman warns that one of every six taxpayers may be prevented from filing returns early or getting timely refunds as his agency scrambles to gear up for the change.

Taxpayers could end up forking over tens of billions that they'll eventually get refunded once the IRS sorts it all out—but in the meantime consumer spending, job creation and the economy will take a hit.

If Congress fails to act on the expiring Bush tax cuts, the new GOP House majority that takes office Jan. 4 will immediately act to extend the Bush tax cuts, retroactive to New Year's Day. It will also patch the AMT to protect taxpayers' 2010 earnings. The Republicans' bill will likely gain Senate passage and Mr. Obama's reluctant signature.

But it will take weeks to reprogram payroll computers and months to work through the IRS's difficulties. That's a bad way for the economy—and the president—to start the year.

Still, there may be a silver lining for Mr. Obama. Despite his deepest ideological desires, the president may have to swallow tax cuts he doesn't want. The lower rates will allow the economy to continue recovering, to the president's political advantage. This won't ensure a second term for Mr. Obama, by any means, but it will increase its likelihood.

No matter; Republicans are doing what's best for the nation. They'll be happy to allow voters to decide who deserves the credit of saving the economy from being brutalized by history's largest tax increase.

This article originally appeared on on Wednesday, December 1, 2010.

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