Tax deal clears first test in Congress

WASHINGTON Mon Dec 13, 2010 6:55pm EST

1 of 3. President Barack Obama makes a statement about the senate vote on middle class tax cuts in the Brady Press Briefing room of the White House in Washington, December 13, 2010.

Credit: Reuters/Jason Reed

WASHINGTON (Reuters) - President Barack Obama's bipartisan tax plan overwhelmingly passed its first test in Congress on Monday, even as a Wall Street ratings agency warned its damage to America's strained finances would outweigh any short-term economic boost.

The $858 billion package, which would keep lower income-tax rates from expiring at the end of the year, now heads to a final vote in the Senate on Tuesday or Wednesday, with a vote in the House of Representatives expected by the end of the week.

By a vote of 83 to 15, the measure easily cleared the 60-vote threshold needed for most legislation to advance in the 100-seat Senate.

Both chambers of Congress could approve the bill by the end of the week, despite complaints from many Democrats that Obama has given away too much to the Republicans who will soon enjoy greater clout in Washington.

"That is the nature of compromise, sacrificing something that each of us cares about to move forward on what matters to all of us," Obama said in a brief White House appearance. "Right now that is growing the economy and creating jobs."

Income taxes would rise by an average of $3,000 per household if Congress doesn't act by January 1 -- an unlikely outcome, Hoyer said.

Many economists say the deal could boost the sluggish economy, in part because of a payroll tax credit and extension of jobless benefits, at a time when Congress has shown little appetite for spending-based stimulus efforts.

They estimate the tax package could lift economic growth next year by up to a full percentage point, perhaps pushing it above 4 percent.

But Moody's Investors Service warned that tax cuts would worsen the debt levels, which left unattended may threaten the United States' bond ratings.

"From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth," Moody's analyst Steven Hess said in a report.

The report could give additional ammunition to Democrats in the House of Representatives who say the package gives away too much to the wealthiest 2 percent as the country is struggling with budget deficits that are higher as a percentage of the economy than any time since World War Two.

House Democratic leader Steny Hoyer said the House might try to change the bill after it clears the Senate, but aims to get a bill to Obama by the end of the week.

Worries about the tax bill drove U.S. bond yields up last week, and the yield on the benchmark 10-year Treasury bond rose to 3.39 percent early on Monday, the highest level since June, before investors drove the yield back down.

MORE EXPENSIVE THAN 2009 STIMULUS

Republicans won big in the November congressional elections amid widespread voter concern about government spending, but few have expressed concern about the cost of the tax package, which outstrips the $814 billion stimulus that Democrats passed last year to fight the deepest economic downturn since the Great Depression.

Although many opinion polls have found voters favoring an extension of lowered tax rates only for lower- and middle-income groups, two polls found broad public support for the current package.

Two senators launched a last-ditch effort to pass legislation to pressure China to raise the value of its currency by trying to attach a bill to the tax plan. The move would require the backing of all senators, making it a long shot.

Democrats, who will hand over control of the House to Republicans in January, had hoped to allow tax rates to rise for the wealthiest households to avoid adding further to a national debt that is approaching $14 trillion.

Democrats are also fuming that Obama agreed to Republican demands that the estate tax be lowered from 45 percent to 35 percent. The president also agreed to boost the exemption to estates of $5 million or less, from $3.5 million.

That provision would cost the government $68 billion in lost revenue over the coming 10 years, according to an estimate by the nonpartisan Congressional Budget Office.

Senate Democrats will try to beef up the estate tax provision in an amendment to the bill, though that effort is likely to fail.

The House will also try to change that provision after the Senate passes the bill, though House Democrats may have a tough time ensuring that their changes remain in any final product Congress sends to Obama to sign into law.

The legislation also extends tax breaks aimed at lower-income families, along with a wide array of subsidies and breaks for businesses, students and wind and solar providers.

It does not include continued subsidies for Build America Bonds, popular with state and local governments.

(Writing by Andy Sullivan; Additional reporting by Richard Cowan, Thomas Ferraro and Kim Dixon in Washington; Karen Brettell and Chris Reese in New York; and Walter Brandimarte in Sao Paolo; Editing by Vicki Allen and Todd Eastham)

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