In Washington, the possibility of going over the fiscal cliff comes down to a game of chicken.
When President Barack Obama last week called on Congress to extend the Bush-era tax breaks for one year for households making less than $250,000 annually, he expressed views that contrasted sharply with those of congressional Republicans, who want to extend them for all income levels for one year. Both sides want Congress to tackle comprehensive tax reform during the one-year reprieve.
The kicker is that Mr. Obama has threatened to veto legislation based on the GOP approach.
Whether he makes good on that threat will determine the fate of the tax cuts and other elements of the so-called fiscal cliff, such as $1.2 trillion in automatic domestic spending cuts over the next 10 years and several other taxes. If neither side backs down, the fiscal cliff will go from being a hyperbolic catchphrase to an economic reality with which every American will have to contend.
“It appears to me that the line in the sand, which has always been there for the president, has been drawn more deeply,” said Jim McCrery, chairman of the Alliance for Savings and Investment, a coalition of companies and trade associations, and a former congressman who served as the Republican ranking member of the House Ways and Means Committee.
The atmosphere is much more brittle than it was in 2010, the last time that the issue of extending the tax cuts came to a head in Washington.
“There may be more strongly held positions on both sides of the tax debate than there were in 2010,” Mr. McCrery said.
Even if he loses the election to the presumptive Republican nominee, former Massachusetts Gov. Mitt Romney, Mr. Obama still will be president during the lame-duck session of Congress.
VETO THREAT
If Mr. Obama vetoes legislation allowing the tax cuts to be extended to all income levels, taxes will go up an average of $1,800 a year for 96% of taxpayers at the middle of the income distribution, according to the nonpartisan Tax Policy Center.
“It depends on where the economy is and what Obama thinks is the right thing to do. I believe he would probably allow the tax cuts to expire,” said Andrew Friedman, principal at The Washington Update online news-letter.
Republicans will resist that outcome, he said.
“They'll negotiate to raise the income level above which taxes go up from $250,000 to something higher, perhaps $1 million,” Mr. Friedman said.
The maneuvering by Mr. Obama and Republicans sets the election-year agenda. The political rhetoric will be amplified by the likely House approval of a one-year extension of the Bush tax cuts this month and a potential vote in the Democratic-majority Senate on Mr. Obama's approach.
The House measure will die in the Senate, and the Senate's will see a similar fate in the House. But the House bill is likely to become the Republican position during the fiscal cliff talks."OWNS THE ECONOMY'
“I'm not sure if, when push comes to shove after the election, that [veto] would hold. The president really owns the economy,” said Phillips Hinch, assistant director of government relations at the Financial Planning Association.
“He's still worried about his legacy as president,” Mr. Hinch said.
One lawmaker doubts that Mr. Obama will reject a congressional agreement.
“If the House and Senate reach a compromise, I don't think the president will veto it,” said Rep. Todd Rokita, R-Ind., a freshman GOP leader.
It is unclear whether middle ground is attainable.
Mr. Rokita credited Mr. Obama for extending the Bush tax cuts in 2010, but he opposes the president's bifurcation of the breaks.
“Class warfare on people earning more than $250,000 won't work,” Mr. Rokita said.
“Money is the property of those who earn it,” he said. “It is not something government can give people and then take away.”
Observers agree that the outcome of the Nov. 6 congressional elections won't affect the fiscal cliff talks significantly. Most think that Republicans will hold the House, while the Senate could go either to the Democrats or the Republicans, but only by a slim majority that can't fight off a filibuster.
That would leave the power equation in place, but if Mr. Romney wins and the Republicans gain a large majority in the Senate, the GOP has every reason to hold out until after the new Congress convenes in January.
Whether or not power changes hands, it is certain that the election winners will have to deal with broad tax reform next year.
“The most likely outcome [of the lame-duck session] is a one-year extension of the current tax policy to leave it to Congress next year to figure out the details,” Mr. Hinch said.
mschoeff@investmentnews.com Twitter: @markschoeff
