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Obama, GOP reach deal to extend tax cuts

President Barack Obama is greeted on the tarmac during his arrival at Greensboro, N.C., Monday, Dec. 6, 2010. President Barack Obama is greeted on the tarmac during his arrival at Greensboro, N.C., Monday, Dec. 6, 2010. (AP Photo/Pablo Martinez Monsivais)
By Jim Kuhnhenn and David Espo
Associated Press / December 6, 2010

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WASHINGTON—Brushing past Democratic opposition, President Barack Obama announced agreement with Republicans Monday night on a plan to extend expiring income tax cuts for all Americans, renew jobless benefits for the long-term unemployed and grant a one-year reduction in Social Security taxes.

The emerging agreement also includes tax breaks for businesses that the president said would contribute to the economy's recovery from the worst recession in eight decades.

Obama's announcement marked a dramatic reversal of his long-held insistence, originally laid out in his 2008 campaign, that tax cuts should only be extended at incomes up to $200,000 for individuals and $250,000 for couples. He explained his about-face by saying that he still opposed the move and noted the agreement called for a temporary, two-year extension of cuts at all income levels, not the permanent renewal that Republicans have long sought.

At the same time, it signaled the arrival of a new era of divided government following midterm elections in which Republicans won control of the House and strengthened their hand in the Senate.

"We cannot allow this moment to pass," Obama said.

Officials said that under the plan, unemployment benefits would remain in effect through the end of next year for workers who have been laid off for more than 26 weeks and less than 99 weeks. Without an extension, two million individuals would have lost their benefits over the holidays, the White House said, and seven million would have done so by the end of next year.

The Social Security tax cut would apply to workers, not employers, and would drop from 6.2 percent of pay to 4.2 percent for one year. The White House said the result would be to fatten take-home pay by $120 billion over the course of the year.

In addition, administration officials emphasized that the agreement would extend a variety of other tax breaks for lower and middle-income families, including the Earned Income Tax Credit and the child tax credit.

The estate tax provision under discussion would mean the first $5 million would pass tax-free to heirs. Anything over that would be taxed at a rate of 35 percent. Democrats favored a $3.5 million threshold, with a 45 percent tax on anything higher.

In a sign of Democratic discontent, Senate Majority Leader Harry Reid, D-Nev., reacted curtly to the president's announcement.

"Now that the president has outlined his proposal, Senator Reid plans on discussing it with his caucus tomorrow," his spokesman, Jim Manley, said in a written statement.

Top Republicans were far more receptive.

"I appreciate the determined efforts of the president and vice president in working with Republicans on a bipartisan plan to prevent a tax hike on any American and in creating incentives for economic growth," said Sen. Mitch McConnell of Kentucky, the GOP leader. In a jab at Democratic lawmakers, he added, "I am optimistic that Democrats in Congress will show the same openness to preventing tax hikes the administration has already shown."

Democrats also objected to an extension of the estate tax that tilted toward the Republican position.

For months, Democrats have repeatedly raised objections to including the upper-income in any plan to extend tax cuts enacted in 2001 and 2003 when George W. Bush was president. The Democratic-controlled House recently passed legislation to let the cuts lapse on incomes over $200,000 for individuals and $250,000 for couples. On Saturday, Republicans blocked an attempt by Senate Democrats to do the same.

Obama said he personally opposed elements of the deal, such as an extension of expiring income tax cuts at upper income levels and the more generous deal on estates. But he said he decided that an agreement with Republicans was more important than a stalemate that would have resulted in higher income taxes at all levels on Jan. 1.

"Make no mistake, allowing taxes to go up on all Americans would have raised taxes by $3,000 for a typical American family and that could cost our economy well over a million jobs," he said at the White House.

Obama said the continued political stalemate over taxes amounted to a "chilling prospect for the American people whose taxes are currently scheduled to go up on Jan. 1."

In his announcement, Obama said he had agreed on a bipartisan framework, and said he wanted Congress to approve it before lawmakers adjourn for the year later this month. In a telling sign that the White House recognizes the extent of Democratic opposition, officials said they would prefer the Senate vote first.

Republicans won control of the House last month, and strengthened their hand in the Senate. Even though the newly elected lawmakers don't take their seats until January, Obama has already treated their leaders with far more deference than he has so far in his term. Similarly, McConnell and Rep. John Boehner of Ohio, in line to become House speaker, have seemed willing to strive for compromise with the White House, rather than merely oppose virtually all of the president's initiatives.

Momentum for a year-end deal picked up after Obama met at the White House last week with Republican leaders for the first time since his party's dispiriting election losses, and accelerated again when the government reported last week that joblessness had risen in November, to 9.8 percent.

The flurry of negotiations is taking place with lawmakers eager to wrap up their work for the year and adjourn for the holidays.

Obama, Reid and McConnell have all said in recent days they believe a deal on tax cuts and unemployment benefits is possible by midweek. If so, that would leave time for the Senate to debate and vote on a new arms control treaty with Russia, which Obama has made a top year-end priority.

Senate Republicans have seemed more willing to hold a ratification debate in recent days as the negotiations over taxes intensified, suggesting at least an implicit link between the two issues in the talks.