Obama Threatens to Veto $440 Billion Tax Deal

Source: By JONATHAN WEISMAN, New York Times • Posted: Wednesday, November 26, 2014

Wind turbines in a field near Anita, Iowa. A tax credit for wind power would be phased out by 2017 under the current proposal. CreditKC McGinnis for The New York Times
WASHINGTON — With negotiators nearing an accord on permanent tax breaks for businesses worth $440 billion over 10 years, President Obama rallied Democratic opposition on Tuesday and promised a veto.

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

The deal, negotiated by House Republicans and aides to Senator Harry Reid of Nevada, the outgoing majority leader, showed how much power has shifted since the Republican election victories this month. The negotiations fractured Democrats, and separated the Obama administration from Mr. Reid.

But Mr. Obama’s threat showed that he could still wield his authority as well. White House officials said the package, intended to avoid letting a host of politically popular tax breaks expire at the end of the year, is too heavily tilted toward corporations and will have deep repercussions for budget and tax negotiations far into the future.

Senator Sherrod Brown of Ohio said that the body’s Democrats would support the president if he made good on his veto threat.CreditDaniel Rosenbaum for The New York Times

A veto would be the third and by far the most significant of Mr. Obama’s presidency. His threat sent negotiators back to the table to see if Republicans could add measures that would win liberal support, especially a permanently expanded child tax credit for the working poor.

“It’s somewhat ironic they’re willing to just proceed here, unpaid for, leave the middle class behind and include a lot of things that I think wouldn’t benefit our economy,” said Jason Furman, chairman of the White House Council of Economic Advisers.

Advocates of the deal in both parties said the emerging accord would lock in tax breaks that have been passed in short-term increments, year after year. Doing so would give businesses more certainty about making investments, they said, while extending tax benefits that already have broad bipartisan support. And Senate Democrats said they cut the best deal possible before next year’s Republican takeover.

But Mr. Obama and Denis R. McDonough, the White House chief of staff, personally stepped in with a furious round of calling Tuesday afternoon to promise a veto. Shaun Donovan, the White House budget director, and Treasury Secretary Jacob J. Lew also called lawmakers.

Senator Sherrod Brown, Democrat of Ohio, said a veto would be sustained, even if the negotiated package were chock-full of tax breaks for constituents of Senate Democrats.

Representative Nancy Pelosi of California, the House minority leader, made several calls to key House Democrats to ensure the votes would be there in the House to sustain the president’s veto.

“The light of day has changed the way this agreement might look,” Mr. Brown said.

The standoff has set up a high-stakes game of chicken. Some 55 tax breaks for businesses and individuals expired last year, and if they are not revived retroactively by Dec. 31, taxpayers will not be able to claim them for the current tax year. Republicans say Congress might pass a one-year retroactive measure that would simply start the fight all over again in January, when they control the Senate and their numbers are fortified in the House.

The emerging tax legislation would make permanent 10 provisions, including an expanded research and development tax credit, which businesses and the Obama administration have wanted to make permanent for years; a measure allowing small businesses to deduct virtually any investment; the deduction for state and local sales taxes; the American Opportunity Tax Credit for college costs; deductions for employer-provided mass transit; and four different breaks for corporate and charitable giving.

Smaller measures already passed by the Senate Finance Committee, from tax breaks for car-racing tracks to benefits for racehorse owners, would be extended for one year and retroactively renewed for the current tax year.

The tax credit for wind power, a Democratic priority, would phase out and end after 2017. Many conservatives oppose the wind credit as an unfair boost to an energy industry in competition with oil and gas.

Left off were the two tax breaks valued most by liberal Democrats: a permanently expanded earned-income credit and a child tax credit for the working poor. Friday night, Republican negotiators announced they would exclude those measures as payback for the president’s executive order on immigration, saying a surge of newly legalized workers would claim the credit, tax aides from both parties said.

Republican aides involved in the negotiations reacted angrily to the White House’s efforts to torpedo the talks. They noted that Mr. Obama had pushed for his own version of a permanent, expanded research and development credit as a boon to the economy and embraced a narrower proposal to let small businesses deduct the cost of investments. Now, they say, he is reversing himself rather than accept yes for an answer.

The potential repercussions of the deal are broad. Republicans taking over the House and Senate budget committees have vowed to pass plans that bring the federal budget into balance in 10 years without raising taxes or cutting the defense budget. If the tax deal is passed, that will mean those budget plans will have to cut deeper into domestic spending. Republicans also have vowed to overhaul the tax code but with a reformed system that brings in the same amount of revenue. That revenue target would shrink by $440 billion over the next decade, a tiny share of overall spending but a big hole for lawmakers to fill if it meant raising taxes elsewhere or cutting spending for important constituencies.

“An extender package that makes permanent expiring business provisions without addressing tax credits for working families is the wrong approach, at the expense of middle-class families,” Mr. Lew, the Treasury secretary, said of the deal. “Any deal on tax extenders must ensure that the economic benefits are broadly shared.”

Democratic negotiators say they secured measures they might not be able to win next year. The American Opportunity Tax Credit was proposed by Mr. Obama and passed in the 2009 stimulus law. A permanent extension would give $97 billion in tax relief over 10 years to families of students in higher education.

But the costs of the business tax breaks would make up two-thirds of the total value of the package, including the R.&D. tax credit’s $156 billion and $73 billion to allow small businesses to deduct from their taxes all investments in new plants and equipment.

White House officials blasted that provision as too broad, noting it could apply to law partners purchasing a new sport utility vehicle for their practice.

In contrast, the wind power credit, which Democrats argue is still needed to keep renewable energy competitive with cheap fossil fuels, would lose 20 percent of its value in 2016 and 40 percent though much of 2017, vanishing entirely by the final three months of that year.

Opposition to the emerging accord united the liberal wing of the Democratic Party with budget hawks who objected to its cost. Maya MacGuineas, president of the Committee for a Responsible Federal Budget, denounced what she called horse trading that bid up the package’s price tag.

“I know every special-interest group wants to protect its tax break, and members want to continue to dole out all the goodies,” she said. “But hey, my kid wants a pony. It doesn’t mean someone doesn’t have to pay for it.”