Looming tax hikes, budget cuts expose rift for Minn. lawmakersby Brett Neely, Minnesota Public Radio
WASHINGTON -- It might be the end of July, but some members of Minnesota's congressional delegation have their minds on the future.
They're not thinking of Election Day in November. Instead, they're worried about Jan. 1, because the first day of 2013 will be a day of reckoning for the federal budget.
Unless Congress takes additional action to address the deficit before then, when the New Year's hangovers wear off, two big things will have happened.
First, the Bush-era tax cuts will expire. That means income taxes for everyone would return to the higher rates that existed under President Bill Clinton. Taxes on dividends and capital gains also would rise from the current maximum of 15 percent. Top individual rates for high income earners could reach 39.6 percent
Second, $109 billion in automatic federal spending cuts will be set in motion, split evenly between defense spending and domestic programs. That's because last summer's agreement to lift the debt ceiling required lawmakers to forge an agreement to reduce the budget deficit by $1.2 trillion. As they failed, the automatic budget cuts are set to take effect.
Widespread disagreement about how serious the consequences will be if Congress doesn't act has sparked a battle of metaphors between the political parties.
U.S. Rep. Erik Paulsen, a Republican, points to studies funded by groups such as the U.S. Chamber of Commerce that predict the nation could lose 700,000 jobs unless Congress acts, a worst-case scenario.
"This really is a fiscal cliff, but it's really going to turn into a jobs cliff if we don't address it soon," Paulsen said.
U.S. Sen. Al Franken, a Democrat, is not as alarmed.
"People are calling it the fiscal cliff," Franken said. "It isn't. It's a slope."
Franken said the tax increases would have little immediate effect on most people since their 2013 taxes won't be due until the following year.
While that's not the outcome he wants, Franken concedes that a willingness to let taxes go up is part of the Democrats' negotiating strategy. "This is the only leverage we have, I think, to focus the Republican Party on being serious about this," he said.
Franken and most Senate Democrats have signed on to President Barack Obama's proposal to keep the Bush tax rates in place for those making less than $250,000 a year.
To fund new government programs and cut the deficit, Democrats want taxes to rise on those making more than that.
Republicans have vowed to keep taxes at the low rates, but unless they reach a deal with Democrats their hands are tied as the tax increase is set to happen automatically.
Both parties have agreed to more than $2 trillion in cuts aimed at reducing the federal deficit so far, but all of it has come from cutting spending.
Franken said it's time for higher taxes on the wealthy to close the gap between what the government brings in and what it spends.
The brinkmanship reflects the new politics of confrontation, said longtime congressional scholar Norm Ornstein of the American Enterprise Institute.
Ornstein and co-author Thomas Mann recently completed a book called "It's Even Worse Than You Think" about the debt ceiling standoff and what it means for Congress.
He said the tough talk from Democrats about letting taxes go up and having spending slashed automatically is a direct response to the tactics Republicans used last summer in the debt ceiling fight to force spending cuts.
"If you make it clear that you mean it when you say you will bring the entire place to a halt or you will focus on who's to blame, you're more likely to get a negotiation that will work," Ornstein said.
The role reversal, with Democrats willing to see taxes go up and spending slashed, has Republicans spooked. GOP leaders are using an argument that Democrats used last year during the debt ceiling standoff -- that the other side will deliberately threaten to harm the economy in order to get its way.
"They have a tax policy that says that they're going to hold the entire economy hostage unless Republicans agree to a tax increase," said U.S. Rep. John Kline, a Republican. "Is a tax increase on anybody, let them pick the number for how wealthy you have to be, so important that they're going to send us over the cliff?"
Kline doesn't want to see taxes go up at all. He's also worried that the automatic budget cuts could devastate the economy by throwing thousands of defense contractors out of work.
"You're going to have huge cuts in the private sector, and that's the piece that I think is most problematic," Kline said.
But Kline voted for the debt ceiling deal that created the automatic budget cuts, and Democrats say the only way for Republicans to help undo the cuts will be to negotiate a deal with them on taxes.
Paulsen, the only Minnesotan on the tax-writing House Ways and Means Committee, sees a way out for both parties.
Both the Democratic Senate and Republican House are working behind the scenes on big rewrites of the tax code, and Paulsen thinks that could eliminate tax loopholes and produce the increased tax revenue that Democrats want while also providing the lower tax rates that Republicans want.
But Paulsen is vague about what loopholes would be cut and how much new tax revenue Republicans will allow.
With the election less than four months away, the earliest that tax overhaul could happen is next year, so he argues in favor of keeping rates where they are for now.
"If we don't extend the rates, we're not giving any certainty to the business community or private sector job growth," Paulsen said.
Postponing those decisions into next year also punts the decisions onto a new Congress and potentially a new president.
With the polls showing a tight race, the outcome of the tax and spending fight will be determined by who wins the election.
- Morning Edition, 07/23/2012, 8:25 a.m.