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Possible Extension to Tax Cuts Explored

After years of debate about whether to extend the tax cuts launched by President Bush, the Obama administration now wants to extend a tax cut of its own.

Among the major tax provisions in the administration's fiscal 2011 budget is a one-year extension of the "Making Work Pay" tax credit, which was a critical part of President Obama's campaign platform and the 2009 stimulus law.

The payroll tax credit is set to lapse at the end of 2010; extending it for a year would cost $61.2 billion.

Obama has touted the tax cut's breadth, emphasizing at last week's State of the Union that it helped 95 percent of working families. Many may not have noticed, however: The $400 per worker, up to certain income caps, is being delivered through reduced paycheck withholding, not as a lump sum, in an attempt to encourage people to spend it instead of saving it.

Obama also is proposing to make permanent almost all of the tax cuts passed in 2001 and 2003 by Bush, except for those that benefit individuals who make more than $200,000 and married couples who make more than $250,000.

All of those tax cuts expire at the end of the year, and the debate over their fate is likely to consume a significant part of this year's congressional agenda. Republicans and some Democrats are arguing that all of the tax cuts should get extended, in part because of the fragility of the economic recovery.

Obama is again proposing to cap the value of itemized deductions claimed by taxpayers in the top tax brackets to the value those deductions would have for taxpayers in the 28 percent bracket.

He had suggested that idea to pay for health care legislation in 2009, but nonprofit groups, which feared a fall off in tax-deductible contributions, and lawmakers pushed back against it.

Obama's budget proposes reinstating the estate tax at its 2009 levels of a $3.5 million per-person exemption and 45 percent top rate. He is also proposing to prevent the expansion of the alternative minimum tax, which would hit tens of millions of families starting with their 2010 tax returns unless Congress acts.


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