John McCain
Byline Withheld  /  AP
Sen. John McCain, R-Ariz., talks with reporters near the floor of the Senate during the votes on tax cuts legislation on Capitol Hill in Washington on Wednesday.
updated 12/15/2010 4:52:51 PM ET 2010-12-15T21:52:51

In a reach across party lines, the Senate overwhelmingly passed sweeping legislation Wednesday to prevent a Jan. 1 income tax increase for millions and to renew jobless benefits for the long-term unemployed.

A House vote is expected by Thursday.

NBC/WSJ poll: Nearly 60% approve of tax deal

Within moments of the 81-19 Senate vote, President Barack Obama urged the House to follow suit without making any changes — a slap at rebellious liberals working to stiffen the terms of an estate tax provision they characterize as a giveaway to millionaires and billionaires.

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"I know there are different aspects of this plan to which members of Congress, on both sides of the aisle, object," Obama said. "That's the nature of compromise. But we worked hard to negotiate an agreement that's a win for middle-class families and a win for our economy. And we can't afford to let it fall victim to either delay or defeat."

At its core, the legislation provides a two-year extension of the tax cuts at all income levels that Congress approved while George W. Bush was president. Without action, they will expire on Dec. 31.

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The bill also would cut 2011 Social Security taxes for all wage earners, a reduction that will mean an extra $1,000 in take home pay for an individual earning $50,000.

In addition, the legislation renews a program of jobless benefits for millions who were laid off more than six months ago. Officials said that without the bill, government checks will be cut off for two million Americans over the holidays, and millions more over the next year.

Energy tax provisions, including extension of a government subsidy for ethanol and breaks for producers of other alternatives to oil, were added in recent days to strengthen lawmakers' support for the measure.

Republicans pick sides on tax deal

Bipartisan agreement on controversial deal
The legislation amounted to the first fruits of a new era of divided government, a deal sealed little more than a week ago by Obama, who is nursing a fragile economic recovery midway through his term, and Republicans whose position was greatly strengthened in last month's elections.

Concessions made by the president sparked criticism from liberals who were angered at tax cuts for the wealthy that he had long criticized. Some provisions agreed to by Republican leaders brought objections from conservatives unhappy that the cost of the jobless benefits would swell the federal budget deficit.

And in the hours before final passage, lawmakers on both sides maneuvered for political gain, a sign of renewed struggle in 2011.

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A Democratic attempt to ease the paperwork burden imposed by this year's big health care bill was blocked by Republicans. Democrats countered by vetoing a GOP alternative that would have included offsetting spending cuts.

In the end, though, the tax bill drew support from 44 Democrats and 37 Republicans, testament to the appeal of lower taxes and renewal of a program of aid for victims of the recession at a time of 9.8 percent unemployment. Fourteen Democrats and five Republicans voted against the bill.

Obama's call for the House to accept the Senate-passed measure continued a postelection season of contentiousness between the president and Democrats distressed that they lost their majority in November.

Democratic House leaders said they intended to have the bill debated and voted on by Thursday, but declined to say what their approach would be to the estate tax.

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Their dilemma was evident — trying to keep faith with members of the rank and file who want to change the legislation, yet avoid at all costs having Democrats saddled with blame if taxes increase on Jan. 1.

That's what the Senate Republican leader, Sen. Mitch McConnell of Kentucky, warned might happen if the bill was changed.

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"This agreement is not subject to being reopened," he said on Tuesday. "In other words, we have an understanding."

However, McConnell's insistence didn't extend to a series of Republican attempts to make modifications in the moments before Senate passage.

He and other Republicans sided with a failed attempt by Sen. Jim DeMint, R-S.C. to make the tax cuts permanent, and again when Sen. Tom Coburn, R-Okla., unsuccessfully proposed spending cuts to cover the cost of the unemployment benefits.

Many House Dems disgruntled
In the House, Obama's liberal critics were outspoken.

A closed-door meeting of the rank and file ended inconclusively Tuesday night, and afterward Rep. David Wu, accused the president of showing weakness in the face of an emboldened Republican Party.

"He has no street cred," the Oregon Democrat told reporters. "This tax bill is a thin part of the problem. They're going to get eaten alive by the Republicans in this chamber," he added, referring to White House officials.

By far the most controversial element of the bill concerned the estate tax. Under the measure, individual estates as large as $5 million would pass to heirs tax free — an amount that would reach $10 million for couples — with the balance taxed at a rate of 35 percent.

Under the Bush-era tax cuts, the estate tax was repealed for 2010, but scheduled to return on Jan. 1 with a top rate of 55 percent on the portion of estates above $1 million — $2 million for couples.

Unhappy with the more generous approach that Obama agreed to, House Democrats voted in a closed-door meeting last week they would not permit the legislation to reach the floor without changes.

They have since retreated from their ultimatum, and now hope they can change the measure on the floor to restore the tax to levels in effect in 2009. At the time, individuals could pass $3.5 million to their heirs, tax-free. Couples could pass $7 million, with a little tax planning, and the balance was taxed at a top rate of 45 percent.

The Senate Wednesday overwhelmingly passed a sweeping tax package that would save millions of Americans thousands of dollars in higher taxes while also reducing their Social Security taxes and extending jobless benefits.

The $858 billion package now goes to the House, where many Democrats are unhappy with a provision that allows estates as large as $10 million to pass to heirs tax-free. Democratic leaders, however, say they expect the bill to ultimately pass and become law.

A wide array of tax cuts enacted under President George W. Bush is scheduled to expire on Jan. 1 — just two weeks away — affecting taxpayers at every income level. The bill passed by the Senate, 81-19, would extend them for two years.

Bill now moves to House, faces Dem opposition
President Barack Obama urge quick action in the House.

"I know there are different aspects of this plan to which members of Congress on both sides of the aisle object. That's the nature of compromise," the president said. "But we worked to negotiate an agreement that's a win for middle-class families and a win for our economy, and we can't afford to let it fall victim to either delay or defeat."

House Democratic leaders said they expect to vote on the bill Thursday.

Obama negotiated the package with Senate Republicans, and then administration officials worked for days to persuade congressional Democrats to support it, signaling a possible blueprint for future legislation. Because of November's election victories, Republicans will take control of the House in January and gain seats in the Senate.

"Middle class families need a boost in this economy, and that is exactly what this plan gives them," said Senate Majority Leader Harry Reid, D-Nev. "It is not perfect, but it will create 2 million jobs, cut taxes for middle class families and small businesses, and ensure that Americans who are still looking for work will continue to have the safety net they rely on to make ends meet."

The bill would extend expiring tax cuts at every income level. It also would renew a program of jobless benefits for the long-term unemployed that is due to lapse, and enact a one-year cut in Social Security taxes. The bill's cost, $858 billion, would be added to the deficit.

"Opposing this bill is tantamount to supporting massive tax increases that threatens our economic future," said Sen. Orrin Hatch, R-Utah. "Allowing middle-class families, small businesses and investors to keep more of what they earn, while denying Washington hundreds of billions in new tax revenue to spend, is the right thing to do."

Other Senate Republicans, however, balked at the price tag, noting that Obama's deficit commission recently outlined the massive fiscal problems facing the nation.

"The American people are going to be looking, and they're going to say, does the Senate get it? Do they understand the severity and the urgency of the problems that face our fiscal future?" Sen. Tom Coburn, R-Okla., said Wednesday.

At the insistence of Republicans, the plan includes a more generous estate tax provision: The first $10 million of a couple's estate could pass to heirs without taxation. The balance would be subject to a 35 percent tax rate.

'This administration fights for nothing'
The lower estate tax infuriated some Democrats who were already unhappy with Obama for agreeing to extend tax cuts for individuals making more than $200,000 and couples making more than $250,000.

"This administration fights for nothing," said Rep. David Wu, D-Ore.

The estate tax was repealed for 2010. But under current law, it is scheduled to return next year with a top rate of 55 percent on the portion of estates above $1 million — $2 million for couples.

House Democratic leaders want to bring back the 2009 estate tax levels. That year, individuals could pass $3.5 million to their heirs, tax-free. Couples could pass $7 million, with a little tax planning, and the balance was taxed at a top rate of 45 percent.

House Democrats said they are considering a vote to impose the higher estate tax, perhaps as an amendment to the package. But even critics of the lower estate tax say they expect the package to be enacted without changes.

"Let's find out if Republicans really want to jeopardize income tax, payroll tax and estate tax relief for every American in order to provide a budget-busting bonanza to the country's richest estates," Rep. Chris Van Hollen, D-Md., wrote in an op-ed in Wednesday's Washington Post. "House Democrats think this trade-off should be debated and voted on in the light of day."

Rep. Bill Pascrell Jr., D-N.J., said, "We can jump up and down all we want about the higher-end estate taxes, and I don't think anything's going to change because the Senate isn't going to change it."

Thirty-one members of the conservative Blue Dog Democrats sent a letter to House Speaker Nancy Pelosi urging quick passage of the bill.

"It is time for us to put aside the partisan talking points and accomplish what the American people sent us here to do," said the letter.

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

Video: House braces for tax deal battle

  1. Transcript of: House braces for tax deal battle

    BRIAN WILLIAMS, anchor: Now something a bit less than a profile in courage perhaps, the current debate going on in Washington . This is the time of year when lawmakers are anxious to leave on Christmas break . The problem is the laws that need to be passed first. Today, the Senate did vote overwhelmingly to pass President Obama 's tax cut package. Now it goes on to the House . But the goodwill sort of fell apart after that. They even ended up arguing over Christmas . NBC 's Kelly O'Donnell is on the Hill for us tonight. Kelly , good evening.

    KELLY O'DONNELL reporting: Good evening, Brian . Well, as you point out, the spirit of the season was here when they got that tax cut compromise through, but then it all kind of fell apart over what else can get done before the Christmas break . There's the new START treaty with Russia , a required government spending bill laden with pork, the repeal of "Don't_Ask,_Don't_Tell," and immigration reform . Republicans accuse Democrats of ignoring the importance of the Christmas break by trying to get too much in for the second year in a row.

    Senator JOHN THUNE (Republican, South Dakota): The Democrat leadership somehow thinks that by being here Christmas week that that's a -- that's an act of courage, that they're being courageous by having Congress here because we're doing all these important things.

    Senator JON KYL (Republican, Arizona): And yes, I did say that I thought it

    was disrespectful of one of the two major Christmasholidays of the year.

    Senator HARRY REID (Democrat, Majority Leader): So it's offensive to me and millions of working Americans across this country for any senator to suggest that working through the holidays is somehow sacrilegious or disrespectful?

    O'DONNELL: Well, you may remember that last year health care reform was passed on Christmas Eve . And Majority Leader Reid says the Senate will be

    working this weekend. Brian: All right, Kel , thanks. Kelly O'Donnell on the Hill for us tonight.

    WILLIAMS:

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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