WASHINGTON (Reuters) – President Barack Obama and Republican leaders sought to break a "logjam" over the fate of Bush-era tax cuts on Tuesday, forming a new panel the White House hopes will reach a compromise within days.
Obama named Treasury Secretary Tim Geithner and budget director Jack Lew to work with congressional Republicans and Democrats on a deal to prevent broad tax increases from hitting middle-income Americans next year.
The working group will also tackle the issue that most divides the two political parties: what to do about extending tax cuts for the wealthiest Americans.
At their first White House meeting since the November 2 congressional election, Obama and Republicans stuck to their divergent positions but the president said they agreed the issue must be resolved by the end of this year.
"We agreed that there must be some sensible common ground, so I appointed my Treasury Secretary, Tim Geithner, and my budget director, Jack Lew, to work with representatives of both parties to break through this logjam," Obama said.
If no agreement is reached, all tax-paying Americans could see higher bills next year, giving Republicans a chance to score politically by making tax cuts their priority when taking control of the House of Representatives in January.
Finding common ground before then will be tricky.
Chris Van Hollen, a top Democrat in the House of Representatives, said the chamber could vote on Thursday to extend lower tax rates on income levels up to $200,000 for individuals or $250,000 for couples, allowing rates for the wealthiest 2 percent of Americans to rise.
That vote is seen as a gesture to liberal Democrats, who want to go on record opposing an extension for top earners. If the measure passes the House, it will likely die in the Senate, where Democrats would not have the votes to make it law.
Knowing that, the president may have to agree to extend cuts for Americans of all income levels for one to three years -- an onerous option to many Democrats but one that may be the most likely outcome if the two sides agree on anything at all.
But many analysts are not optimistic.
Charlie Smith, chief investment officer at Pittsburgh-based Fort Pitt Capital Group, said there was less than a 50 percent chance that the tax cuts will be extended.
Obama said he and many Democrats continue to believe it would be "unwise and unfair" to spend $700 billion to extend tax cuts for the wealthiest Americans while also trying to bring down the U.S. deficit.
Republican leaders, emboldened by gains in the elections, argued it would be better for the economy if tax cuts for all Americans were extended.
"Republicans made the point that stopping all the looming tax hikes and cutting spending would, in fact, create jobs and get the economy moving again," said Representative John Boehner, who will become Speaker of the House next year.
"We're looking forward to the conversation with the White House over extending all of the current rates, and I remain optimistic."
Obama met for about two hours with Boehner and Mitch McConnell, the Republican leader in the Senate, as well as Democrats Nancy Pelosi, the current House speaker, and Harry Reid, the Senate majority leader.
The president said he hoped the meeting would lead to a better relationship with congressional leaders and White House spokesman Robert Gibbs said Obama expressed regret for not having reached out more to Republicans in the past.
Republicans won a majority in the House in the November 2 elections but the Democrats retained control of the Senate.
"MUCK THINGS UP"
Expiration of all the lower tax rates, especially those for the middle class and lower-income Americans, would harm the U.S. economic recovery, many economists say.
It could cut economic growth by roughly 1 percentage point a year, according to some Wall Street estimates, though many believe any bump in taxes would be short term.
Brian Gardner, an analyst for investors at Keefe, Bruyette and Woods, said Pelosi may side with liberals before becoming minority leader in the next congressional session.
"There is some thought that the last thing that Nancy Pelosi wants to do on her way out of the Speaker's office is to have Congress approve an extension for tax cuts for the wealthy," he said. "She could muck things up a little bit."
Democratic Senator Charles Schumer has floated a possible compromise to keep the tax cuts for those making less than $1 million a year but the White House indicated that proposal did not have legs.
Reid has made clear he would like to hold a Senate vote on extending the rates only for those up to the $250,000 level to underscore the Democratic position, although such a vote is sure to fail.
WASHINGTON – By a nearly 3-2 margin, the Senate voted Tuesday to let lawmakers keep sprinkling bills with home-state pet projects like roads, bridges, water treatment plants, grants to local police departments and special interest tax breaks. But with anti-earmark GOP reinforcements arriving in January, the curtain may soon come down on the practice.
Most Democrats and a handful of Republicans joined in a 56-39 majority to reject a ban on funding for home-state projects not included in the budget proposal that the president submits to Congress each year.
Earmark critics, nonetheless, rejoiced in the vote, noting their side had increased by 10 senators since they lost a 68-29 vote on the same question earlier this year. Any votes next year should be closer because a band of anti-earmark Republicans will join the Senate in January. Earmark opponent Jim DeMint, R-S.C., predicted his side will have 45 votes next time.
Senate Republicans bowed to tea party activists after the midterm elections and passed a party resolution declaring GOP that senators would give up earmarks. House Republicans who took 63 seats away from Democrats on Nov. 2 to become the majority in January also have given up the practice.
Most Democrats maintain that earmarks are a legitimate way to direct taxpayer money to their constituents. They were joined by eight Republicans in Tuesday's Senate vote. On the other side of the ledger, seven Democrats voted with GOP critics of the practice.
Sen. Dick Durbin, D-Ill., said Democrats have made the earmarking process far more transparent than it was the last time Republicans controlled Congress. The reforms include requiring lawmakers to document every project they seek and receive.
"I believe I have an important responsibility to the state of Illinois and the people I represent to direct federal dollars into projects critically important for our state and its future," Durbin said.
Critics say that peppering most spending bills with hundreds or even thousands of earmark projects creates a go-along-get-along mindset that ensures that Washington spending goes unchecked.
President Barack Obama supports a ban as well, but hasn't fought earmarks in the past two years as Democrats controlling Congress enacted two cycles of appropriations bills studded with them.
Opposition from Senate Republicans leaves Senate Democrats as the only faction of Congress in a position to try to save the practice of earmarking. But their position doesn't seem very strong, since House Speaker-in-waiting John Boehner, R-Ohio, has vowed that no earmark-laden bills will pass after Republicans take over the House.
Senate Republican Leader Mitch McConnell of Kentucky had long been a strong supporter of earmarks — they were a big issue in his 2008 campaign — but reversed course shortly after the GOP's big win in the midterm elections.
McConnell's move headed off an internal party battle over earmarks and came after an election cycle in which prolific earmarkers Robert Bennett, R-Utah, and Lisa Murkowski, R-Alaska, lost bids to win the GOP nod for their re-election. (Murkowski subsequently won a rare bid as a write-in candidate.)
Sen. Tom Coburn, R-Okla., sponsor of Tuesday's measure, says GOP support will likely increase as old-timers leave the Senate. And GOP moderate Olympia Snowe of Maine — facing a potential challenge from the right should she seek re-election in 2012 — switched in favor of the ban after supporting earmarks in a vote in March.
"A lot of the earmarkers are leaving," Coburn said. "And I think people are going to be looking over their shoulders in 2012 a little bit. This isn't the last time we're going to have that vote."
Estimates vary, but earmarks went from more than 1,300 projects worth nearly $8 billion in 1994 to a peak of nearly 14,000 projects worth more than $27 billion in 2005, according to Citizens Against Government Waste, a watchdog group that opposes the practice.
Democrats also say they've cut back the number and cost of earmarks by half. Some watchdogs dispute that, but there's universal praise for reforms that made the process more transparent for outsiders to track a "pay-to-play" system in which lobbyists and corporate executives showered lawmakers with campaign funds in exchange for earmarks.
Coburn said earmarks can create "a conflict of interest that benefits just those we represent from our states or just those who help us become senators. All we have to do is look at campaign contributions and earmarks, and there is a stinky little secret associated with that."
Supporters picked up new help from Democrats Michael Bennet and Mark Udall of Colorado, Bill Nelson of Florida, and Mark Warner of Virginia. At the same time, eight Republicans who were who opposed the ban in a vote in March now have joined with earmark opponents, including Lamar Alexander of Tennessee, Kay Bailey Hutchison of Texas, and Snowe.
WASHINGTON (Reuters) – The House of Representatives may vote on Thursday on a measure to let income tax rates rise for the wealthiest 2 percent of U.S. households, a top Democrat said on Tuesday.
"Things can change, but we are talking about Thursday," Representative Chris Van Hollen, a member of the Democratic leadership, said after meeting with fellow lawmakers in his party.
Lawmakers are scrambling to reach a deal before the end of the year to delay expiration of tax cuts enacted under former President George W. Bush. Democrats want an extension of lower tax rates for income up to $200,000, while Republicans want lower rates for income above that amount to be extended as well.
A vote on the Democratic proposal appears certain to pass the House, but is unlikely to muster the 60-vote threshold needed in the Senate to overcome Republican opposition.
A senior Democratic aide said a House vote on extending just the lower rates is expected sometime this week.
"That is a position that both sides agree on and there is no reason why we should delay that vote to debate the merits of a tax cut for the rich that will blow a $700 billion hole in the deficit," the aide said. "Let's vote on the middle-class tax cuts and then we can negotiate the rest later."
The House vote is seen as a gesture to more liberal Democrats who want to go on record as opposing any additional extension of low rates for the wealthy and an effort to press the Senate to stick to the original Democratic proposal.
Earlier on Tuesday, congressional leaders met with President Barack Obama, where they agreed to form a working group to resolve the issue.
"It was very positive in the spirit of moving forward and doing so in a way that helps to create jobs, reduce the deficit and lower taxes for the middle class," House Speaker Nancy Pelosi said after the meeting.
Still, Democrats are divided on strategy.
Heading into a Democratic House leadership meeting to discuss the issue, Representative John Larson said "extension of all the tax cuts in the House is pretty much a non-starter."
Others said there is room for compromise. Representative Richard Neal, who heads a tax subcommittee in the House, said there needed to be a vote on middle-class tax cuts only, even if it cannot pass the Senate.
"Both sides are probably going to need a vote before they come to some middle ground," Neal said. "Middle ground is not inescapable."
Neal has advocated a compromise where taxes would go up only on income above $500,000. More liberal members, however, may not be enthusiastic about that benchmark.
Expiration of all the lower tax rates, especially those for the middle class and under would harm the recovery, most economists say.
It could chip away at economic growth by 1 percentage point a year, according to some Wall Street estimates, though many believe any bump in taxes would be short term.
(Additional reporting by Thomas Ferraro and Andy Sullivan) (Reporting by Kim Dixon; editing by Mohammad Zargham and Stacey Joyce)