Fiscal-Cliff Showdown Mirrors Payroll-Tax Fight

Nancy Cook
National Journal

The fight over the fiscal cliff, politically at least, is starting to look a lot like last December’s message wars over the payroll-tax holiday.

You remember that scene, don’t you? President Obama received a huge political boost when he managed to isolate the House Republicans politically and sought to blame them for increasing payroll taxes on 160 million Americans just days before Christmas. Even the Wall Street Journal editorial board balked at the House Republicans' stance, calling the fight a “fiasco.” And, in those days in mid-December, the president stopped just short of calling the Republicans the Grinches who stole Christmas.

A repeat of that scenario is fast-approaching, if Congress and the White House cannot cut a deal in the next few weeks on the fiscal cliff’s mix of more than $500 billion in tax hikes and spending cuts. Even before the president won reelection, the Democrats had the 2011 payroll-tax fight in mind as a potential playbook, says one Democratic congressional aide familiar with the negotiations. The payroll-tax fight had a far better ending for Democrats than the debt-ceiling debacle in the summer of 2011.  

This strategy also keeps the focus of the fiscal cliff fight squarely on the question of tax rates, as opposed to the the broader menu of spending cuts, unemployment benefits, the alternative-minimum patch, or business tax breaks. It maintains the pressure on the Republicans to agree to a single tenet—politically challenging for them but easily boiled down to a nice slogan for normal, outside-the-beltway Americans: "Raise taxes on the richest Americans."

“The Democrats went from asking the rich to pay more in the days after the election to locking in on increasing marginal tax rates,” says Alex Brill, a former policy director of the House Ways and Means Committee and a research fellow at the American Enterprise Institute. “A lot of the rank-and-file Republicans draw the line on statutory rates. I think that’s really hard.”

Yet, tax rates were the president’s primary focus this week, as they've been since he won the election and gained additional leverage in the fiscal-cliff showdown. On Thursday, Obama upped the ante by heading to Fall Church, Va., to meet with a high school teacher named Tiffany Santana and her family, including her 6-year-old son, to talk about the importance of extending the Bush-era tax cuts for households with annual incomes below $250,000.

The president sat at the family’s round kitchen table and spoke about the need for higher taxes for the rich. "Everyone is going to have to share in some sacrifice. But it starts with folks who are in the best position to sacrifice,” he said, according to pool reports.

The visit came toward the end of a week in which the president waged a huge outside campaign to pressure the Republicans to cave. In addition to tweeting about the need for middle-class tax cuts with the hash tag #my2K, the president met with business leaders. He told them that if the Republicans moved on tax rates, the White House and Congress could easily reach a deal—as if that were the only component at stake.

The business leaders left the meeting thinking the president was totally reasonable and sensible, says one financial-services industry leader, who asked not to be named to preserve his ties to the administration.

Though the business community cannot dictate the terms of the deal to the tiny number of negotiators, the business community can “urge them to reach a deal and dissuade them of the notion that going over the cliff is OK,” the financial-services leader said. “They can also provide cover for the deal.”

Privately, lobbyists with close ties to the Republicans predict that the GOP will cave in some way on taxes. Republican politicians and staffers on the Hill have been trying to combat the president’s effort to repeat the payroll-tax strategy by talking about the way income-tax hikes would hurt small businesses;kill off investment for businesses; or hurt the prospects for tax reform in 2013.

So far, these messages do not seem to resonate with American voters. A poll from the Pew Research Center and The Washington Post, released on Tuesday, showed that 53 percent of respondents say they would blame congressional Republicans if the parties failed to reach a deal on the fiscal cliff by the end of the year. Just 27 percent would blame Obama, according to the polling data.

House Speaker John Boehner “may be forced to pivot and the rates will go up,” Brill says.

Most likely, if the Republicans do agree to any rate increases, the tax rates will not return to a top rate of 39.6 percent, and the two parties will find additional revenue by capping itemized deductions either through a dollar cap or a percentage of a person’s adjusted gross income.

“I always thought there was an obvious deal, if the parties don’t take the top rate as high as 39.6 percent. It’s just about numbers,” says Ken Kies, managing director of the lobbying shop Federal Policy Group and a former chief of staff for the Joint Committee on Taxation. “The problem with all of this is that we’re rapidly running out of time.”

The To Do list is lengthy, as Congress and the White House wrap up week four of the fiscal-cliff negotiations. Still, one should never doubt the way the threat of a cancelled vacation—and the optics of raising taxes on middle-class people right before Christmas—motivates politicians. That, at least, seems to be what White House officials are betting on, based on the lessons they learned from last December's payroll-tax standoff.