I’ve been steeling myself for the next political firestorm: the expiration of the federal tax cuts that were enacted by President George W. Bush and the Republican-controlled Congress in 2001 and 2003. Whether the current recovery is a good time for tax increases is certainly debatable – and it is being and will be debated. But before the shouting gets too loud, I think it’s important to review how we got to the point where all President Barack Obama has to do to raise taxes by more than $40 billion a year is … nothing.
The nonpartisan Tax Foundation has a page of its website devoted to answering this question: Why are the Bush tax cuts expiring? The political gamesmanship that went into adopting the health reform bill earlier this year has nothing on the gamesmanship that went into the tax cuts. Here’s the history:
In 2001, Senate Republicans were unsure whether they could garner the 60 votes necessary to make permanent tax cuts. Congress therefore passed the first of the tax cuts – the Economic Growth & Tax Relief Reconciliation Act – in the form of a reconciliation bill, which needed only 51 votes.
The reconciliation process (used this year by the controlling Democrats for health care reform) has been around since 1974. But since 1985, the Senate has also had a rule that forbids using reconciliation for any bill that alters federal revenue for more than 10 years. Senate Republicans couldn’t use reconciliation for permanent tax cuts and couldn’t risk having the EGTRRA die altogether for lack of 60 votes, so they inserted a "sunset" date nine years in the future. (That probably seemed less risky when Karl Rove’s "durable Republican majority" was expected to last longer than five more years.)
Eventually, 58 senators – including 12 Democrats, one being Blanche Lincoln – voted in favor of the 2001 tax cut. (And two Republicans, including John McCain, voted against it. Obama wasn’t even a senator yet.) The Jobs & Growth Tax Relief Reconciliation Act of 2003, which was similarly passed using the reconciliation process, accelerated the original tax cuts, but also put in place new tax cuts for dividends and capital gains. All are scheduled to expire on Dec. 31 without a congressional extension.
Now, it is an article of faith among many conservatives that tax-cutting is always good and always leads to prosperity and that tax increases are the opposite – always bad, always job-killers. But neither absolute is historically supportable: According to the Department of Labor’s Bureau of Labor Statistics, a net of 22.7 million jobs were created during the Clinton administration (which began with a big tax increase on high-earning Americans), while only 1.1 million jobs were created during the Bush administration. Yes, some of the Clinton jobs were undoubtedly created by the artificial tech stock bubble, while job creation under Bush was undoubtedly hampered by the recession he inherited and 9/11. But clearly the targeted tax increases adopted during the Clinton years did not kill the job market and the Bush tax cuts did not supercharge it.
The Clinton tax increases did contribute to a budget surplus that was actually reducing our country’s outstanding debt, and the Bush tax cuts did contribute to the current budget deficit that should concern us all, regardless of political persuasion. (I shall never understand why wars that are worth American blood are not worth raising the taxes to pay for, but I’m funny that way.)
Recent statements by Sens. Jon Kyl, R-Ariz., and Mitch McConnell, R-Ky., to the effect that tax cuts don’t increase the budget deficit and therefore don’t have to be offset by reduced spending are examples of magical thinking. Just wanting that to be true doesn’t change basic math or economic history. Taxes are going to have to be raised, and the likeliest source of new taxes is that relatively small portion of Americans who are most able to pay more taxes. And that’s what Obama intends to do: Let the tax cuts that affect households with annual income of $250,000 or more expire on schedule.
The way the Republican leadership chose to cut taxes in 2001 and 2003 has created an enviable position for Obama and the current (and likely temporary) Democratic majorities in both houses of Congress: They don’t have to do anything in order to raise taxes, and it will be very hard politically for Republicans to resist the Democrats’ plan to extend the tax cuts for the vast majority of American voters.
President Obama owes someone a thank-you note.
Gwen Moritz is editor of Arkansas Business, a member of the Alliance of Area Business Publications (AABP). BizTimes Milwaukee also is a member of the AABP.