This is a rush transcript from "Special Report With Bret Baier," September 14, 2010. This copy may not be in its final form and may be updated.


SENATE MAJORITY LEADER HARRY REID, D-NEV.: No matter what you thin k of President Bush tax breaks for millionaires and above, we can all see that the middle class could use some help. But as everyone knows, my Republican colleagues are promising to hold hostage the economic security of the middle class.

SENATE MINORITY LEADER MITCH MCCONNELL, R-KY.: We ough t not to be raising taxes in the middle of a recession. The Democrats like to call these tax cuts as if we're doing people a favor. This has been the tax rate for a decade.


BRET BAIER, ANCHOR: Well, the Senate majority leader and Senate minority leader talking about the extension of the Bush-era tax cuts. The Obama administration according to top Democrats we're told, are considering refunding the extension to calling the -- president -- President Obama's tax cuts for the middle class.

What about all of this, where it's heading and what it means politically? Let's bring in our panel: Steve Hayes, senior writer for The Weekly Standard, A.B. Stoddard, associate editor of The Hill, and syndicated columnist Charles Krauthammer.


STEVE HAYES, SENIOR WRITER, THE WEEKLY STANDARD: I think the White House can rebrand as much as they want. The fact of the matter is what will happen -- the de facto effect of what will happen -- is a tax cut on the very people who in a recession the most likely to be creating jobs --

BAIER: Tax increase.

HAYES: A tax increase. I'm sorry, a tax increase.

BAIER: If it's not extended to the top tier, you're saying it will be a tax increase on the people who are creating jobs.

HAYES: On the people who are most -- in the best position, a, to spend money, and, b, to create jobs. It doesn't make sense.

Republicans have been remarkably unified on this with the exception what John Boehner said over the weekend. But I think they sort of found their footing again and saying the same thing. At the same time 11 House Democrats at least who have said they want to extend all of these tax cuts. You've got three or four members of the Senate on the Democratic side who said that they want to extend this.

Those numbers are small. They're still growing. I think Republicans are good to not complicate the issue. You could say that the president said last summer don't raise taxes in recession. He said it was the last thing you'd want to do. And he gave a specific reason for saying that, he said it would suck demand out of the economy. Republicans are wise, I think, at this point, to continue to make that argument: Why was it smart to avoid raising taxes last summer and why does it make sense to do so now?

BAIER: A.B., the semantics of this are -- are interesting. Whether this has been, as the Senate minority leader said, the base tax rate for a decade after the Bush tax cuts were enacted, so people are used to this. If they go away it is an increase in the rate that we have been at for the past decade.

The Obama administration wants to call this the Obama tax cut for the middle class, but yet, even if they get it through Congress, no one will be getting cut further from what they are today in the middle class.

A.B. STODDARD, ASSOCIATE EDITOR, THE HILL: Well, status quo is that they sunset in 2010, on December 31 of this year, that's actually status quo and anything new is a new tax cut. I mean, technically.

It is a game of semantics. I disagree with Steve. I do think that they will all be extended. I do not think this will happen before November 2nd, and I think they will come back in the lame duck session and the pressure will be so enormous from the Republican victories if not a huge Republican majority, maybe a slight one or a close call with the Democrats barely holding on and I do believe that at that time they will buckle and extend it for at least a year or two to all the brackets.

In the meantime, Democrats are back from an extended recess tonight in a very tense meeting, all coming together after having lost August in a disastrous way politically, to discuss the fact that they have six national polls bolstering the argument -- their argument -- that independents are with them on this issue.

They're going -- the leadership will ask their members to go out and continue to campaign on President Obama's campaign let's drop the last two brackets, but I don't think it's voted on until November 2. It will be a fight this'll take rhetorically, but I can't imagine that they will take a vote before November 2 that can be called a tax hike.

BAIER: In fact, Charles, we're hearing from some sources up on the Hill that they've already started working on cutting back the time on this session by one week, instead of leaving October 8th, they'd leave October 1st or possibly sooner than that. There's a question whether they'll get it done in at that time.

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: Well, it's obvious that tactically speaking the Democrats have no intention, I think as A.B. has said, particularly the ones on the edge have to vote for an increase in taxes in a recession.

I mean, I think the tactical objective of the Republicans is to force a vote if there's going to be any vote, at least have one vote in each house which would extend all the cuts, because if you're a vulnerable Democrat in the swing district and you're in trouble now, it's going to be really hard to oppose that extension, a, because in general you don't want to raise taxes in a recession as Obama's own budget director said just a week ago, and secondly because you will be significantly increasing the taxes on one half of all small business income in the country.

The engine of hiring in the country, you'd be raising its taxes by about five points when you are in the middle of a recession and unemployment is at almost 10 percent.

I don't think there's a Democrat who wants to have to vote that way.

BAIER: Steve, this is what David Plouffe, adviser to the president said on another network last night, quote, "The Republicans who like to lecture us on fiscal discipline who created these deficits in the first place are more than comfortable giving $700 billion in tax cuts largely to millionaires and billionaires and they won't tell you who you to pay for it. Even worse, they say they shouldn't have to."

We've put this up before -- the joint committee on taxation estimates and how much all of this package really costs. If you want to say costs -- $3 trillion for the middle class portion, under $250,000, and $700 billion for top earners.

HAYES: Look, I think that the stimulus is revealing on a broader philosophical level in that it tells you exactly whose money David Plouffe thinks this is. It's not the government's money. And that's the fundamental difference here. Republicans aren't making a good enough argument.

This isn't the government's money. This is the people's money. Make the argument that they should keep their money, that they should be able to spend it the way they want to spend it, not the way that someone in Washington has determined, whether it's with accelerated depreciation or what have you. This is their money. I think it's a very effective argument the Republicans aren't making strong enough and often enough.

BAIER: A.B., do people get it? You say Democrats are energized by this talking point. But is the electorate engaged in the issue?

STODDARD: You know what, I really don't think it will be material in the face of enthusiasm gap and who is going to turn out in this midterm election: Older voters, whiter voters, angry voters, Republicans in the primaries in numbers we haven't seen in decades. I mean, I don't think this is going to stop.

You know what we're going to see here, I'm just saying that the leadership is going to use this data to try to urge their members just to hang tough on this.

As Charles said, and as Steve said, there's just too many Democrats splintering off. It can't go to a vote in the Senate. It's can't get out of the Senate and it won't go back to the House. We are not going to see a vote on this before November 2 because the Democrats are divided.


HAYES: Everybody should be asked about it anyway. That's the political relevance.

STODDARD: And the leadership just wants them to stay unified on the message.

KRAUTHAMMER: In the end it's a desperate attempt by the Democrats in a terrible economy where they have no arguments about how they have improved it of creating an issue class war. I think it's going to be a wash. Some people will respond on the class war issue, but others are going to stay it's insane to go around raising taxes in a recession.

BAIER: Next up, how the health care law and the lawsuit against it is playing in the 2010 political campaigns. You can follow all of tonight's primary results, by the way, in the Show Notes section of our home page, foxnews.com/specialreport.


TROY KING (R) ALABAMA ATTORNEY GENERAL: I believe that the states will get their day in court. For many of us who watched Obamacare unfold in the United States Congress, we felt like our voices weren't heard. This court is the place we can come and we can have not just our voices heard, but the voices of the Founding Fathers, the men who set up this system of government that has been trampled as Obamacare has been passed.


BAIER: Two hours in court today in Florida as three attorneys general argued that the Obama health care law is unconstitutional. In the response, the Department of Justice and the deputy assistant attorney general arguing before the judge there, saying that he thinks that this whole case should be thrown out: "Ruling otherwise would throw out decades of case law and scores of decisions dealing with the interplay of state and federal government. It would be a revolutionary decision" -- in part, the Department of Justice argues, that the mandate in place, that's being challenged now by some 20 states, deals with the ability of the federal government to tax. That's one of the argument that the Department of Justice is making.

Here's what the president said in September of last year about that.


PRESIDENT BARACK OBAMA: For us to say that you've got to take a responsibility to get health insurance is absolutely not a tax increase. What it's saying is that we're not going to have other people carrying your burdens for you.

GEORGE STEPHANOPOULOS, ABC NEWS: Your critics say it is a tax increase.

OBAMA: My critics say everything is a tax increase. My critics say I'm taking over every sector of the economy. You know that. Look, we can have a legitimate debate about whether or not we will have an individual mandate or not.

STEPHANOPOULOS: So you reject that?

OBAMA: I absolutely reject that notion.


BAIER: The attorneys for the Department of Justice do not and they're making that argument in court. We're back with the panel.


KRAUTHAMMER: So he rejected the idea last year and now he accepts it. Well, you've heard of situational ethics. This is situational reality. The fact is Obama early is correct. Of course, it's not a tax, it's a sanction. It's a fine.

Look, here is why this is such an important argument. Really what's at stake in this case is: Are we a nation of enumerated powers, limited government, or not? Enumerated powers means it's not that the government has control of every area and gives you a small sphere of individual liberty. You have unlimited liberty and the government has small areas of control.

Now, that's been eroded under the commerce clause. The government has extended its reach on the idea that anything and everything is related to interstate commerce.

However, the health care idea, the health care, Obamacare, is a reach that is really extremely extreme in this area. It says that it can force a citizen in an arrangement with an insurance company, a private citizen, under the penalty of a sanction.

If you allow that power, if the federal government can actually wield that kind of regulation over you, then there is no limit in any way on the power of the federal government and it's a kind of abolition of enumerated powers.

That's why it's very important case and that's why whether it's a tax or not is what it hinges on.

BAIER: And it will likely end up in the U.S. Supreme Court soon.

On the issue of health care and how it's polling heading into the midterms, here is the latest poll from Rasmussen. Should the health care be repealed -- 53 percent favor the repeal of the health care law. What about this as a political issue, A.B.?

STODDARD: It's very difficult. There was also one just a few weeks back from the Kaiser Family Foundation also showing that repeal continues to gain steam with the public and the law continues to fall out of favor. It is a very difficult issue. Democrats are running away from it on trail. If they voted for it, they seek to avoid any mention of it.

BAIER: And there isn't one, really, is there, who is mentioning health care?

STODDARD: There might be someone very safe in an urban district somewhere who is not in a tough election. Anyone in a competitive seat dare not mention health care reform.

If they are a Democrat, conservative or moderate Democrat who voted against it they tout that right away in their campaign literature and television commercials. If they are one of the seven who switched the vote from no on November '09 to 10 -- to yes, excuse me, in March '10 they're in very deep trouble.

And I think this lawsuit really shows you not only as repeal gains favor, there's also a small business provision and onerous paperwork requirement that right now a provision in the Senate failed today but is gaining bipartisan favor. This portion of the health care law, will be repealed in this Congress or next.

And I think it just shows you, this is going to bleed into President Obama's reelection campaign. It's going, with lawsuits and partial repeals, it's going to be an issue again and again, into 2011 and then into 2012.

BAIER: Steve?

HAYES: Well, I called around several strategists today asking that very question -- is there anyone -- a Democrat in a competitive congressional seat -- campaigning on the fact they voted for this? And nobody could give me a name. The closest I came was Blanche Lincoln in Arkansas who is running an ad that basically said, she's saying now, "I stopped -- a government-run health care program wasn't right for Arkansas and I worked stopped it."

BAIER: Getting rid of the public option.

HAYES: Right. But in the primary she ran ads, when she challenged from the left, ran ads, she was touting the fact she'd stood firm and taken a tough vote in favor of health care reform.

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