U.S. tax cut votes prelude to bigger "fiscal cliff" fight
* Democrats see winning issue this year
* Votes will test party unity, especially for Democrats
* Fiscal cliff looms after elections
By Kim Dixon and Donna Smith
WASHINGTON, July 23 (Reuters) - The U.S. Congress is set to begin debating this week whether to extend hundreds of billions of dollars in expiring tax cuts in what amounts to a round of shadow boxing in advance of the real battle after the November elections.
Both the Democratic-led Senate and Republican-led House of Representatives will take up the expiring tax rates in coming days, but the outcomes will be very different and will settle nothing.
Still the votes may provide some hints on the prospects for party cohesion - especially for Democrats - on the tax issue after the election.
"For Senate Democrats, the primary goal is to avoid the optics of late 2010 when they couldn't really come together," said Helen Fessenden, an investor adviser at Eurasia Group. "They want to avoid the public message of division."
U.S. lawmakers from both parties fear the blame for pushing the country over the so-called fiscal cliff of expiring lower tax rates on Dec. 31, and automatic spending cuts set to kick in days later unless Congress steps in. The Congressional Budget Office says failure to act could spur a recession in 2013.
The tax cuts, passed under Republican President George W. Bush, e xpire at the end of the year unless Congress and President Barack Obama agree to extend them in one form or another, as they did after a bitter struggle in December 2010.
Republicans want to extend the tax cuts for at least another year with an eye toward a broader reform in 2012. They are playing to small-government Tea Party advocates and voter worries about the economy and sluggish job growth.
Democrats want to extend the lower rates for the first $250,000 of an individual's income and allow rates to rise for income earned above that threshold.
They are making a play for what polls show are a majority of Americans who believe the rich should pay more to reduce deficits.
The risk is highest for Democrats, who split among themselves in the 2010 vote extending the cuts for all taxpayers. The Democrats also have more Senate seats at risk in the Nov. 6 election as they are defending 23 seats in the 100-mbmer Senate, compared with 10 being defended by Republicans.
In the nearly identical scenario at the end of 2010, with the same set of tax cuts up for renewal, several moderate-to-conservative Democrats balked at raising taxes as the economy emerged from the 2008 financial crisis.
Obama ended up doing an about-face and signed a two-year extension of all the tax cuts.
Democrats say it is different this time.
"We've made a diligent effort to separate the middle class from the highest-income people," said Senator Charles Schumer, a member of the Senate Democratic leadership.
Representative Kevin McCarthy, the third-ranking Republican in the House, said Republicans planned sessions with small businesses during the August congressional recess, as they highlight their opposition to any tax increases at a time of tepid economic growth.
Obama, in a speech to veterans on Monday, addressed the other piece of the fiscal cliff puzzle: the roughly $100 billion in automatic spending cuts that will kick in if Congress fails to act by Jan. 2.
He said lawmakers ought to agree on a balanced plan to avoid the widely feared cuts to defense and other areas.
Democratic Congressional Campaign Committee Chairman Steve Israel attempted to beef up Democrats' unity in an internal memo on Monday.
"Polling shows that voters - including independents - support letting the Bush tax cuts expire for the wealthiest Americans and want to see tax cuts extended for the middle class," the memo reads.
Senate Majority Leader Harry Reid has expressed confidence he will have a majority to pass the Democratic proposal. But a majority is not sufficient where 60 votes are required to advance legislation. Reid is expected to fall short.
Democratic Senator Claire McCaskill, facing a potentially tough re-election fight for her seat in Missouri, said she backed extending tax cuts for the middle class, but added she was open to a $1 million threshold, rather than $250,000.
A Republican aide said McCaskill and conservative Democratic Senator Joe Manchin, up for re-election in West Virginia, could join them in blocking the Democratic plan. Manchin has not decided how he will vote, an aide said.
House Republicans expect few if any defectors from their majority w hen they bring a bill up next week to extend all the tax cuts. A handful of moderate Democrats in tough re-election fights will likely vote with Republicans.
One analyst said the election was also affecting Republicans.
"The Democrats are less cohesive than the Republicans on this issue, but there are probably Republicans who are willing to compromise as well," said Joanne Thornton, an investor analyst at Washington Research Group. "But that is not going to happen until after the election."
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