Congress barely agreed on extending the payroll tax cut by two months. The stakes will be much higher next year.
WASHINGTON - The brinkmanship in Congress over a payroll tax-cut extension may end up looking like a quaint disagreement by next December, when lawmakers must grapple with a fiscal policy debate at least 25 times more costly.
Unless Congress acts by the end of 2012, income tax cuts will expire, automatic reductions in defense and domestic spending will start and the alternative minimum tax will ensnare millions more taxpayers. The same Congress that had great difficulty finding a way to extend the widely supported payroll tax cut beyond Dec. 31 will have a much bigger challenge.
"The prospects are bleak," said Leonard Burman, a former Treasury official who teaches at Syracuse University. "I've never seen such a high level of dysfunction in the 25 years or so that I've been paying attention to government."
The year-end 2012 series of deadlines on tax and spending policy stems from Congress' tendency to push problems into the future with temporary solutions. This year alone, lawmakers have flirted with a government shutdown three times, almost defaulted on the U.S. debt for the first time in history and allowed aviation taxes to lapse for two weeks.
The income tax cuts, first enacted in 2001 and 2003 under President George W. Bush, were scheduled to expire at the end of 2010 and were extended two more years by Congress and President Obama. The spending cuts are a byproduct of a 2011 agreement to raise the federal debt limit.
The $4 trillion in expiring tax cuts and $1.2 trillion in potential spending cuts dwarf the $200 billion that was at stake in the fight over the payroll tax cut and other provisions, including expanded unemployment insurance.
House leaders, Senate leaders and Obama blamed one another for the stalemate. House Republicans had insisted on a yearlong extension. Senators from both parties backed a two-month extension on Dec. 17 to buy time for negotiations on a longer-term agreement.
The final payroll tax-cut deal caps a year in which approval ratings for Congress have plummeted.
Rep. Tom Reed, R-N.Y., who entered the House in November 2010, criticized Obama and the Senate for trying to push decisions on policy issues -- such as the Keystone XL oil pipeline from Canada to Texas -- beyond the 2012 election.
"It's amazing to me that grown responsible men and women will defer to politics and support reckless policy, just because the politics are such that it may be in their interest to do it," said Reed.
Rep. Allyson Schwartz, D-Pa., said Democratic willingness to cut spending hasn't been met with an equal spirit of compromise from the GOP on taxes.
"This week seems dramatic, but the fact is all year we have been dealing with Republican leadership and a Republican conference that has taken us to the brink of a crisis and an inability to really work in any kind of bipartisan effort," she said.
Unless Congress acts next year, the top income tax rate in 2013 will rise to 39.6 percent from 35 percent. Dividends would be taxed as ordinary income, and the top rate on long-term capital gains will rise to 20 percent from 15 percent. Tax increases for investment income included in the 2010 health care law are also scheduled to take effect in 2013.
In addition to everything else expiring at the end of 2012, Congress also will have to fund the government for the fiscal year that starts Oct. 1, 2012. That issue may linger into December unless lawmakers can reach a pre-election agreement.
Furthermore, depending on economic growth, the federal government may again bump up against the debt limit -- a debate that consumed Washington last July.
If those issues collide simultaneously, including the debt limit, "it would be like a nuclear device being detonated," said Kenneth Kies, a Republican tax lobbyist.
The political dynamics of fiscal policy will change after the 2012 election, depending on who gains control of Congress and the White House. Lawmakers are starting to envision scenarios for how the tax and spending issues are reconciled, depending in part on the election results.
Earl Pomeroy, a former Democratic congressman from North Dakota who is now a Washington lawyer, said the national focus on the federal budget deficit will make it more difficult for Republicans to press for an extension of the 2001 and 2003 tax cuts without covering their cost.
"For those from the right side of the political spectrum, you've got the worst of all worlds," said Pomeroy. "If Congress fails to act, you're going to have a tax increase and steep defense cuts. What we're seeing with the legislative process is that it's fallen to a state of utter dysfunction."