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What Exactly Is In Obama's Tax Cut/Unemployment Extension Compromise?

December 6, 2010 - by Donny Shaw

President Obama on Monday announced the “framework” of a deal with congressional Republicans for dealing with the looming expiration of the Bush tax cuts. It’s a two-year deal, and it includes a bunch of other stuff, all at a cost about $900 billion. None of it is offset, so this will be a direct increase in the deficit. Let’s take a look at the specifics of what’s included:

1. Two-year extension of all Bush tax cuts — Income taxes will stay right where they are at least until January 2013, even for the wealthiest Americans. Obama seems to think that having this tax debate again in 2012 will be good politics for his re-election.

2. Two-year estate tax cut — Bush’s 2001 tax bill gradually scaled back the estate tax, a federal assessment on inherited wealth, to 0% in 2010. But because it was done using budget reconciliation, the bill sunsets after ten years (just like the income taxes) and the rate is scheduled to go back up on January 1st to the pre-Bush rate — 55%, with the first $675,000 being exempt. Obama’s proposal would lower this significantly for 2011 and 2012 — the first $5 million would be exempt and the rest would be taxed at 35%. This compromise is taken directly from a Sen. Blanche Lincoln [D, AR] amendment that was added to the 2010 budget resolution by a vote of 51-48.

3. 13-month extension of federal unemployment programs — The filing deadline for federal unemployment insurance that provides benefits for people who run out of their 26 weeks of state-provided benefits without finding a job would be extended until January 2012. Essentially, this will make it possible for people who became unemployed in the past 99 weeks and still haven’t found a job to collect benefits for the same length of time as people who lost their job more than 99 weeks ago. This would not add additional weeks of benefits — 99 weeks would still be the maximum amount of time that anybody could receive benefits.

4. One-year payroll tax holiday — Social security payroll taxes, which, under current law, are split equally between employees and employers, would be reduced from 6.2% to 4.2% with all of the benefits of the reduction going to the employees. For the average U.S. salary of $50,000, this would mean tax savings of about $1,000 next year. Obama originally wanted to include an extension of his “Making Work Pay” tax credit, which provides workers up to $400 annually for all workers, but Republicans objected and the payroll tax holiday was included instead. Reducing payroll taxes is generally considered the most stimulative form of supply-side policy.

5. Two years of 100% business expensing — Businesses will be able to immediately write off 100% of the costs of new equipment purchases until 2013. Typically, the costs of equipment purchases are deducted over the life of their use. This proposal is designed to free up now money for businesses that would normally be spread over multiples years in order to encourage more hiring and investing.

6. Miscellaneous stimulus bill tax cut extensions — The lower earning threshold for the child tax credit would be extended for two years. The expanded earned income tax credit would be extended. And the American opportunity tax credit, which provides college students with a $4,000 credit in exchange for community service, would be extended.

Now, this is far from a done deal. This package is designed to get 60 votes in the Senate, but it may not pass muster in the House. The House Democratic caucus, which is generally more progressive than their Senate counterpart, is reserving the option to revolt. And Tea Party Republicans are threatening to vote “no” because of the unemployment insurance extension that is attached.

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