House Dems Reduce Obama's Tax Cut to $230B - and Falling

There seems to be a minor debate going on in the comment section to my last post on Obama’s stimulus plan, related to whether Congressional Democrats will defer to Barack or attempt to dictate to him. I think the answer is clear: unless he takes them to the woodshed, they will take every inch that he gives — and more. For example:

Democrats in Congress may cut the share of the economic stimulus package dedicated to tax cuts below the $300 billion or more that President-elect Barack Obama is asking for, House Ways and Means Committee Chairman Charles Rangel said.

“The tax cuts will go in with 300 or less,” Rangel, a New York Democrat whose committee writes tax laws, said after a closed-door party meeting. He didn’t give details.

I’m not sure exactly what Rangel means, but it can’t be good news for Obama that the total number for tax cuts will be at or below $300 billion ‘going in.’ Presumably he means ‘going in’ to the Ways and Means markup, where the liberal leadership of the committee could choose to reduce the tax cuts further.

But even if Congress does not reduce the overall level of tax cuts below $300 billion, Charlie Rangel has already effectively reduced the total by $70 billion more. That’s because he will include the annual ‘AMT fix’ in the bill. This will reduce the overall level of stimulus tax cuts to a total of $230 billion, and force the elimination of several that could help economic growth:

Barack Obama’s Democratic allies on Capitol Hill are trying to use the president-elect’s economic recovery bill to extend a tax cut for middle- to upper-income taxpayers despite concerns from his transition team that it won’t boost the economy…

Making that fix for one year alone will cost about $70 billion, a healthy chunk out of the $300 billion that Obama has set aside for tax cuts in his emerging $850 billion stimulus plan…

Rangel, the Ways and Means Committee chairman, said other tax provisions would have to take a “haircut” to pay for dealing with the AMT. A $3,000 job- creation tax credit — which drew strong objections as unworkable anyway — appears likely to be jettisoned from the Obama plan.

Also threatened is a pro-business provision proposed by Obama that would allow companies posting losses last year to get refunds for taxes paid as far back as five years earlier.

The reason this should make the Obama team angry is that everyone in Washington accepts that the AMT fix will pass at some point this year. It’s an ongoing problem in the tax code that Congress has considered too big to ‘fix,’ so instead they ‘patch’ it each year. Whenever the AMT fix comes up — and it was expected to come up late in the year — it will pass. For Rangel to move it into the stimulus bill makes it appear that he’s simply trying to block any new tax cuts by replacing them with old ones.

If Obama doesn’t push back, he won’t recognize the package that Congress sends him.