How immigration killed the tax deal

How could a major tax deal brokered by the top Senate Democrat die so quickly at the hands of a Democratic president?

Immigration politics and Democratic infighting came together to doom the $400 billion deal even before it had made it into print. The brinkmanship threatens to disrupt the lives of millions of taxpayers who rely on the mishmash of expired provisions the plan was trying to revive.

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The collapse highlights the fragile coalitions in Congress, where even leaders of opposition parties agreeing to a deal can’t bring it home. It also shows the new-found boldness of President Barack Obama as he tilts back toward the liberal base in the aftermath of the midterm elections.

Interviews with the key players showed that the two tax-writing panels in the Senate and House had for weeks been making solid progress toward a final tax package that looked like it would include the breaks for low- and middle-income people sought by the president.

(Also on POLITICO: Executive reaction)

But the deal fell apart just as it seemed to be coming together.

The immigration executive order soured the GOP on the tax cuts for the working poor and middle class sought by Democrats. Republicans worried undocumented immigrants targeted by the order would begin claiming the credits in droves. They found a friend in Senate Majority Leader Harry Reid, who reluctantly agreed to drop his party’s demands to extend expiring parts of the earned income tax credit and its companion, the child tax credit.

The decision infuriated Reid’s colleagues.

“Everyone felt that Reid had suddenly given the store to Republicans and not gotten much in return,” said a Democratic House aide.

(Also on POLITICO: House GOP could respond on immigration next week)

The president, with liberal Democratic backing on the Hill, issued the veto threat and the plan imploded, making the tax deal the first major collateral damage of the White House’s immigration action.

The internecine fight comes at the lowest point of Obama’s relationship with Reid and the Senate’s soon-to-be disempowered Democratic leadership. White House officials — from Obama on down — have been feuding with Reid’s brash chief of staff, David Krone, and The New York Times has reported that Obama took the extraordinary step of asking Reid to exclude Krone from White House meetings.

Until late last week, Senate Finance, House Ways and Means, and leadership met regularly and were making progress on the package of tax breaks known as tax extenders. The group of some 55-plus tax breaks has expired, and many lawmakers in both parties want to renew by the end of the year, amid warnings from the IRS that failing to act would disrupt the upcoming tax filing season. They include everything from a major business research credit to one to reimburse teachers who buy school supplies.

Both sides wanted to go big and include more, throwing concerns about the budget deficit aside. Senate Finance Chairman Ron Wyden (D-Ore.) and the Democrats were entertaining the idea of more permanent business tax relief that Republican wanted, and Republicans had even offered to make the expansion of the EITC permanent, according to a senior Senate Democratic aide.

(Also on POLITICO: Schumer joins criticism chorus)

Senate Democrats had made the EITC, a wage supplement for the working poor, and the $1,000 child tax credit key priorities weeks ago. In October, Wyden huddled with Finance members to find out what concessions he should wrestle from Republicans as part of the talks. They agreed on the provisions.

But then the president announced his executive action on immigration late last week, and it all started to unravel.

Republicans took the Democrats’ tax credits off the table completely.

For years, the GOP has railed against undocumented immigrants who claim the child tax credit, and Obama’s immigration order raised the prospect they would begin claiming the EITC, as well. If Republicans agreed to extend them now, it would look like they were voting to expand government benefits to illegal immigrants.

What’s more, the EITC is notorious among Republicans for fraud. It has one of the highest rates of improper payments of any federal program. How would they sell that to rank-and-file Republicans in the House?

Some Democrats worried that the only way Republicans would ever agree to extending the provisions is if they included tough new rules aimed at preventing illegal immigrants from claiming them. So they dropped the idea, figuring that was better than either risking a crackdown on immigrants trying to claim the breaks or not getting a deal at all.

“It’s a political reality for Republicans,” said a source familiar with the negotiations between Reid and House Ways and Means Chairman Dave Camp (R-Mich.). “Our two biggest priorities, EITC and CTC, got taken off the table with the immigration announcement.” The source added: “If the immigration announcement had been delayed, we probably could have gotten something done.”

Democratic leadership instead emphasized other concessions they had wrung from Republicans. They got a permanent extension of the American Opportunity Tax Credit, which helps millions of middle-class voters with the cost of college. They got a permanent extension of the state and local sales tax deduction, important to many blue states. They got an extension of a break for using public transit. And they got Republicans to agree to Senate Democrats’ plans to roll over the rest of the extender provisions for another two years.

But much of the rest of their caucus wasn’t buying it.

By last Friday, Democrats on the Hill not party to the new talks caught wind of the secret negotiations between Reid and Camp from outside sources. The rank-and-file Democrats were confused: This “came out of no where,” as one Senate Democratic aide said.

By the time The New York Times on Monday reported that the tax credits might be left out, the reality had set in that the rank and file had been undercut.

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