Decade-old tax breaks continue to loom over budget

Reporting from Washington —  President George W. Bush’s signature tax breaks were never an easy sell. They passed Congress only after Vice President Dick Cheney’s tie-breaking vote in the Senate. Critics called them a giveaway to the rich. They cost the U.S. Treasury trillions.

A decade later, those tax cuts continue to loom large, becoming central to almost every budget debate in Washington. Whether to maintain the reduced tax rates for wealthy Americans was a question that deadlocked the congressional “super committee” in its search for a plan to cut the government’s long-term deficit. The expiration of the tax cuts at the end of next year will be a major issue in the 2012 campaign.

The battle over the Bush-era breaks will determine what happens to almost every part of the federal budget, including the spending cuts that are now mandated as a result of the “super committee’s” failure and the long-term outlook for Medicare and other entitlement programs.

“They’ve been hanging over the budget,” said Robert Bixby, executive director of the Concord Coalition, a fiscal watchdog organization. “If you’re talking cuts to middle-class programs like Social Security and Medicare it becomes really difficult to argue for upper-income tax cuts.... We have to resolve that tension between entitlement cuts and tax cuts — clearly we’re not there.”

The Bush-era breaks, approved in 2001 and accelerated in 2003, are a mix of rate cuts and deductions that benefit households across the income spectrum. The most controversial part of the package is the reduction of taxes for upper-income households; those account for about $700 billion of the total $4-trillion impact the Bush tax law would have if it were extended for the next 10 years.

Hardly anyone in Congress, regardless of party, wants to end the tax breaks that benefit the middle class. Those include a $1,000 tax break for households with children and lower income-tax brackets for those earning less than $250,000 annually.

It is the breaks for the wealthy that propel the debate — including a reduction of the top individual bracket from 39.6% to 35%. The 35% top rate was the latest in a series of reductions over the last half-century, during which the top income-tax bracket has dropped from the 91% that prevailed during the 1950s to 70% for much of the 1960s and 1970s to the 50% adopted under President Reagan.

Republicans see the lower rates on wealthy Americans as necessary for the creation of jobs and want them made permanent. Among those upper-income earners are many small-business owners, a major GOP constituency, that would be hit hard by higher rates.

Most GOP lawmakers — and increasingly the Republican presidential candidates — have signed an anti-tax pledge with activist Grover Norquist’s Americans for Tax Reform. They also argue that spending, not revenue, is the root of the government’s deficit problem.

“Even if Republicans agreed to every tax increase desired by the president, our national debt would continue to grow uncontrollably,” Rep. Jeb Hensarling (R-Texas), co-chairman of the super committee, wrote in an op-ed piece in the Wall Street Journal last week. Controlling spending, particularly on Medicare and other health costs, “is therefore a crucial challenge,” he said.

Democrats argue that the tax cuts drain too much money from the Treasury, putting important government functions such as defense spending and Social Security under pressure. They also say that the low rates are fundamentally unfair at a time when low- and middle-income Americans are being asked to sacrifice to reduce the federal deficit. Democrats hope those arguments will provide them with a powerful campaign message.

But deciding where to draw the line for higher taxes has proven difficult for them. President Obama has backed away from his initial suggestion that an annual income of $250,000 be the threshold for new taxes. That amount made some in his own party uncomfortable, particularly those representing states with high costs of living, including California and New York.

Democrats increasingly point their tax increase focus at those making at least $1 million, hewing to polls that show Americans support taxing the rich, a sentiment also reflected by protesters occupying public parks and property across the country.

“We’re asking the wealthiest Americans — the folks who got the biggest tax cuts over the past decade, the folks who made it through the recession better than most, folks who have seen their incomes go up much more quickly than anybody else over the last three decades, exponentially — we’re asking them to contribute a little bit more,” Obama said in making a push for his jobs proposals at a stop in New Hampshire on Tuesday.

The fact that all the tax cuts automatically expire at the end of 2012 unless Congress reaches an agreement provides a powerful incentive for both sides to make a deal. Whether that deal leans more toward the GOP or the Democrats will depend heavily on the outcome of the November election, in which the Bush tax cuts will continue to drive the debate, a prospect noted by the credit rating agency Moody’s. The credit agency does not take a political position on the cuts but notes that its outlook for U.S. debt will be partly determined by how the issue is resolved.

“One of the most important medium-term questions concerning the fiscal outlook is the level of personal income tax rates beginning in 2013,” Moody’s wrote last week after the super committee’s failure.

lisa.mascaro@latimes.com