Republicans to zero in on regulators, not the regulated

It remains to be seen whether lawmakers will extend tax cuts set to expire at the end of the year. Indeed, a roster of marginal-rate tax cuts implemented under President George W. Bush — as well as reductions in capital gains and dividend taxes — are set to expire Dec. 31 unless Congress renews them. Lawmakers will return to Capitol Hill for a lame-duck session of Congress on Nov. 15 to sort out those and other niggling issues — such as approving a new federal budget. But following exhausting midterm elections, members of Congress may be suffering from both legislative fatigue and burnout from campaigning, which may result in modest lame-duck productivity. “What I think you'll see is Congress and the administration kick the can down the road by extending the Bush tax cuts for all income levels for one or two years,” said Dan Crowley, a partner at K&L Gates LLP. Senate Majority Leader Harry Reid, D-Nev., began to outline the Democratic approach last Wednesday. “We are going to cut taxes for the middle class,” Mr. Reid said during a conference call with reporters. “I would hope that Republicans would not block that.” The Obama administration and congressional Democrats are seeking to extend the Bush tax cuts permanently for individuals who earn less than $200,000 a year and families who make less than $250,000 while letting rates snap back to their pre-2001 levels for high-income earners. Republicans want to renew the cuts for all income levels, arguing that raising anyone's taxes will further slow a tepid economic recovery. Mr. Reid, however, dismissed a proposal by Senate Minority Leader Mitch McConnell, R-Ky., that would renew permanently the Bush tax cuts for all income levels. Mr. Reid said that it would add nearly $4 trillion to the burgeoning national deficit. “That won't happen,” he said. In a speech in Washington on Thursday, Mr. McConnell indicated that he won't give any ground on taxes. “In the short term, we have to make sure that taxes don't go up on anybody,” he told an audience at the Heritage Foundation. “What I think we'll do is come together here in the lame-duck [session] and agree to extend the current tax policy for everyone.” Mr. Reid's warning notwithstanding, no one knows what kind of tax policy will emerge from the additional weeks that Congress will work in November and December. The new Congress will be seated in early January. “The politics and processes of a lame-duck session are unpredictable,” said Clint Stretch, managing principal for tax policy at Deloitte Tax LLP. “It really comes down to whether the Senate can pass a compromise bill or whether Republican leadership thinks they can hold out and get a better deal next year.” One of the notions floating around the capital is that the middle-class tax cuts would be extended permanently but those for upper-income Americans would get only a short-term renewal. Mr. Stretch doubts that conservatives would allow that scenario to play out. “They lose bargaining leverage that way,” he said. The estate tax is also in limbo. It isn't in effect this year but will snap back to a 55% rate and a $1 million exemption in January, unless Congress acts. From negotiations, it appears that there may be a compromise between a 45% rate with a $3.5 million exemption, which Democrats support, and a 35% rate and $5 million exemption, which has the backing of Republicans. Determining the estate tax level will occur after marginal rates are sorted out, according to Mr. Stretch. Some observers predict that the Democrats will propose a compromise that would raise the threshold for income tax cuts to $1 million. But that could cause significant political crossfire if Democrats accuse recalcitrant Republicans of holding the middle class “hostage” to benefits for millionaires. “That could blow the whole thing off the tracks,” Mr. Stretch said. In that case, tax policy would have to be resolved in “January, February, March or April.” Although there are more tax machinations ahead, the fact that Republicans are in charge of the House will assuage investors' fears, according to Steve Onofrio, managing director of the SEI Advisor Network. “There's hope that [Bush tax cuts] won't be reversed or reduced as much,” he said. “If that's the case, advisers can get back to effective planning.” In the meantime, Capitol Hill tension will remain over tax cuts. “There will be uncertainty into December,” Mr. Stretch said. “This is going to be a drama that will take a while to sort out.” E-mail Mark Schoeff Jr. at mschoeff@investmentnews.com.