Obama veto threat on tax-break bill deepens rift among Democrats

(Bloomberg) — President Barack Obama’s threatened veto of a $400 billion-plus tax-break bill exposed a widening fault line within the Democratic Party.

Negotiators from both parties, including Senate Majority Leader Harry Reid, were preparing to exclude a pair of Obama’s top priorities from a year-end agreement. The plan would lock in permanent extensions of tax breaks for corporations, college students and residents of states without income taxes while not making permanent breaks for low-income families.

Obama objected and responded in an unusual way yesterday. The White House issued a veto threat before lawmakers released the plan publicly, siding with progressive groups and advocates for a lower budget deficit over his own party’s Senate leaders.

“The president would veto the proposed deal because it would provide permanent tax breaks to help well-connected corporations while neglecting working families,” Jen Friedman, a White House spokeswoman, said in an e-mail yesterday.

The Democrats’ intraparty feud on policy and strategy has intensified and become more public since the Nov. 4 election, when Democrats lost control of the Senate.

The White House’s threat came on the same day that New York Senator Charles Schumer gave a speech saying Democrats made a mistake by passing the Patient Protection and Affordable Care Act (PPACA) in 2010, when they controlled both chambers of Congress, instead of focusing more directly on helping the middle class.

Agreement uncertain

The veto threat threw the tax talks into uncertainty just as they appeared near a conclusion.

Democratic infighting between Reid and Senate Finance Chairman Ron Wyden and between Senate Democrats and the White House made it hard to reach a final deal, said a Republican aide close to the negotiations.

The talks are in limbo now so Senate Democrats and the White House have a chance to get on the same page, said the Republican aide, who asked for anonymity to discuss the talks. It’s not clear what set of policies would satisfy Senate Democrats and Obama, the aide said.

The deal that was almost done would take dozens of tax breaks that expired at the end of 2013 and extend them through 2015. A few breaks would become permanent law, including the research tax credit for businesses, a handful of provisions for charities, the deduction for state sales taxes and a break for mass-transit users.

It wouldn’t address expansions of the child tax credit and earned income tax credit that are scheduled to expire at the end of 2017. Letting those breaks expire would hurt more than 16 million people, including almost 8 million children, according to the Center on Budget and Policy Priorities, a Washington group that advocates for low-income families.

The emerging deal had appeal for some Senate Democrats. For starters, it would forestall Republicans’ backup plan — a bill that would extend the lapsed breaks only through Dec. 31, 2014.

Republicans take over the Senate in January, giving them more control over the agenda and greater ability to pick and choose which of dozens of breaks survive. Democrats are concerned over the fate of the production tax credit for wind energy, which may fall victim to Republican opposition with only a short-term deal.

Under the bipartisan framework, the wind credit would have gotten a multiyear phaseout before expiring Oct. 1, 2017, the Republican aide said.

Revamping taxes

The veto threat shows that the White House has calculated that an extenders agreement now — regardless of the merits — would make it harder for the administration to negotiate a revamp of the tax code with Republicans when that party controls the Senate, said a Senate Democratic staff member, who requested anonymity to discuss the matter.

The deal also would make permanent specific provisions backed by Senate Democratic leaders.

Reid, a Nevada Democrat, wants to lock in the deductibility of state sales taxes, an important issue in his home state, which lacks an income tax. In that state 22 percent of tax filers take advantage of the break, the second-highest percentage in the U.S., according to the Pew Charitable Trusts.

The extension of the mass-transit break is a top priority for Schumer, who represents New York. He’s also been a long-time backer of a tuition tax credit. Like Obama’s priorities, that break is scheduled to lapse at the end of 2017.