FT Alphaville presents a guest post by Sean West and Helen Fessenden, US political risk analysts at Eurasia Group, a political risk research and consulting firm. The views expressed are strictly their own.
Taxpayers, investors, and businesses hoping that the Bush tax cuts will be quickly extended once the election is in the rear-view mirror have another thing coming: It is more likely than not that the tax cuts will expire in January.
This doesn’t mean they will go away for good—chances are high that a deal will be struck in early 2011 to extend the tax cuts for all who make below a threshold higher than Obama’s suggested $250,000 per couple. A bill to extend the breaks for all those who earn under $1 million could be passed in the first weeks of the new Congress.
But until then, here are five reasons we now believe the breaks will expire at year-end:
1) Lack of Democratic consensus
Republicans want to extend all the tax breaks for as long as possible, but at least the next 12 to 24 months. By contrast, Democrats are more divided. While a few defected early in support of the Republican position, some of those who have hung in with Obama’s proposal are increasingly skittish. Forging consensus within the ruling party in the wake of what looks to be a serious election defeat will be a challenging prerequisite to any lame-duck fix.
2) Republicans are unlikely to compromise
The GOP is probably going to win control of the House on Tuesday. This limits any incentive to compromise and accept a deal before they take over in January. Some Republicans are convinced the President will be blamed for expiration—and they will get credit for fixing the tax cuts next year—which provides reason to drag out action until 2011.
3) The White House capitulates at its peril
The White House will express openness to increasing the upper threshold over $250,000—and, indeed, policy will likely land there eventually because those levels are acceptable to most members. But given that Republicans aren’t looking to compromise, the only clean way to get a deal before January would be for the White House to capitulate and support an across-the-board extension. While possible, this would be politically treacherous for Obama after claiming it is irresponsible to give tax breaks to millionaires—and many Democrats would openly question him for doing so.
4) Lame-duck politicking is hard
After an election defeat, Democrats will have little incentive to take controversial votes—in 1994, for instance, they were in session for only three days after the election. Their personal and committee staff will be looking for new jobs while Republicans will be settling internal disputes over leadership and committee positions. There will be neither the bandwidth nor appetite on either side for protracted deal making.
5) Agreeing how to pay for tax breaks is as hard as striking a deal
Even if the two sides agree to a compromise, they will have to satisfy budget rules as well as statutory “pay-go” legislation enacted earlier this year, which will require, among other things, that any tax extension more generous than the Obama package be offset by tax increases or spending cuts. Both sides have plenty of ideas of what to cut or who else to tax—and they will both suggest budget offsets that the other side finds intolerable. The complexity of satisfying budget constraints is an added hurdle that makes a lame duck deal harder to strike.