WASHINGTON—Democrats abandoned plans to vote before Election Day on extending Bush-era tax cuts for the middle class while eliminating them for better-off Americans, spooked by protests from vulnerable incumbents and bleak prospects for passage.
With time running out to plan for 2011, the delay raises uncertainty for small businesses and individual taxpayers over their future liabilities. It also sets up a titanic battle over taxes after the election.
if returning lawmakers don't pass legislation by Dec. 31, the expiration date of the cuts, tax rates would rise not only on income, but also on estates, capital gains and dividends. Important corporate tax credits and relief from the Alternative Minimum Tax also are up for renewal.
Democratic leaders and President Barack Obama made the proposal to extend the middle-class tax breaks a centerpiece of their midterm campaign strategy. They now face the possibility their members are vulnerable to Republican charges that they have failed to prevent taxes from rising for almost everyone.
Congressmen from both parties said the toxic politics of taxes and the crush of issues to be resolved increased the likelihood all the Bush-era breaks, including those for higher earners, would be extended at least for a year or two. But Mr. Obama could still veto such a bill.
For now, taxpayers confront a number of worrisome scenarios, including the possibility Congress might deadlock on the issue in the post-election "lame duck" session, resulting in across-the-board tax increases.
With taxes a hot-button issue on the campaign trail, lawmakers threw in the towel Thursday until after the elections. Sen. Richard Durbin, the No. 2 Senate Democrat, said, "The reality is, we are not going to pass what needs to be passed to change this, either in the Senate or in the House, before the election."
House Majority Leader Steny Hoyer (D., Md.) said Thursday the House wouldn't schedule a vote on taxes if the Senate didn't. Later, on Thursday evening, a House Democratic aide said a floor vote remained "possible," adding that no decision had been made.
Sen. Tom Harkin (D., Iowa) said that the first part of next week would be taken up with debate over a bill seeking to limit the outsourcing of jobs. Then the Senate would turn to a bill to fund the government until after elections.
At this point, neither the House nor the Senate is expected to stay in session past next week.
Senate Majority Leader Harry Reid of Nevada sought to blame Republicans in a statement Thursday evening that conceded there would be no vote before November. "Democrats believe we must permanently extend tax cuts for the middle class before they expire at the end of the year, and we will," said Jim Manley, a spokesman for Mr. Reid. "Unfortunately, to this point, we have received no cooperation from Republicans to do so.…We will come back in November and stay in session as long as it takes to get this done."
Republicans said Democrats hadn't yet written a tax bill on which lawmakers could vote, because of disagreement among Democratic members.
"This delay is irresponsible and reckless. It's no wonder the American people are fed up with the leadership of Congress. Every family in America faces a major tax increase next year because the Senate majority leader has failed to take action to prevent it," said GOP Sen. Chuck Grassley of Iowa.
The delay could complicate the financial planning of millions of Americans. "You're going to have families sitting there thinking about the tax consequences in end-of-life situations," said Alan Rothschild, chairman of the American Bar Association's section on estate law. "That's a horrible situation." The estate tax, which lapsed in January, will return next year at rates up to 55% unless Congress acts.
Mr. Rothschild said that to reduce uncertainty lawmakers should announce their intention to make any estate-tax solution effective on the day of its announcement, not its passage.
Whatever lawmakers decide to do, "they should do it quickly," Mark Zandi, chief economist of Moody's Analytics, wrote last week. "The uncertainty of not knowing what tax rates will be just a few months from now is adding to the collective nervousness." He called the impact on business decision-making, especially hiring, "discernible."
Democratic leaders, led by House Speaker Nancy Pelosi of California and Mr. Reid, settled on the strategy of voting on the permanent extension as a way of casting Democrats as the party of the middle class, in contrast with Republicans' support for higher earners.
The plan quickly ran into opposition from centrist Democrats in the House and Senate, who worried that passing Mr. Obama's proposal would leave them vulnerable to the charge of raising taxes on high-income taxpayers in a weak economy.
"I actually believe that voting on taxes right before the election is a mistake," Sen. Dianne Feinstein (D., Calif.) said Thursday before Democrats huddled to discuss their final legislative moves. Her home-state Democratic colleague, Sen. Barbara Boxer, is facing a tough re-election fight where taxes are big issue.
A White House spokeswoman accused Republicans of holding the middle-class tax cut "hostage" to prevent a tax increase on the wealthy, and said the administration's message was coming through.
"Republicans in Congress have made it clear they would rather stall and obstruct, instead of giving working families the assistance they need," said spokeswoman Jen Psaki.
Quite the contrary, said Sen. Orrin Hatch (R., Utah), who's expected to become the top Republican on the Finance Committee next year. "It's unfortunate that the White House and its Capitol Hill allies have allowed politics to get in the way of making sure the American people's taxes don't go up," he said.
Dec. 31 isn't a final deadline. Congress could fashion a retroactive tax fix in 2011. But Mr. Obama is likely to push Democrats hard to avoid a lapse of the Bush breaks.
The second the clock ticks over to the New Year, the president would technically have presided over an across-the-board tax increase for most Americans, a problem as he prepares to run for re-election in 2012. Changing the tax code next year would also likely cause havoc at the Internal Revenue Service.
Republicans and many Democrats are more likely to be open to compromise once election pressure has abated. When Congress takes up taxes in the lame-duck session, "I think it's highly likely that taxes will not go up for people making up to $250,000," said Sen. Evan Bayh (D., Ind.), who has vocally opposed Democratic leaders' plans. "I think it's also likely that we'll get an extension for a year or two for higher earners."
Another inducement to compromise: The expiration would raise tax rates higher than the White House wants in a few key areas, not just on middle-class families, but also on dividends for higher earners and the estate tax. A key to an eventual compromise could be on the emotional issue of the estate tax, where a possible compromise would see a return to the 2009 rate of 45%, with an eventual reduction to 35%.