Lawmakers face daunting tax agenda when they return for lame-duck session

When Congress returns in mid-November, lawmakers will face a daunting tax agenda that, left unresolved, would cost taxpayers trillions of dollars beginning next year.

Shortly after they adjourned this week, Democratic leaders vowed that extending middle-class tax cuts enacted by President George W. Bush would be their top priority upon returning after the elections.

{mosads}But that promise barely scratches the surface of the unfinished tax business that awaits them.

If Congress does nothing on taxes by the end of the year:

– The estate tax will return to pre-2001 levels, socking estates worth more than $1 million with a 55 percent tax.
– The capital gains tax on most assets will jump from 15 percent to 20 percent.

– Dividends currently taxed at 15 percent will skyrocket to individual tax rates that go as high as 39.6 percent.

– The Making Work Pay tax break will cease to exist.

– The Alternative Minimum Tax will hit the middle class for 2010 tax returns.

– A slew of tax breaks that expired last year, including credits for research and development expenses and relief for college tuition, will not be available for 2010 tax returns.

– The Child Tax Credit will revert from $1,000 to $500.

When combined with inaction on the Bush tax cuts affecting marginal rates, taxpayers would be hit with a tax increase that easily tops $4 trillion over the decade if all the tax issues are untouched. Next year’s increase alone would amount to over $200 billion, according to Republicans on the House Ways and Means Committee.

Passing legislation on taxes has proved difficult this Congress, and time is running out for lawmakers to take action. As the Hill reported this week, Democrats are considering votes on up to 20 pieces of major legislation during the lame duck.

With such a packed scheduled for the short post-election session, it’s unlikely that there will be enough time to get to everything on the tax agenda.

“I think that we may very well have some unresolved issues go into the year 2011,” National Taxpayer Union executive vice president Pete Sepp told The Hill. “That could start with how many tax brackets at their current rate will be extended into next year.”

House Majority Leader Steny Hoyer (D-Md.) this week vowed that extending the current tax brackets for the middle class would be the first order of business when Congress returns in November.

Lawmakers made a similar promise last year when they vowed to fix the estate tax before January, the missed the deadline. Ten months later, Democratic leaders have still not resolved the issue, putting the tax liability of estates across the country in limbo.

Still, Chuck Marr, director of federal tax policy at the left-leaning Center on Budget and Policy Priorities, thinks the odds are with the Democrats in delivering on the current promise.

“I think it’s likely, but nothing in Washington is certain,” he told The Hill.

One hurdle that could complicate the agenda is extending unemployment benefits past the Nov. 30 deadline. It took lawmakers more than two months to extend an expansion of benefits last time, and debate is already heating up for the next go-around.

Sen. George LeMieux (R-Fla.) this week blocked a unanimous consent request by Sen. Debbie Stabenow (D-Mich.) to extend the relief, arguing the extension should be paid for.

“Senate Republicans have and will vote to extend unemployment compensation if it is paid for,” LeMieux said.

A similar debate ensued the last time the issue was raised, with Democrats declaring that the extension did not have to be offset because it was an emergency. Republicans took a different position, and the fighting ground the Senate to a halt through the July 4 recess.

Sepp predicts a less divisive debate on the issue in the post-election session.

“My guess is that the issue will be less controversial and will have less political punching power after the election,” he said.

Democratic leaders can’t afford a protracted debate on unemployment in November. They will have roughly seven weeks to tackle their tax agenda before the year ends.

“If the Obama middle-class tax cuts expire, 95 percent of working people will face smaller paychecks on Jan. 1st.” Marr said. “And there’s little attention paid to that [while] there’s all this focus on the high-end Bush tax cuts for a very small slice of people.”

Democrats must also offset some of the tax cut extensions, such as the research and development tax credit and any compromise on the Bush tax cuts that resuscitates breaks for wealthier taxpayers.

Sepp cautions that increasing taxes on the oil-and-gas industry — which Democrats have proposed multiple times as a viable offset for tax legislation — will only deepen the gridlock.

“A nagging issue that just keeps coming up are energy and tax increases,” Sepp said. “If there is one thing consumers and the industry could use, it’s a cease fire on new tax proposals on oil and gas.”