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updated 12/8/2010 9:44:26 AM ET 2010-12-08T14:44:26

The fate of a U.S.-Russia nuclear arms control treaty, President Barack Obama's top foreign policy priority, may now hinge on the fate of his top domestic goal, winning approval of a contentious tax cut plan.

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If Obama persuades reluctant congressional Democrats to quickly endorse the tax cuts he negotiated with Republicans, that would clear the way for the Senate to consider the New START treaty.

Video: Would tax deal set stage for START debate? (on this page)

But if the Senate gets bogged down in a tax debate, there will not be time to consider the treaty before the year ends and Congress goes out of session. With fewer Democrats in the Senate next year, prospects for passage dim.

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A failure to ratify the treaty could cast a long shadow over Obama's foreign policy goals. Obama has made arms control one of his top priorities and the centerpiece of his efforts to improve relations with Russia.

Kyl: GOP reaction to tax cut deal 'positive'

Treaty supporters said the tax deal Obama reached with Republicans increased the New START's prospects.

"I thought this was good news, that they are closer to a vote," said Kay King, a specialist on Congress and foreign policy at the Council on Foreign Relations. "But it's not done yet."

Debate on controversial tax-cut plan
Still, it is not clear how quickly the tax-cut issue would be resolved. Some Democrats, angered because they believe Obama made too many concessions on tax cuts for the rich, were calling for changes.

The debate comes as treaty supporters believe they have had some momentum in cornering enough votes for ratification. Obama would need at least nine Republicans to join all Democrats and independents to reach the necessary two-thirds majority, or 67 votes, in the Senate. That number would grow to 14 when the new Congress begins in January.

On Tuesday, Republican Judd Gregg said in a television appearance that he was leaning toward supporting it, joining a growing list of Republicans who have spoken favorably on the treaty.

Republican Sen. George Voinovich, who had recently raised concerns about the treaty, also said he would like to see the treaty ratified this year.

"It's a modest proposal, we ought to get it done," he said.

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Former Secretary of State Condoleezza Rice also joined a long list of Republican foreign policy luminaries backing the treaty Tuesday. In a Wall Street Journal opinion piece, she said lawmakers should ratify the treaty while making a clear statement that it will not limit U.S. missile defense options.

The treaty would cut the limits on strategic warheads to 1,550 for the United States and Russia from the current ceiling of 2,200. The pact also would establish new procedures to allow both countries to inspect each other's nuclear arsenals to verify compliance.

Worries treaty could undermine U.S. security
Democrats were increasingly confident that the treaty could be ratified, if it could be brought for a vote. But once the tax cut issue is resolved, the treaty could also face stalling tactics from Republican opponents, who have argued that it would undermine U.S. security interests.

Lawmakers also need to pass a measure that would finance government operations before the end of the year. Republicans have insisted that it should be dealt with before any vote on the treaty.

Some Republicans, led by Sen. Jon Kyl, have said that the treaty could be considered next year. At a minimum that would delay ratification by months, because new hearings would have to be held before it could be brought to the floor.

On Tuesday, Kyl said he still does not believe there is time to consider the treaty this year.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Video: Would tax deal set stage for START debate?

  1. Closed captioning of: Would tax deal set stage for START debate?

    >> assuming that's the case, would that also open the door then for debate and actual ratification to start nuclear arms treaty with russia?

    >> look, i don't set the agenda in the senate. 42 republicans sent our friends on the other side of the aisle earlier this week saying two things we need to do first is decide what people's tack rates will be come january 1 and decide how we'll fund the government for the next ten months. we haven't done that either. once we get those things out of the way, what you do with the balance of the time is up to the majority leader.

    >> do you see it being ratified in the lame duck session ?

    >> i have no idea.

    >> are you prepared to vote to ratify it?

    >> i haven't made a decision

Explainer: Breaking down the tax compromise

  • Image: President Barack Obama speaks during a news conference at the White House briefing room on the tax cut deal
    Getty Images

    The tax cuts compromise between the White House and congressional Republicans still must be passed. But here is how it would affect major categories of government, and personal, finance.

  • Income tax rates

    Image: Tax forms
    AP

    By extending the current rates across the board, you’ll see no change in the basic tax you pay on earned income: those rates will top out at 35 percent. The Obama administration had wanted to let the rate rise for wealthy taxpayers, but under the deal struck with Republicans, everyone gets to keep the current rate for two years.

    "If this package does indeed pass, it's going to make a significant difference over the coming year for middle-class taxpayers," said Melissa Labant, a tax manager for the American Institute of Certified Public Accountants.

    Economists expect the combination of maintaining current tax rates, reducing payroll taxes and boosting other tax benefits will induce consumers to spend more and investors to turn more bullish.

  • Capital gains and dividend

    Image: Counting money
    Reuters

    Current tax rates on long-term capital gains will remain in place for two years. The tax applies to profits from the sale of an asset, such as stock, held more than a year. The highest rate of 15 percent was expected to rise to 20 percent next year.

    Investors will also benefit from an extension of the historically low tax rates on dividend income, which top out at 15 percent. Had no action been taken, dividend payments would be taxed as regular income. This would raise the tax rate to as much as 39.6 percent for top earners. The extension means a savings of nearly a quarter on every dollar of dividend income for this group.

    Individuals with dividends paid to taxable accounts can collectively expect to save nearly $75 billion over two years, according to an analysis by Standard & Poor's analyst Howard Silverblatt.

    Cliff Caplan, a financial planner and president of Neponset Valley Financial Partners in Norwood, Mass., said the extension of the lower tax rates could lift prices of dividend-paying stocks as they become more popular with investors who can now avoid the higher tax rates for at least two more years.

  • Estate taxes

    Image: Mount Vernon estate
    AP file

    Wealthy taxpayers also benefit from other provisions of the deal. The estate tax on inherited money, which was eliminated altogether in 2010, was scheduled to return to 2001 levels of taxing estates above $1 million at 55 percent. Under the proposed deal, for the next two years, a new 35 percent estate tax will kick in on estates over $5 million ($10 million for couples).

    Except for the temporary repeal of the estate tax this year, the rate has not been less than 45 percent since 1931.

    Only about 4,000 to 5,000 estates will likely owe the estate tax under the plan, based on last year's tax filings. That compares with roughly 7,000 under Obama's earlier proposal of a 45 percent tax on value exceeding $3.5 million. Although that may not sound like a big difference, House Speaker Nancy Pelosi said the new estate tax proposal will add about $25 billion to the deficit.

  • Tax credits

    Image: Child
    AP

    Tuition tax credit
    Families with kids in college can benefit from a tax credit for tuition and fees. A maximum of $2,500 will remain in place for two years. A credit reduces taxes owed, versus a deduction which reduces taxable income.

    Parents familiar with 529 college savings plans may question what to prioritize. A 529 account encourages savings by enabling account holders to make tax-free withdrawals for eligible college expenses.

    Parents should set aside $4,000 per year to maximize the tax credit before contributing to a 529 plan, says Mark Kantrowitz, a college financial aid expert and publisher of FinAid.org. That's because directly lowering their tax bill exceeds the financial benefit of tax-free distributions.

    The extension is welcome assistance: The average annual cost of in-state public four-year schools rose to $7,605 this fall and private college expenses increased to $27,293.

    Child tax credit
    There's more good news if you're a parent: The $1,000 child tax credit is being extended for two years. Taxpayers with income of less than $75,000 — or $110,000 for married couples filing jointly — qualify for the full amount.

    Wealthy taxpayers also benefit from other provisions of the deal. The estate tax on inherited money, which was eliminated altogether in 2010, was scheduled to return to 2001 levels of taxing estates above $1 million at 55 percent. Under the proposed deal, for the next two years, a new 35 percent estate tax will kick in on estates over $5 million ($10 million for couples).

  • Payroll taxes

    Image: Payroll taxes
    AP

    Everyone will also get a break on their payroll taxes, but wealthy taxpayers will get a slightly better break. In exchange for dropping the so-called Making Work Pay tax credit, all taxpayers will get a two percent break on their Social Security payroll taxes for one year. The old tax credit, which maxed out at $400 ($800 for couples), was limited to people who made less than $95,000 (or couples making $190,000.)

    Currently, the government takes 6.2 percent out of your paycheck, up to $106,800, for the Social Security payroll tax. That would drop to 4.2 percent in 2011 and give you an immediate increase in take-home pay. So the more you earn, the more you save.

    If you make $50,000 a year you will pay $1,000 less. If you get paid twice a month, you will have an extra $41.67 in your paycheck starting in January.

    Anyone who makes more than $106,800 a year will receive the maximum savings of $2,136.
    "That certainly provides an added level of dollars to do whatever people were planning on doing, whether that's saving or spending," said Greg Rosica, a tax partner at Ernst & Young LLP.

  • Alternative Minimum Tax

    Image: AMT
    Getty Images file

    Middle class taxpayers get continued protection from a perennial monster called the Alternative Minimum Tax. Under the proposed deal, the existing AMT “patch” will be extended for two more years, saving some 21 million middle class taxpayers from getting hit with these higher rates.

    The AMT was enacted in 1969 to make sure wealthy people couldn't avoid taxes altogether, but it wasn't indexed for inflation. This means Congress has to raise the amount of income exempt from the AMT each year to spare millions from tax increases averaging about $3,900.

    Had no adjustment been made, taxes would have gone up for individuals making as little as $33,750, and married couples making $45,000.

    Similarly, a married couple making $85,000 a year with two college-age children would have had to pay $4,500 more in taxes, according to an analysis by The Tax Institute at H&R Block. A married couple making $100,000 a year with two young children would have faced a tax increase of more than $6,100.

  • Unemployment insurance

    Image: Help Wanted sign
    AFP - Getty Images

    Million of job seekers will benefit from an extension of their benefits at current levels through the end of 2011. The extension applies to workers laid off for more than six months, and less than 99 weeks. Seven million Americans would have lost their benefits through next year without the 13-month extension. Obama's Council of Economic Advisers estimates the provision will create 600,000 jobs next year.

    That's because the unemployed live on the edge, and tend to spend every dollar they get, rather than save. That spending flows to businesses, putting them in better position to hire.

    The average weekly payment for the roughly 8.5 million people receiving unemployment benefits is $302.90. But it varies widely by state, from as little as $119 in Puerto Rico to nearly $420 in Hawaii. Each state sets the amount through a formula meant to replace a portion of an unemployed person's old income.

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