WASHINGTON Lawmakers are far from a deal to renew lower tax rates that expire at the end of this year as divisions inflamed by the congressional election in November stand in the way of compromise.
President Barack Obama and most of his fellow Democrats want tax cuts enacted under former President George W. Bush to be extended only for the first $200,000 of a person's income, saying the country cannot afford the cuts for higher earners.
Republicans want the lower rates renewed for all Americans, regardless of income, and say that losing the cuts would hurt small businesses and job creation just as the economy is recovering from its worst recession since the 1930s.
There were hints of compromise recently from John Boehner, the Republican leader in the House of Representatives, but any deal now seems remote. The two parties are digging in, with the faith that voters will side with them in the November 2 election.
"We should immediately pass tax relief for 98 percent of the American people," said Representative Chris Van Hollen, chairman of the Democratic Congressional Campaign Committee and a chief aide to House Speaker Nancy Pelosi.
"If (Republicans) want to come back and have a debate about tax policy then that's another issue," he told the Reuters Washington Summit on Wednesday.
Some economists worry the stalemate will result in all of the tax cuts expiring, which would cut consumer spending when the economy is still shaky.
The economy is the dominant issue in November's election and, as a Reuters/Ipsos poll showed this week, most Americans (57 percent) see cutting the budget deficit as a better way to help the recovery than raising government spending.
The poll also showed support for Democrats and Republicans essentially tied, just six weeks before Americans vote.
The Senate is expected to act first on the Bush-era tax cuts but it has few working days left before lawmakers leave Washington to campaign.
The chairman of the tax-writing Senate Finance Committee, Max Baucus, is expected to release a draft bill very soon that reflects the Democrats' proposal.
But Baucus faces some defiant Democrats who are calling for all of the tax rates to be extended. A handful of Democrats in the Senate and more than a dozen in the House support the Republican plan -- and they have been vocal about it.
On Wednesday, about 40 House Democrats sent a letter to House leaders calling for the extension of the Bush-era tax rates of 15 percent on capital gains and dividends, according to sources familiar with the matter. Obama's plan is to raise them to 20 percent for higher earners.
Even if Republicans cannot get enough support to pass their plan, they could delay a vote that Democrats want on extending the cuts for people earning less than $200,000 per year.
But that may be perilous just before the election and fuel Democratic claims that Republicans are the party for the rich.
"Why hold the middle class hostage in order to do something that most economists don't think makes sense?" Obama said earlier this month.
The top Republican on the Senate Budget Committee, Judd Gregg, suggested his colleagues are not wavering.
"In the Senate, we have a way of making votes being much more in tune with what our concerns are rather than just the other side of the aisle," Gregg said at the Reuters summit on Wednesday. "Raising taxes at this time would be extraordinarily unproductive to the economy."
Financial players are keeping a close eye on the battle.
"A significant downside risk to our forecast for early 2011 is the possibility that Congress fails to extend even the broadly supported portion of the tax cuts," Goldman Sachs analyst Alec Phillips wrote. "This would occur most likely because of a political impasse in the Senate."
Not all are so glum. Some Republicans believe the Democrats will blink.
"I get the impression that we will extend all of the tax cuts," Senator John McCain said at the Reuters summit earlier this week. "But I can't explain to you how we get there."
On the related issue of tax breaks, a study by two groups that advocate for poorer Americans said government efforts to encourage home ownership, retirement savings, business start-ups and education mostly benefit top earners.
More than half of the nearly $400 billion spent by the government in 2009 to promote wealth creation, mostly through tax breaks, benefited the richest 5 percent of taxpayers, said the study sponsored by the nonprofit Annie E. Casey Foundation and the Corporation for Enterprise Development.
The study will be sent to Obama's fiscal commission that is due to report its recommendations in December on ways to reduce the massive $1.47 trillion budget deficit and slow the growth of the nation's debt, which now tops $13 trillion.
(Additional reporting by Donna Smith; Editing by John O'Callaghan)