Lame-duck Congress faces key financial issues

Never has Congress been expected to do so much in so little time.

When lawmakers return to work for a lame-duck session Nov. 15, they will face up to 20 important bills that were shelved until after the election. If you subtract time off for Thanksgiving and Christmas, Congress could have fewer than 30 days to act before the new team comes in. Next year, Republicans will seize control of the House and Democrats will hold a slimmer majority in the Senate, which could make it hard to get anything done.

The issues that need urgent attention are federal unemployment benefits, which expire at the end of November, and the Bush-era tax cuts, which sunset Dec. 31 and affect virtually every American.

If Congress does nothing, about 2 million people will lose federal extended unemployment benefits in December, according to the National Employment Law Project. Federal benefits kick in after state benefits run out. Together, they provide up to 99 weeks of benefits in high-unemployment states.

With concerns about the deficit mounting, Congress let extended benefits lapse June 2. Democrats could not overcome Republican insistence that they be paid for. It wasn't until July 22 that proponents gained enough votes to restore them retroactively to June 2 and through Nov. 30.

Getting them extended could be even tougher. "One of the major themes of (the midterm election) is this new austerity, and this new austerity is very harsh," says Greg Valliere, chief political strategist at Potomac Research Group. "Support is dwindling rapidly for any new spending, including an extension of unemployment benefits."

Wall Street economist Ed Yardeni agrees that unemployment benefits "will run into resistance," but says they might get through because Democrats will still have a majority in the House through the end of the session.

Leon LaBrecque, founder of wealth management firm LJPR LLC, says Democrats might be willing to extend the Bush tax cuts for everyone if Republicans agree to an extension of unemployment benefits.

If the Bush tax cuts expire, starting next year tax rates on income, dividends and capital gains will go up; the marriage penalty will return; the child credit will drop to $500 from $1,000 per dependent; higher-income people will lose some of their deductions and exemptions; and estates worth more than $1 million will be taxed at rates up to 60 percent. A host of other tax breaks will also disappear.

Big tax savings

The Tax Foundation estimates that the Bush tax cuts have saved the median family of four $2,200 a year.

President Obama and most Democrats want to extend them, at least temporarily, for everyone except those making more than $200,000 (single) or $250,000 (married). Republicans, in general, would like to extend them for all.

Given the fragile economy, it seems inconceivable that Congress would let all of the Bush tax cuts expire, but this time last year people said Congress would never let the estate tax die in 2010 - and to everyone's astonishment, it did.

Congress will also have to decide whether to extend several tax breaks voted in during the Obama administration, such as the Making Work Pay credit, which expire at the end of this year.

It will have to tackle a separate package of expiring tax provisions that affect 2010 taxes, such as a temporary patch that will prevent about 20 million additional Americans from paying the alternative minimum tax.

Uncertainty over what Congress will do is making it nearly impossible for individuals and businesses to do year-end tax planning. Investors are debating whether to sell investments in which they have a profit before year end to lock in a top rate of 15 percent on long-term capital gains. This rate goes to 20 percent next year if Congress does nothing. The rate for lower-income people will go to 10 percent from zero.