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U.S. Rep. Tim Walz

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Hot Dish Politics: Looking for leverage on fiscal cliff

  • Article by: KEVIN DIAZ
  • Star Tribune
  • December 8, 2012 - 7:54 PM

Both sides in the fiscal cliff debate in Washington are looking for leverage, and some Minnesota Democrats think they've got it in the 2.4 million taxpayers who comprise the state's "98 percent."

That's the percentage of Minnesotans they see as "hostage" to Republican demands that the expiring Bush era tax rates be extended at all income levels.

Minnesota Democrat Rep. Tim Walz has proffered a novel formulation, arguing that restricting the Bush tax cuts to the first $250,000 of income, as per the Obama plan, actually helps everybody -- including the top 2 percent.

Walz has received some national press this week for filing a "discharge petition" to force a House vote on the extension up to $250,000. It requires 218 signatures, meaning Walz would need more than two dozen Republicans to get him there. So far he has zero.

But the game of leverage relies on a larger set of numbers. In Minnesota, those come from the IRS, which breaks down tax year 2010 like this:

Of more than 2.5 million individual income tax returns in the state, only 78,933 reported income above $200,000, the proposed threshold for single taxpayers. Most of those were for joint returns.

Either way, that leaves more than 2.4 million Minnesota taxpayers well below the threshold for any soak-the-rich tax hike being proposed by the Democrats.

That 2.4 million, generally speaking, includes the vast majority of workers and small business owners in Minnesota who hang in the balance as Congress teeters over the precipice. Reach a deal and their federal tax rates remain the same; go over the cliff and their taxes go up an average of $2,200, according to President Obama's National Economic Council.

As for the top 2 percent, their tax rates go up under any scenario except one where the Democrats totally cave on Obama's signature campaign pledge. That seems unlikely given polls that continue to show popular support for the proposition that the wealthy and super-wealthy should shoulder more of the tax burden for reducing the national debt.

Many Democrats, and even some Republicans, believe Obama could gain still more leverage should Congress go over the cliff on New Year's Eve. Then everyone's tax rates would go up. Democrats could then put up the Walz plan again, and dare Republicans to say no.

If the Republicans seem boxed in, as former Gov. Tim Pawlenty suggested this week, they also have an obvious out: For some, the quarrel is less about higher taxes (which they've already agreed to in principle) than about wresting as many cuts as they can in entitlement programs like Medicare and Social Security.

Minnesota Republican Rep. John Kline, who is as close to House Speaker John Boehner as anybody in the state delegation, made that clear in a recent interview. The GOP's objective in the fiscal cliff negotiations, he said, has always been to rein in spending and reform entitlement programs.

So at this point, for Team GOP, it's either get a broader deal done on safety-net cuts in exchange for tax hikes, or play the only trump card they have left: Go over the cliff and let Obama live with the resulting economic damage.

It's an ugly threat. Then again, compromise is still a possibility before the expiration of the 112th Congress. If Republicans agree to a $500,000 threshold instead of $250,000, that would affect about 64,000 Minnesota tax filers. If they go up to $1 million, the hit dwindles to 4,564, according to the IRS figures. Even if it remains at $250,000, the wealthy would still get a tax break because the first $250,000 of their income would be taxed at the lower rate.

Are Minnesota Republicans going to fall on their sword for a few thousand millionaires? Despite the posturing on both sides, there may still be room to compromise.

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