Tax Analysts Blog

Brown Wins, Capitol Shudders

Posted on Jan 20, 2010

Soon Senator-elect Scott Brown will drive his GMC pickup 450 miles through the Democratic Northeast into the Capitol Beltway and into history. . . From the state of the original Tea Party . . . . From the state that in 2006 pioneered compulsory health insurance coverage for most of its citizens - signed into law by a Republican governor - and voted for by Brown himself as a state senator. . . .To the Senate seat of a legendary liberal who devoted his life to health care reform. . . . And almost exactly one year after the inauguration of a charismatic President who launched the Democratic Party to new heights. The ironies are almost too mind-boggling to contemplate.

The most immediate effect is the bucket of cold water Brown’s 52-47 margin of victory throws on health care reform. The Senate Majority Leader painstakingly crafted a bill that only works with 60 Democratic votes. With Brown in town to cast the crucial 41st vote the White House and the congressional Democratic leadership are left with two alternative paths to reform. Neither of them pretty.

Under the first, the President and party leaders must convince the House to approve a bill identical to the Senate-passed bill. Because they are egomaniacs, it is hard for House members to imagine not putting their own imprint on the legislation. Because of their close ties to unions, liberal Democrats cannot imagine voting for the Senate version of the excise tax on Cadillac health insurance plans. It may be possible, however, for the President and the House leadership to overcome these obstacles with a combination of carrots and sticks. The biggest carrot of them all would be a solemn (but ultimately unenforceable) promise to “correct” Senate errors in this year’s reconciliation bill.

The larger problem for the Democrats is the Blue Dog coalition of moderates from traditionally Republican districts. If a Democrat with a 20-point lead one month ago can lose in Massachusetts, Democrats with Republican challengers are vulnerable everywhere in the 2010 election. Some will make sacrifices for their party but few will commit political suicide. The House bill passed on November 7 was approved by only a 220-215 margin.

Under the second option, Democrats start over and move health insurance reform through Congress as part of the budget process known as reconciliation. The big advantage is that passage of reconciliation measures only requires a simple majority in the Senate. The big disadvantage is that only “budget” matters may be considered. So Medicare and tax changes are OK. Insurance reforms and cooperatives would be out. One intriguing possibility for reconciliation, put forward by former Democratic Party chairman Howard Dean, would be to reduce the age of Medicare eligibility to 55 - an approach briefly considered by Senate negotiators a few weeks ago.

Implications for fiscal policy

The health care bill is a tax bill. If the Senate bill were adopted, the tax on high-end insurance plans (without the concessions for union members adopted by House negotiators) would become the law of the land. A surtax on high income households included in the original House bill is now out of the question. If health care gets melded into the reconciliation process, the modified House version of the excise tax probably would be the starting point.

Looking beyond health care, the conventional wisdom is that the election of Scott Brown throws the whole Obama agenda into jeopardy. This may be true. It is not so much that Brown now gives Republicans the crucial margin needed to block Senate action. After all, before the 2008 election the notion of a 60-vote Democratic majority was a dream that only barely came true with a string of happenstance, including a 200-vote margin of victory for Al Franken in Minnesota.

The message the Massachusetts election sends will have a larger effect than the marginal vote. For even if Brown were to become the 35th or the 45th Republican, the implications of his victory are enormous. The Democratic leadership is humbled. The Democratic rank-and-file is scared. Everybody can clearly see conservatism is back on the rise. Proposals can no longer risk being labeled part of “the liberal agenda.” How this will translate into legislation is hard to say.

The tax agenda for 2010 was already jam-packed before the explosion in Massachusetts. Here’s Congress’s fiscal policy to-do list: (1) health care reform; (2) raise the debt ceiling; (3) retroactively extend and reform the estate tax; (4) retroactively extend about 40 tax provisions that expired at the end of 2009; (5) extend about 50 tax provisions expiring in 2010; (6) extend the “patch” on the individual AMT, and (7) extend the expiring Bush tax cuts scheduled to expire at the end of 2010, except for incomes over $250,000 and raise the capital gains rate to 20 percent; (8) enact another jobs bill; (9) enact a budget that puts the government on a fiscally sustainable path (10) enact a new 15 basis-point tax on non-deposit liabilities of large financial institutions, and - if you can believe the statements of the chairman of the tax-writing committees - (11) give serious consideration to fundamental tax reform (perhaps based on already past-due recommendations from the Volcker commission).

And all of this must be done by early October because incumbents are going to need a lot time to avoid repeating Martha Coakley’s tone-deaf aloofness.

In general, the situation is ripe for gridlock and - where there is must-pass legislation - temporary fixes.

Here are some predictions:
  • Health care dies or a simple and slimmed down version is enacted. The Congress has run out of time and patience to pass anything complicated.
  • Congress takes the middle path between the House-favored 45 percent rate and the Senate-favored 35 percent rate and passes an estate tax extension with a 40 percent rate.
  • Congress enacts another jobs bill but moves away from spending and includes more tax cuts. This would be a good vehicle for expiring provisions.
  • The Obama proposed bank tax survives even though it suffered a blow when Brown made a point of opposing it during his campaign. Republicans will let it pass because they do not want to jeopardize their potential electoral gains by being painted as cronies of Wall Street.
  • Congressional leaders must attempt to pass a major tax bill that extends the Bush tax cuts for taxpayers with incomes below $250,000. But note, the bill could be postponed with the promise of retroactively enacting the cuts in 2011. (Taxpayers don’t file returns for 2011 until early 2012.)
  • The AMT patch must be enacted or tens of millions of Americans will be hammered when they file their returns for 2010 in early 2011. This could and probably should be rolled into a jobs and/or an extenders bill.
  • Tax reform - which never had a chance anyway - is entirely off the table.
  • Deficit reduction - which was supposed to be the Obama Administration’s top fiscal priority after health care reform - will be pushed further into the future. The fragile state of the economy provides the perfect excuse.

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