How the White House torpedoed Harry Reid’s tax deal

The White House worked closely with liberal House Democrats last week to torpedo a tax deal that Senate Majority Leader Harry Reid (D-­Nev.) was negotiating with Republicans.

{mosads}The unusual move to kill a Reid­-backed proposal has raised suspicions among Senate negotiators about the White House’s motivations. They believe President Obama’s team is eyeing a broad corporate tax reform deal in 2015, when Republicans will control the Senate and the House.

“It might indicate less about the merits of the package and more about the White House using progressives to kill a deal now in order to pave the way for a deal with Republicans next Congress that progressives will absolutely loathe,” said a senior Senate Democratic aide.

The administration joined forces with the House Democrats with one thing in mind: making sure a possible veto wouldn’t be overturned.

“Clearly the White House calculated that the House Democrats could sustain a veto,” said another Democratic aide. “The White House had conversations with a slew of House Democrats on Tuesday. It was furiously trying to assess how much opposition there was in the House. They were very upset.”

A White House spokeswoman declined to comment.

The Reid­-GOP deal would have indefinitely revived both the popular credit for business research and a tax break for small­-business expensing, a pair of proposals that House Republicans have been pushing for months.

Democrats would have gotten a long-­term extension of a tax break that helps families pay for college costs, while Reid — who is up for reelection in 2016 — would have scored a permanent extension of a tax break for state and local sales taxes that’s especially important to Nevada.

But Democrats wouldn’t have gotten long-­term extensions of expansions of the Earned Income Tax Credit and the Child Tax Credit, which some in the party had called their top priority in the tax discussions.

Republicans balked at that idea in the wake of Obama’s decision to shield millions of illegal immigrants from deportation.

The deal fell apart amid lingering tension between Reid and the White House in the aftermath of last month’s devastating midterm losses, which many Senate Democrats blame on Obama.

Many lawmakers and tax lobbyists are skeptical about the prospects of passing tax reform next year, so fears of Obama working alone to cut a corporate tax deal with Senate Republicans may be overblown.

But the senior Senate Democratic aide said a corporate tax package will be more likely next year now that Reid’s proposal to permanently extend popular business tax breaks favored by Republicans has derailed.

The logic is that Senate Republicans will have less of an incentive to pass corporate tax reform if major business tax credits are made permanent this month.

One Democratic aide on Capitol Hill dismissed the idea that the White House was trying to improve its position for tax reform, noting that Obama has yet to make an overhaul of the tax code a major priority in his six years in office.

Instead, the aide suggested that the Senate staffers were seeking cover for failing to get a deal that could get the support of most Democrats and that a deal to extend the expired breaks for good could be a bigger boon for Republicans by making the math for tax reform easier.

“That’s a way for them to try to spin the White House opposition as more nefarious than it really is,” the Democratic staffer said.

By framing the proposal as something that would avoid the prospect of Obama forging a worse corporate tax deal next year, Senate leaders have begun to mend fences with angry liberals.

Sen. Elizabeth Warren (D­Mass.), a new member of Reid’s leadership team, and Sen. Sherrod Brown (D- Ohio), both staunch liberals, were the most outspoken critics of the dashed tax deal.

Reid has since assured colleagues that even though he was prepared to drop the Earned Income Tax Credit and Child Tax Credit from the lame­-duck package, he will insist it be included in future tax reform legislation.

“Sen. Reid would oppose any tax reform deal that doesn’t include extensions of the Earned Income and Child Tax Credit Expansions,” said Adam Jentleson, Reid’s spokesman.

Reid has since stepped away from the table and left the lame­-duck tax talks entirely to Senate Finance Committee Chairman Ron Wyden (D­-Ore.). This means a one-­year extension of expired tax provisions appears more likely, though Wyden insisted Monday that he was no fan of that approach.

“It’s all in Wyden’s hands now. Whatever happens is in Wyden’s hands,” said the senior staffer, who added that passing a one-­year extension of tax provisions this month sets up new tax talks next year, when Sen. Mitch McConnell (R­Ky.) will be the majority leader.

“Anyone who wants to do corporate tax reform wants provisions to expire in the next Congress,” the aide added.

With Reid now backing away from extenders negotiations, House Republicans are moving toward a vote that would restore many of the expired tax breaks only through the end of 2014.

Last week, Obama joined senior officials in his administration to ensure there was enough Democratic opposition to the emerging deal, according to Democratic aides.

Treasury Secretary Jack Lew, Shaun Donovan, Obama’s budget director, and Jason Furman, the chairman of the president’s Council of Economic Advisers, also reached out to Democratic lawmakers last Tuesday, the staffers added.

The administration’s lobbying effort reached a crescendo on Tuesday, shortly before Obama delivered his veto threat.

Reid likely won over Sen. Charles Schumer (D­-N.Y.) to support the deal by including a permanent extension of the American Opportunity Tax Credit, which lowers college costs, and a tax break for commuters who ride mass transit.

He may have had enough support to override a presidential veto in the Senate, but House Democrats gave Obama a political backstop.