House Democrats in open revolt over tax-cut deal

House Democrats erupted into open revolt Thursday over the tax-cut deal negotiated by President Obama and Republican leaders, threatening to undermine GOP support and rekindling the prospect of a tax increase for virtually every American worker.

FOR THE RECORD:
Tax-cut debate: An article in the Dec. 10 Section A about President Obama enlisting the support of former President Clinton for his tax-cut package said the plan would result in a 2% reduction in the Social Security payroll tax. It would be a drop of 2 percentage points, reducing withholding from 6.2% to 4.2%. —

During an angry and emotional meeting of their caucus, Democratic lawmakers voted overwhelmingly against bringing the Obama package to the floor without substantial modification. “Just say no!” many shouted in the Democratic caucus meeting.

Though the voice vote amounted to a recommendation to party leaders, it marked the first major challenge to Obama from his party in Congress as he navigates in a new political reality by negotiating with Republicans, who will have the majority in the House and greater numbers in the Senate in the new Congress.

The rebellion came as House and Senate Democratic leaders scoured for votes to pass the White House deal extending Bush-era tax breaks on Jan. 1, facing pressure with only a week left before Congress plans to adjourn for the holidays.

The Senate could begin voting Monday, after the White House and leaders from both parties agreed late Thursday to renew expiring tax breaks for ethanol and other forms of alternative energy through 2011. But the developments earlier Thursday thrust the proposal into uncertainty in the House.

The Democrats were particularly incensed by inclusion of a new estate tax provision that would benefit a few thousand wealthy households — a provision sought by Republicans.

“It’s just obscene,” said Rep. Jan Schakowsky (D-Ill.). “We’re talking about a handful of Americans that we should have to trade for millions of unemployed people, for millions more middle-income Americans.”

The White House tried for days to quell the discontent among the House Democrats, but the efforts may have backfired after representatives said Vice President Joe Biden met with lawmakers earlier in the week and presented the agreement with the GOP as a “take it or leave it” deal.

“Let’s leave it,” said Rep. Donna Edwards (D-Md.).

Rep. Peter A. DeFazio (D-Ore.), author of the resolution that led to the voice vote, said he heard one expression of opposition. “We have given our leadership license to force the Senate leadership and the White House back to table, to get a better deal for the American people,” he said.

The setback surprised Democratic leaders, as the White House has mounted an aggressive campaign to portray the deal as a needed economic stimulus measure that will boost the economy and create as many as 2 million jobs next year.

White House spokesman Robert Gibbs was optimistic that Congress would act by the year-end deadline, but acknowledged that the agreement was a compromise.

“A perfect deal? Not by any means,” Gibbs said. “But the nature of compromise is taking enough things to get an agreement through. And I think in the end we will.”

The White House ceded to GOP demands to extend the expiring tax cuts approved during the George W. Bush administration — including those that most Democrats oppose, for the wealthiest 2% of taxpayers who earn beyond $250,000. In exchange, the administration won several provisions Democrats support.

Among those is an extension through 2011 of unemployment benefits for jobless Americans, including 2 million who are without benefits during the holidays.

The package also includes a 2% reduction in the Social Security payroll tax that will provide up to $2,000 for all workers.

But inclusion of the new estate tax, a long-sought GOP objective, has become a deal-breaker among many Democrats, who say they cannot agree to what they see as a generous tax break for the wealthy on top of the tax break extension for the upper 2% of earners.

“To add insult to injury they added the estate tax — that was a bridge too far,” said House Speaker Nancy Pelosi (D-Calif.), emerging from the meeting. “It’s just not fair.”

The federal estate tax lapsed this year and, without action, is scheduled to return to pre-2001 levels. That would mean a 55% tax on all estates valued at more than $1 million.

Most Democrats favor an estate tax of 45%, exempting estates worth up to $3.5 million for singles and up to $7 million for couples. That is the formula established in 2001 under the Bush tax cuts.

But Republicans have pressed for a reduced 35% rate, with exemptions of estates worth up to $5 million for singles and up to $10 million for couples.

Obama included the Republican-led proposal in the agreement he reached with the GOP. Analysts say the proposal will benefit 2,900 more estates than under the Democratic proposal.

Rep. Loretta Sanchez (D-Garden Grove) described the estate tax provision as “overkill for most Democrats.”

Democrats hope to call attention to the issue to pressure Republicans to defend their insistence on protecting those few thousand taxpayers at the expense of tax cuts for all Americans.

While the Senate will launch the debate in a matter of days, House Democrats are contemplating ways to structure the votes to separate the provisions, adding to pressure on GOP lawmakers. Both chambers are also considering other changes.

The deal was never expected to draw support from all Democrats, and was designed in a way to ensure a sizable bipartisan coalition would pass the measure.

Republicans, however, warned Thursday their support would not be guaranteed if changes were made to their priorities.

“Republican support for this deal is tenuous at best, and any effort by liberals to make the tax burden heavier would make Republican support less likely,” said Rep. Mike Pence (R-Ind.).

Rep. Lamar Smith (R- Texas) put pressure on Obama to uphold his commitment. “I assume the president is going to keep his word on this and not backtrack, and if he keeps his word I think we will pass the package,” Smith said. “The estate tax agreement was part of the deal.”

Rep. Kevin McCarthy (R-Bakersfield), who will be majority whip in the GOP-controlled House next year, said the revolt showed that Democrats did not learn what he said was the lesson of the election: that Americans don’t want new taxes.

“I don’t think Republicans are exactly jumping for joy,” said Rep. Jack Kingston (R-Ga.). “There are a lot of people who haven’t made up their mind to support it.”

Some Democratic lawmakers also objected to the Social Security tax reduction, which they said would siphon away funds at a time when the Social Security trust fund faces shortfalls.

In addition, the Social Security tax holiday falls more favorably on those earning higher incomes than on the poor, which some lawmakers object to.

lisa.mascaro@latimes.com

richard.simon@latimes.com