Why the White House torpedoed Harry Reid's tax deal: The competing claims

WASHINGTON – When President Obama issued a preemptive veto threat last week against a measure extending a group of tax exemptions, it was widely seen as a swipe at Senate Majority Leader Harry Reid, D-Nev.

Reid had been negotiating with Republicans — and was close to reaching agreement with them — to keep the tax breaks in place at least in the near term. The White House’s unusual move, announcing the threat of a veto before legislation had even been introduced,  appeared to many observers to be retribution for the brazen defiance of Reid’s chief of staff, David Krone, who openly criticized the administration after the Democratic Party’s crushing losses in the midterm elections.

But Reid’s office argued that there is more to the story, telling Yahoo News that it believes the White House’s main reason for spiking what is known as the “tax extenders” deal (which in fact included provisions prolonging tax exemptions for working families) is to retain leverage with the goal of winning Democratic support for a broader tax reform plan next year.

“We think what was going on is that the White House was trying to tank any tax extender deal, regardless of what it was, because they want to get to a stage next year of doing corporate tax reform with Republicans, and they want to keep extenders on the table as perks to get votes,” a Reid aide said.

Republicans scoffed at this explanation, saying that such a strategy defies credulity and arguing that the real reason for the White House’s action was simply to brutally embarrass Reid. The White House also dismissed this theory. The administration has said in public statements that it opposed the extenders deal on principle.

White House Press Secretary Josh Earnest said this week that the bipartisan agreement under discussion would have “shower[ed] significant tax benefits on well-connected corporations, without providing much relief to working people in this country.”

The White House did not specify what it meant by this justification for torpedoing the deal, and a peeved Reid groused this week, “It’s hard to veto something that doesn’t exist.”

But a senior administration official told reporters at a breakfast Thursday morning that the president wanted extensions of the Earned Income Tax Credit, the Child Tax Credit and a tax credit for college students.

“The president, he’s worried about EITC, he’s worried about the Child Credit, he’s worried about the college credit,” the senior administration official said. “He’s not willing to say: You can have permanent [extensions of tax exemptions] for business, and we’ll leave the family at risk.”

And yet one of the extensions in the package opposed by Obama is targeted to college students and supported both by Democrats and Republicans: the American Opportunity Tax Credit, which gives up to $2,500 in tax credits to students for tuition.

In addition, the earned income and the child tax credits are permanent tax credits that are not up for negotiation through the "extenders" package. And while temporary provisions added on to these credits by the 2009 stimulus are opposed by Republicans, who say that these expansions have resulted in improper claims for tax deductions, to the tune of roughly $13 billion each year, those expansions don’t expire until September 2017.

Negotiators on the staff of the House Ways and Means Committee and in Reid’s office had discussed extending the temporary provisions in the EITC and the CTC beyond 2017, but Republicans concluded that disagreements with Democrats could not be resolved during the lame-duck Congress, especially after Obama’s executive action on immigration exacerbated concerns that undocumented immigrants would claim tax deductions improperly. So they put them aside.

As for Earnest’s contention that the agreement being negotiated by Reid and House Ways and Means Chairman Dave Camp, R-Mich., would “shower … benefits on well-connected corporations,” there are only permanent two carveouts under discussion that could even remotely be construed as benefiting corporations, according to Reid’s office. One is the research and development tax credit, which is routinely praised by Democrats and which is included in the president’s own budget proposal. Reid’s office wrote that this is predominantly "used by businesses to invest in high-skill, high-quality research jobs that will create the next wave of innovation.”

The second exemption benefiting business, under discussion for permanent status, is known as the “AMT [Alternative Minimum Tax] in Lieu of Bonus Depreciation.” Reid’s office said this was a Democrat-proposed measure that “enables businesses still without net income that are struggling to recover" to benefit from investment incentives, helping them “to keep investing and keep growing while the economy recovers.”

Beyond these provisions, the measures under discussion for permanent extension included tax credits or deductions that Reid’s office said would have helped students, charitable giving, small businesses and low-income taxpayers. These are the measures that Reid’s office said the White House wanted to take off the table for now in order to win over Democratic support for tax reform next year, since Republicans are already largely on board with the idea of a deal.

The House Republican aide who was involved in the negotiations cast doubt on the explanation from Reid's office, arguing that the provisions in the extender package were not game changers that could win over wavering Democrats to a tax reform plan next year. Yet there is no question that many of the provisions that were going to be made permanent in the deal are attractive to Democrats: the American Opportunity Tax Credit, state and local sales tax deductions for lower-income people, mass-transit commuter subsidies, deductions for teachers' classroom expenses and a raft of charitable giving credits.

The Republican aide was unequivocal in stating that the White House — for whatever reason — never made any effort to engage in negotiations before issuing its veto threat.

“They never called us. The White House never contacted staff,” the Republican aide said. “We were all kind of stunned.”