The Price of Politics (11 page)

In his State of the Union address the next month, in which he focused on the nation’s budget problems, the president barely mentioned the fiscal commission.
⁴⁷
His proposed budget, released in February, bore no resemblance to Simpson-Bowles.
⁴⁸

The commission’s plan seemed dead.

O
n Thursday, December 2, Nancy Pelosi, who had a month left as speaker, rammed a bill through the House extending the lower-and middle-class Bush tax cuts without the high-income tax cuts the Republicans considered essential.
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The bill passed on a largely party-line vote, 234–188.

The lame-duck force play agitated incoming speaker John Boehner. “I’m trying to catch my breath,” he told reporters, “so I don’t refer to this maneuver going on today as chicken crap, all right? But this is nonsense.
⁵⁰
All right? The election was one month ago. We’re 23 months from the next election, and the political games have already started.” Pelosi’s move was contrary to the spirit of cooperation the president had just promised, he said.

Each side had the same problem. Far apart on tax policy, they had to agree on a way forward. Otherwise, the Bush tax cuts would expire and taxes would go up for everyone, which neither party wanted.

The Democrats still controlled the Senate. But Pelosi’s tax bill would not pass there because Minority Leader McConnell could order a filibuster. And in the new Congress he would have 47 Republican senators, up from the current 42, giving him even more of a stranglehold on legislation.

Biden had seen this coming even before the House vote. If there
was a window to get something done, it was now. Sometimes it came down to one man. He told Obama he wanted to make a back-channel call to McConnell.

Sure, Obama said. Why not? Try everything.

Biden was known in the White House as the “McConnell whisperer,” the person who knew the right combination of sympathy and gentleness, never force, needed to work with the minority leader.

In an October 2010 interview with
National Journal
, McConnell had said that for Republicans, “The single most important thing we want to achieve is for President Obama to be a one-term president.”
⁵¹
The statement was widely reported in the press and was cited by Democrats as evidence that Republicans in Congress prized defeating Obama above the good of the country.

But the coverage largely ignored the rest of what McConnell had said.

Asked if his strategy involved constant confrontation, McConnell said, “If President Obama does a Clintonian backflip, if he’s willing to meet us halfway on some of the biggest issues, it’s not inappropriate for us to do business with him.”

“I don’t want the president to fail,” he said later in that interview. “I want him to change.”

Working with McConnell would be tricky, but he and Biden had served together in the Senate for 25 years, and both knew the foremost Senate club rule: You get some, I get some.

Biden enlisted his chief of staff, Ron Klain. Klain had been an editor of the
Harvard Law Review
three years before Obama became the
Review
’s first black president. Laurence Tribe, a Harvard Law professor, said Obama and Klain were two of the most brilliant students he had taught.

Klain, 49, saw the president’s economic philosophy as technocratic. It seemed to him at times that Obama was seeking mathematical answers to questions that did not always have them. The president was a progressive but clearly had a Blue Dog streak. He saw the perils of unsustainable federal spending.

Losing the House, Klain thought, put them in uncharted territory.
At times like this, Klain would say, “Scary
Jaws
music was playing in the background.”

McConnell and his top domestic policy aide were direct with Biden and Klain.

You’ve got a problem here, Joe, McConnell said. There are things you want, like the START treaty, and for that to pass, you’re going to need some Republicans. You don’t want a party-line vote, so the anti-START people need five, six, seven days of Senate floor debate. If you don’t give them a fair hearing, I have to round up the Republicans to vote down START to validate their procedural rights. As their leader, my job is to protect their right to be heard on this. McConnell said he would order a filibuster if necessary.

Fine, Biden said. The START treaty would be held hostage until the Republicans got their debate.

And there was another problem, McConnell explained. We can’t even do the START treaty until this tax thing gets done. Because for my guys, getting the tax thing done is the most important matter. If you guys drag out this tax thing, I can’t get anybody to focus on anything else. “For us, taxes is the thing.”

The “tax thing” meant the extension of the Bush tax cuts for everyone. McConnell said that the tax thing was so important that he would consider anything that Obama and Biden might want in exchange.

Okay, Biden said. A door had opened.

The vice president and Klain weighed the realities of late 2010. Larry Summers and Biden’s own economic advisers said that raising income tax rates while the recovery was still shaky would hurt the economy, and failure to extend the tax cuts before the Christmas season could ruin it. Even prolonged uncertainty would have a negative impact. And Biden realized that the Republicans were more adamant in their position—no one’s taxes should go up, especially in a down economy—than Democrats were about ending cuts to the upper-income brackets.

Although raising taxes on just the upper brackets remained White House doctrine—the president had reiterated the pledge before the
2010 congressional elections—Biden was sure the Democrats would cave. “Our guys will blink,” he said. If they didn’t get a tax deal in the 30-day lame duck, everyone’s taxes would go up and the economy would likely take a hit. Republicans would quickly pass an extension of all Bush tax cuts. In the Senate, a lot of Democrats would fold quickly. So, as long as there was going to be a deal, Biden said, strike it now. Get that done and they could get the START treaty ratified.

The president didn’t want to give up that easily. I still want to extend the tax cuts for everyone but the wealthy, he told Biden.

Biden told him it wouldn’t sell to McConnell.

Let’s try, Obama said.

Biden tried, and McConnell repeated that it was not going to happen. He wouldn’t budge on the tax thing. His feet were in cement. But, tell me what else you want.

Biden wanted START. He wanted help for working people to send their kids to college, help for the working poor, the very poor, the unemployed. And he wanted to extend Making Work Pay, a program of $400-a-year income tax cuts from the president’s original 2009 stimulus program. The cost would be about $60 billion a year.

No way can I sell that, McConnell said. Making Work Pay was refundable, which meant that it gave money to people who didn’t pay any income taxes, either because they were poor or had a lot of deductions. A married couple could get a check from the federal government for as much as $800 even though they paid no income tax. Won’t fly.

The deadline was running out on the tax thing, but McConnell’s adviser Rohit Kumar proposed a solution.

A 37-year-old attorney, Kumar was a Boston native, educated at Duke and the University of Virginia. An expert in taxes and financial policy, he had served as an adviser to the two Senate Republican leaders who preceded McConnell.

Suppose we adopt Making Work Pay, but just for those who pay taxes? he suggested. No tax due, no check in the mail?

Klain took this idea to his old friend Gene Sperling. Sperling was a veteran of eight years in the Clinton White House, the last four as
head of the National Economic Council—Clinton’s economic czar. Now 51, he had played critical roles in the 1993 and 1997 budget deals and was one of the strongest advocates of progressive causes in the Democratic Party. Since he had supported Hillary Clinton in the 2008 presidential race, he had not been given a top economic post in the Obama administration. Uncomfortable on the sidelines, Sperling had accepted a position as Tim Geithner’s counselor at the Treasury Department, handling much of the White House business on deficits, taxes and jobs. He had an office just down the hall from Geithner’s, and was a fount of new ideas. He had hired a small army of young, hardworking number crunchers who worked in a section of the Treasury Department that other staffers referred to as the BoG, Bureau of Gene.

When Klain confided that they were considering dropping the poorest citizens from Making Work Pay, Sperling went nuts. “That would be immoral,” he said. If you do that, we’d be run out of town. No way could Obama abandon those at the bottom.

All right, said Klain, but Republicans owe us. If the president gives in on the high-income-bracket extension, that’s $60 billion a year. “So they should give us $60 billion. That’s fair. McConnell knows that.”

The task now was to find another way to get what was theirs. Sperling suggested payroll tax cuts.

He knew the tax code and federal budget inside and out. A famous workaholic, Sperling believed in preparation. He and his bureau had already gathered the research to show that many Republicans, including McConnell and Boehner, had been proponents of cutting the payroll tax that funds the Social Security Trust Fund. The payroll tax was currently set by law at 12.4 percent, with half paid by the employer and half by the employee. A cut in the tax would apply only to those who paid it, so nontaxpayers wouldn’t benefit. Republicans loved tax cuts, and this one would apply to 160 million workers.

Sperling went back to the Bureau of Gene and put together Power-Point slides showing all the different Republicans who had been for a payroll tax cut. Biden and Klain presented the idea to McConnell in a conference call.

McConnell liked it, and he and his deputy, Jon Kyl, went to the soon-to-be leaders of the new House majority, Boehner and Cantor.

McConnell announced that they were going to get an extension of the high-income Bush tax cuts, holding the top rate down to 35 percent. This was a big victory for Republicans. As their share of the pie, Obama and Biden wanted a one-year payroll tax cut that would cost $60 billion.

Boehner was fine with the deal.

Wait, said Cantor. A payroll tax holiday was not great policy. Since Reagan, the Republican Party had been about low income tax rates to grow the economy. The $60 billion cut in the payroll tax would technically come from the Social Security Trust Fund, which Reagan and Tip O’Neill had saved in 1983. He looked down the road into the 2012 tax year. The White House would argue that the cut had to be extended for another year. Republicans would have no choice but to go along. They could hardly be for allowing taxes to go up, especially in an election year.

McConnell and Kyl insisted, so Boehner again said fine. But given Cantor’s hesitation, McConnell told Biden that if they went along with the payroll tax cut, he needed something more to sweeten the deal. Kyl wanted to change estate tax rates, which were scheduled to rise to 55 percent with a $1 million exemption when the Bush tax cuts expired. The White House would have to accept a drop in the estate tax rate to 35 percent with a $5 million exemption for two years. This was a pet plan of Kyl’s and of Arkansas Senator Blanche Lincoln, a Democrat.

“It’s just terrible,” Sperling said when he heard the proposal. Obama and Biden were outraged. This was classic special interest legislation that might apply to only 6,000 to 7,000 families and would cost the Treasury $25 billion.

Geithner told the president there was a principle involved. “The only way you can possibly do Kyl-Lincoln is if they give us everything.”

• • •

Biden knew House Democrats were anxious about the White House cutting its own deal with the Republicans, so on Saturday night, December
4, Biden had the Democratic leaders, Pelosi and Hoyer, and Maryland Representative Chris Van Hollen, a top Democrat on the House Budget Committee, to dinner at the vice president’s residence. There as backup were Geithner, Lew and Schiliro. Biden mentioned that all kinds of ideas were being explored with the Republicans. We’re not really negotiating, he said. He did not mention extending the Bush tax cuts, the most explosive issue. You’ll be in the loop, don’t worry about it, there’s no deal yet.

As usual, there were a great many players to be kept in the loop, and with the “tax thing” deadline coming closer each day, the loop was beginning to feel like a noose.

The next day, Biden and McConnell agreed to a basic two-year extension of all the Bush tax cuts ($544 billion), the payroll tax cut for a year (now $112 billion), the Kyl-Lincoln estate tax plan (at least $25 billion), and extension of unemployment insurance for 13 months ($56.5 billion). Other provisions favored by the Republicans allowed businesses of any size to entirely write off the cost of equipment or other capital investments for the next year. Businesses would save an estimated $150 billion in taxes. In addition, the highest rate on capital gains and dividends would remain at 15 percent for two years. Other details remained unfinished, but both men knew they were close to a deal.