Senate Democrats, who are desperate to stimulate the economy but don't have the money to pass traditional stimulus legislation, will turn to cutting business taxes when they return to Washington this fall.
In doing so, they will try to drive a wedge between business interests and the GOP leadership, who has tried to block almost every element of the Democratic agenda, by pushing a round of corporate tax breaks, say Senate Democratic aides.
The strategy has appeal on two grounds.
The legislation would stimulate the economy at a time when many economists argue the government must step in to revive demand despite it not being politically feasible to pass traditional infrastructure spending bills. It would also force Republican leaders to either endorse the Democratic agenda or block proposals that are popular among corporate leaders and domestic manufacturers.
But the plan is not without pitfalls. Democratic leaders could find centrists and liberals within their caucus divided over how to structure the tax cuts and whether they must be paired with infrastructure spending programs, as some liberals might demand.
Democrats have found themselves at odds with the business lobby for much of their reign in the majority, fighting over healthcare, cap-and-trade and other regulations. And they were disappointed businesses did little to help them in their standoff with House Republicans over raising the debt limit, even though business leaders saw the mere threat of a default as dangerous.
Their new plan could net them the support of groups like the U.S. Chamber of Commerce, which traditionally supports Republicans - both politically and financially.
Their first tax proposal is to make the corporate research and development tax credit permanent. The second is to pass an Advanced Energy Manufacturing Tax Credit. This would create a 30 percent tax credit for companies that manufacture new clean-energy technologies, which Democratic aides say would help create thousands of new jobs around the country.
A third idea is to extend the payroll tax cut Congress enacted in December and expand it to employers, reducing the cost of labor. And a fourth option is to give employers tax breaks for hiring new employees, an idea Democratic members of the Senate Finance Committee panned in 2009 but now seems more attractive.
"We'll be looking at things in the tax-cut variety. All will be proposals that have a history of bipartisan support or animate the business community in a way that Republicans will go along," said a Senate Democratic leadership aide.
The aide said other proposals might include tax incentives for people who make their homes more energy efficient. Some of these ideas will be included in a jobs agenda Senate Democrats plan to unveil upon their return in September. Legislation to make permanent the research and development (R&D) tax credit is expected from Senate Finance Committee Chairman Max Baucus (D-Mont.).
"Chairman Baucus is always working to find ways to boost the economy and help businesses create jobs, and he supports a permanent extension of the R&D credit as a part of that effort," said a committee aide. "He has, on a bipartisan basis, sought expansions and improvements to the credit to spur growth at home and boost American competitiveness abroad, and he remains committed to that end."
Senate Democratic leadership aides predict that Republicans would have difficulty opposing a jobs agenda that cuts corporate taxes.
A spokeswoman for Sen. Orrin Hatch (Utah), the senior Republican on the finance panel, said her boss would support making the research and development tax credit permanent.
"Senator Hatch has long championed the R&D tax credit - a credit that is so effective at encouraging investment and growth that the deficit commission endorsed it by keeping it in place last December," said Julia Lawless, a Republican spokeswoman on the Finance Committee. "He's working on legislation extending this critical job-creating tax incentive and is discussing how to move forward with it with his colleagues."
But the Democratic plan to advance legislation making the research and development tax credit permanent could become ensnared in internal caucus politics. The R&D tax break now stands at 14 percent, and businesses want to increase it to 20 percent, according to Monica McGuire, senior policy director at the National Association of Manufacturers (NAM).
But some Democrats want any increase in the tax credit to be contingent on a company basing a high proportion of its manufacturing within the United States.
"We have a proposal that would increase the R&D tax credit for companies that would do most of their manufacturing here," said Ryan McConaghy, director of the economic program at Third Way, a centrist Democratic think tank.
NAM rejects this idea.
"Those proposals penalize U.S. multinational companies," said McGuire, who also serves as executive secretary of the R&D Credit Coalition. "Only 6 percent of world's population lives in the U.S. I think it's pretty well understood that for U.S. companies to grow they need to expand their markets. There are a lot of reasons a U.S. company is going to manufacture abroad."
Sens. Debbie Stabenow (D-Mich.), Sherrod Brown (D-Ohio) and Jeff Bingaman (D-N.M.) are pushing the Advanced Energy Manufacturing Tax Credit. The credit was first enacted as part of the economic stimulus legislation Congress passed in 2009, which set aside $2.3 billion for companies that build new clean energy technologies. That amount was quickly exhausted as companies applied for $7 billion worth of tax breaks under the law.
A Senate Democratic aide said NAM supports the proposal and Democratic leaders had discussed including it in the September jobs agenda.
