GOP says no deal on tax cuts

WASHINGTON - Republican leaders in Congress on Monday backed away from a possible compromise with the Obama administration over extending expiring Bush-era tax cuts, committing both sides to an election-year battle with huge stakes for the economy.

Senate Minority Leader Mitch McConnell of Kentucky and others distanced themselves from a statement Sunday by House Republican Leader John A. Boehner that he might agree to let tax relief for the wealthiest Americans expire, as President Obama wants, if that's politically necessary to save middle-class tax cuts.

By the end of the day Monday, Boehner issued a statement dropping his suggestion.

Obama is pushing for a permanent middle-class tax cut, but only if Bush-era cuts for top earners are eliminated. Republicans, in turn, want permanent tax relief for all levels.

The divide is rapidly becoming the marquee issue of the midterm election.

Democrats are using it to portray themselves both as champions of the middle class and as deficit hawks, because, they say, GOP proposals would depress government revenues.

Republicans say the Democrats are prepared to raise taxes on small-business owners and couples making more than $250,000 a year during a recession, which, they argue, will hamper a recovery.

The cuts, which were passed in the first term of the Bush presidency, when there was a surplus, expire at the end of the year. They include a $1,000-per-child tax credit, relief for married couples, and lower taxes on investments and large estates.

Economists generally agree the United States faces a strong possibility of a renewed recession should lawmakers do nothing and let all of the cuts die.

Given the lackluster recovery - with the critical housing and job markets still ailing - an expiration of all tax cuts, worth $300 billion a year, would be a huge hit to the economy, equivalent to 2 percent of the nation's output. The potential economic fallout is less clear if tax rates rise only for high earners.

It's unlikely Congress will address the issue before November. But it provides an opportunity for both parties to amplify their economic messages during the campaign.

Republicans, particularly in the Senate, are gambling that Democrats will be unable to muster enough votes to pass a package that includes only the middle-class cut - and will have to offer relief to all tax brackets.

That possibility was bolstered Monday when Sen. Joseph Lieberman, an independent from Connecticut generally aligned with the Democrats, said he would push to extend the Bush-era cuts for all taxpayers for at least one more year.

Some House and Senate Democrats also are nervous about leaving themselves open to the charge that they raised taxes during a weak recovery and are open to extending the cuts for everyone for a limited time.

Republicans may seek to exploit that anxiety by proposing bills to freeze current tax rates. As Congress returned from a five-week recess, McConnell proposed legislation to make the Bush-era cuts permanent, saying Democrats had enlarged government over the last two years and "now they want the tax hike to pay for it all."

"There is ample evidence that a bipartisan majority of the House would support a clean bill to ensure that no American faces a tax increase in this difficult economic environment," House Minority Whip Eric Cantor (R., Va.) said Monday.

Democrats have a card to play as well. Should Congress fail to act, the reductions will expire for everyone, opening Republicans up to accusations that they killed a tax cut because it did not benefit the wealthiest Americans.

Obama on Monday told a backyard town hall in Fairfax, Va., that a permanent middle-class cut could pass Congress now - except that "we're still in this wrestling match with John Boehner and Mitch McConnell about the last 2 to 3 percent" of taxpayers.

Boehner may have been attempting to defuse that line of attack in his Sunday interview, when he suggested he could strike a deal.

But his GOP colleagues refused to follow suit, and Boehner said Monday he, too, would fight a tax increase affecting any bracket.

Obama administration officials insist that letting the tax cut expire for wealthy earners won't hurt job creation. They say it will be good for the economy because it will bring down the deficit.

That "far outweighs any other effect the expiration of tax cuts [for the wealthy] would have," said Jason Furman, deputy director of the National Economic Council, a presidential advisory panel.

Some say the statistics aren't clear on how much the tax increase on the wealthiest would hurt small employers.

Renewing the tax cuts for everyone would cost the government $4 trillion over the next decade, say congressional analysts, who assume Congress won't allow the alternative minimum tax to hit millions of middle-class taxpayers with eye-popping tax increases.

Regardless, there's little incentive for Republicans to help Democrats pass anything before the midterms.

"If the tax question is settled before the November election, one of the main things the Republicans have as a rationale for their races is taken away," said Jim Kessler, an analyst for Third Way, a centrist think tank.