On tax cuts, a deal begins to take shape

The partisan stalemate over tax cuts softened Monday, pointing to the outlines of a potential compromise that could involve extending the cuts for up to two years.

Other proposals also were being floated as representatives and senators gathered for a post-election, lame-duck session, including one that would raise the income threshold for the tax cuts to $1 million, which would allow many households in the top bracket to continue receiving a tax break.

For months, Republican lawmakers have been bitterly at odds with President Obama over how to extend tax cuts approved early in the George W. Bush administration, with especially sharp disagreement over breaks for higher-income taxpayers.

But overtures from both sides now point to a possible deal.

“It’s incumbent on all of us to try and find a way to address this issue,” said Sen. Jeanne Shaheen (D-N.H.). “The American people said very clearly they want to see us work together, and we need to work together to get this done.”

Obama has returned from a lengthy trip to Asia amid expectations that the tax cut issue will be the most urgent facing lawmakers with only six weeks remaining before the cuts are due to lapse.

Should they expire, virtually every American taxpayer would likely see an income tax hike next year. The top rates would increase from 33% and 35% to the previous levels of 36% and 39.6% for the wealthiest.

Obama has loosened his longstanding view that tax cuts should be extended permanently only for households earning less than $250,000 a year ($200,000 for singles). Democrats had argued that the country cannot afford the additional $700-billion cost of tax breaks for the wealthy, who account for fewer than 2% of American taxpayers.

Republican leaders had been insisting on a permanent extension. But with indications that the president is open to temporarily continuing the tax breaks for the higher income households, some Republicans and their top supporters also appear to be softening their stance that all tax cuts must be permanently extended.

“I’d love to see a longer extension, but I think two years gets us to where we need to go and then we can focus on these other issues coming forward,” said Sen. Bob Corker (R-Tenn.).

A U.S. Chamber of Commerce letter Monday urged a “preferably permanent” extension, apparently leaving the door open to something less.

The president has invited House and Senate leaders to the White House on Thursday for a meeting at which the tax cut issue is expected to dominate the discussion.

“The president’s priority is providing permanent middle-class tax relief, and he is willing to compromise to get that done,” said Jen Psaki, a White House spokeswoman. “But he has been clear that we cannot afford to make the high-income tax cuts permanent.”

Among the other ideas circulating is one from Sen. Charles E. Schumer (D-N.Y.) that would extend the tax breaks to households earning up to $1 million annually but end them for higher earners.

Republicans were cool to the Schumer proposal. But opposing it would put the GOP in the politically difficult position of fighting to preserve tax breaks for millionaires.

The nonpartisan Tax Policy Center estimated that fewer than 300,000 taxpayers would be hit with a tax if the threshold were set at $1 million for married couples and $500,000 for singles.

Another proposal, from Sen. Mark R. Warner (D-Va.), would allow the tax cuts for those earning above $250,000 to expire as Democrats first envisioned, but use part of the savings to provide business tax breaks to spur job creation.

Still, both sides remained wary Monday of striking a deal in a political environment in which voters have demonstrated little allegiance to their elected officials in Washington and limited patience with either political party.

Already, both liberal and conservative activists have urged lawmakers to hold the line on any deal. Sen. Harry Reid of Nevada, the majority leader, warned of a “very busy few weeks.”

Even though most of the new members of Congress do not begin their terms until January, their presence for orientation on the Hill this week is a stark reminder of voter unrest. Republicans are bringing a more conservative ideology to a Congress dominated the past four years by Democrats as they take control of the House and see their ranks bolstered in the Senate.

In a sign of conservative potency, the Republican leader of the Senate, Mitch McConnell of Kentucky, reversed himself on Monday and announced he would support a ban on earmarks — those specially tailored funds members of Congress direct to their home states.

Earmarks have become a symbol of Washington overspending, and McConnell’s switch all but ensures that GOP members will halt their earmarks and put pressure on Democrats to do the same. Several Democrats have announced they also support a ban.

Obama on Monday welcomed the growing support for an earmark ban, seen as an area of agreement between the GOP and the White House.

But an agreement on tax cuts remains a more difficult negotiation.

Democratic senators are meeting behind closed doors on Tuesday to gauge support in their ranks for various proposal being considered for ending the tax cut stalemate.

As Democrats weigh how to proceed, they also will decide how much to push other priorities before their control diminishes in January.

Reid will attempt a vote this week to extend unemployment benefits that are set to expire on Nov. 30. But legislation is not expected to advance in the face of opposition.

Other issues that could be taken up during the lame-duck session include repeal of the military’s “don’t ask, don’t tell” policy against gays openly serving in the armed forces, legalization of the status of some illegal immigrant children and ratification of a new U.S.-Russia arms-limitation treaty.

lisa.mascaro@latimes.com

Peter Nicholas in the Washington Bureau contributed to this report.