Murray, Rossi clash on tax-cut renewal

Among the thorniest debates facing Congress when it returns to work next month is whether to extend the Bush-era tax cuts.

It's a dispute that's echoed in Washington state's competitive U.S. Senate race between Democratic incumbent Sen. Patty Murray and Republican challenger Dino Rossi.

Both candidates largely follow their party's lead on the issue: Rossi wants all the tax cuts to remain in place for everyone. Murray says wealthy Americans can afford to pay higher taxes on their incomes and investments to help shrink the federal budget deficit.

If Congress does nothing, the 2001 and 2003 tax cuts will expire at the end of the year, returning rates to their higher 1990s levels. That's a scenario that Rossi has played up on the campaign trail.

He's pushed Murray to support permanent extension of all the tax cuts "to stop the largest tax increase in U.S. history," saying working families "can't afford to send more of their hard-earned money to Washington, D.C., to prop up the federal government's overspending."

The reality may not be so dramatic. For most Americans, federal income taxes wouldn't change under what Democrats propose.

Murray said she favors President Obama's plan to permanently extend lower tax rates for all but the wealthiest 2 to 3 percent of taxpayers — couples making more than $250,000 ($200,000 for individuals). The president has also proposed keeping in place higher tax deductions for dependent children, child-care tax credits and other tax savings largely aimed at the middle class.

The top income-tax rate would return to 39.6 percent under the president's plan, up from the current 35 percent.

In Washington state, the higher income-tax rates would apply to about 74,000 families, the top 2.9 percent of households, according to Census Bureau estimates.

While tax increases are never popular, the federal government's total taxes-and-other-revenue haul as a share of the U.S. economy is now at its lowest point since 1950, according to the nonpartisan Tax Policy Center.

Murray voted against the 2001 and 2003 tax cuts, calling them irresponsible gifts to the wealthiest Americans. Given the current federal budget deficits, Murray said it makes even less sense to retain lower taxes for the highest-income earners.

"That's the trickle-down theory of the past. As we know, it hasn't worked out very well," Murray said, pointing to the budget surplus of the Clinton years turning into huge budget deficits.

Murray said she is "fearful of spending a lot of money that we don't have" by extending all the Bush-era tax cuts.

Allowing the entire package of tax cuts to expire would bring an additional $3.7 trillion to the federal government over the decade, according to the Tax Policy Center.

Raising taxes on just the wealthy would bring in an additional $700 billion over that period, according to Obama administration estimates.

This year's federal budget deficit is estimated at more than $1.3 trillion. The total federal debt is $13 trillion.

Rossi argues that higher taxes — even on the wealthy — could kill jobs and slow the economy's recovery.

"Job creators need predictability so they can plan growth and expansion," he said in a statement. "As I've traveled around the state, I've heard from a number of small-business owners who have told me that the uncertainty regarding what Congress will do to extend tax relief means they are holding off on hiring workers or expanding, even though they have the means to do so."

Rossi has particularly highlighted his opposition to the federal estate tax with visits to area businesses, including Seattle's GM Nameplate.

The federal estate tax temporarily expired this year. If Congress does nothing, it will return next year at a 55 percent rate for estates worth more than $1 million. Obama has proposed returning the tax to 2009 levels, with a 45 percent tax on estates worth more than $3.5 million for individuals and $7 million for couples.

Don Root, president and CEO of GM Nameplate, led Rossi and reporters on a tour of his Interbay factory this month. The company, which Root bought in 1977, makes industrial labels and signs for companies like Boeing and John Deere.

Root said he's not so worried about proposals to increase his income tax. But he worries his four sons will have to sell all or part of the company when he dies to pay the federal estate tax. His company may be worth $40 million or more, but Root said most of that is tied up in equipment and facilities in the U.S. and overseas.

"Anybody who thinks they could figure out how we could pay an estate tax of 35, 40 or 55 percent, I will open up the books for them," said Root, who supported Rossi during his two runs for governor.

Murray said she supports efforts to lower the estate tax — including a compromise proposal by Sens. Blanche Lincoln, D-Arkansas, and Jon Kyl, R-Ariz, which would fix the tax at 35 percent with a $5 million exemption that would grow with inflation. But she said it would be irresponsible right now to completely eliminate it.

"I don't want it to go to one extreme or the other," she said.

Like Rossi, Murray has been organizing media events at local businesses this summer — but not to talk about taxes.

Instead, Murray has played up a $30 billion small-business lending fund she says is more crucial to job growth.

The proposal, which has been blocked by Senate Republicans, would lend money to small businesses through community banks. Many of those businesses say they'd be able to hire more workers or expand, but have been denied credit by banks.

Joe Fugere, owner of Tutta Bella Neapolitan Pizzeria, said business owners he knows are more worried about access to credit than marginal increases in their tax rates.

Even after the federal government spent billions of dollars to rescue big banks, Fugere said he struggled mightily to find one willing to finance his new restaurant in Issaquah. "If we're talking about economic recovery, it's not about taxes as much as getting capital to small businesses," he said.

If Rossi's "extend them all" position on the Bush tax cuts is clear, he's been foggier on another fundamental tax question: support for a national flat tax.

Earlier this year, Rossi signed onto the "Contract From America," a 10-point platform backed by tea-party activists. That document calls for a flat tax — a single tax rate for everyone — to replace the current graduated income-tax system, which taxes higher incomes at higher rates.

But during an August conference call with reporters, Rossi backed away from that idea, refusing to say what flat tax rate — if any — he'd back.

"What I talked about is having a tax code that is more fair to people," he said. "I didn't sign on to any specific flat tax."

For its part, Rossi's campaign accused Democrats of being hazy on the specifics and timing of a vote on the Bush tax cuts.

Jennifer Morris, Rossi's spokeswoman, said Americans won't know with certainty how their taxes will look next year until Congress actually takes up legislation. "There is nothing to look at right now," she said.

The Senate comes back into session in September. But there is no guarantee a final vote will occur before the Nov. 2 election.

Seattle Times news researcher Gene Balk contributed to this report.

Jim Brunner: 206-515-5628 or jbrunner@seattletimes.com