* Obama administration insisted on tax breaks, McConnell aide says
* White House says Obama backed wind energy, R&D tax breaks
* Republicans also supported business tax breaks - White House
* Business lobbyists pushed for more than $60 billion in breaks
* $12.1 bln in wind energy tax credits a big part of 'extender' package
As the U.S. Congress rushed last week to approve a "fiscal cliff" tax bill that raised income taxes on the wealthy, Washington lobbyists were fretting over a drama that was playing out within the negotiations: whether the bill would include about $64 billion in tax breaks for businesses.
The bill extended several tax breaks backed by both parties, including $14.3 billion in credits for research and development projects for thousands of U.S. businesses. But it also had other provisions - breaks for companies involved in wind energy, auto racing, rum, Hollywood films and much more.
In the end, the bill approved by Congress and signed into law by President Barack Obama included all of those things, thanks partly to the White House's interest in promoting wind and other alternative sources of energy, and in subsidizing research and development costs for companies.
It also became a lesson in how Washington's taste for dishing out favors to special interests is alive and well, despite bipartisan calls for the government to reduce the tax credits it gives businesses and individuals at a time when the nation's debt tops $16 trillion and is growing.
Some business lobbyists told Reuters they were surprised that the package of tax credits - which had been approved by the Democrat-led Senate Finance Committee in August - survived the negotiations over the tax bill. The main part of the bill extended Bush-era income tax cuts for individuals with incomes of less than $400,000 and couples who make less than $450,000.
The longer the negotiations dragged on, lobbyists for various causes had figured, the more likely the bill would focus solely on the core issues of the talks: raising income taxes on the wealthy, allowing a payroll tax cut for all Americans to expire, and extending unemployment insurance benefits.
The lobbyists' expectations also were lowered by the emergence of Senate Minority Leader Mitch McConnell, a Kentucky Republican, as a key negotiator in the talks.
McConnell has spoken on the Senate floor about the need to rethink Congress' approach to various tax breaks, saying that many had been "reflexively extended" for years "without any meaningful review or oversight."
His words were echoed in September by 47 House Republicans who had urged Republican Speaker John Boehner to eliminate the wind energy tax credit, which had split the Republican Party and drawn criticism from Mitt Romney, the Republican nominee for president.
But in the final hours of the negotiations over the fiscal cliff bill, lobbyists pushing the additional tax breaks appear to have had a key ally: President Obama, who during his re-election campaign had touted the need to increase the nation's investment in alternative energy sources such as wind.
Tax credits for the energy industry make up a big chunk of the "add-ons" that were attached to the fiscal cliff bill - about $18.1 billion worth, of which $12.1 billion represents a dramatic expansion of write-offs for wind energy investments.
McConnell's spokesman, Don Stewart, said the White House insisted that it would a "deal breaker" if the entire package of tax credits was not in the bill. Stewart also said the White House initially wanted to make all of the tax breaks permanent, rather than extend them only through the end of this year.
"The White House ... can't deny that the only reason the (business tax breaks were) included in the final agreement is because the president insisted" they be in there, Stewart said.
White House spokesman Jay Carney on Monday said that Obama supported the overall package of tax breaks for businesses. He emphasized that the president favored the wind energy credit and tax benefits for research and development to encourage "job-creating research investments."
Carney also said that many of the tax breaks in the fiscal cliff bill had bipartisan support.
"It would strain the credulity of everyone in this room to suggest that Republicans did not support or want tax credits for business," Carney said during his daily briefing to reporters.
Some Democratic strategists said that given the rush to get a fiscal cliff bill through Congress before U.S. financial markets opened for the new year last Wednesday, it likely seemed unrealistic to pick apart the package of tax credits - known as "extenders" - that had passed the Senate Finance Committee on a bipartisan, 19-5 vote.
So the package - with its $222 million credit for the rum industry, a $78 million write-off for the owners of NASCAR auto racing tracks and tax credits for the film industry that could total $248 million, among other things - survived intact, like a holiday bonus to Washington's lobbyists.
"I reacted, like, 'Wow,' " said Rich Gold of Holland & Knight, who lobbied for tax breaks for wind energy and railroad maintenance.
He represented the Juno Beach, Florida-based company NextEra Energy as well as the Greenwich, Connecticut-based Genesee & Wyoming, a freight rail company.
"The (fiscal cliff) package had gotten so skinny," Gold said, "that I just didn't expect it to happen at the end of the day."
THE WAY WASHINGTON WORKS
Outrage over the tax breaks flowed from small-government advocates and conservative voices such as the Wall Street Journal's editorial page, which called the tax credits a "crony capitalist blowout."
Such business tax breaks are called extenders because lawmakers usually extend them all at once, adding them to other tax bills as they move through Congress. Government budget analysts project their total costs over 10 years, even though many of the breaks are extended for only one or two years at a time.
During a session in which a bitterly divided Congress had trouble passing any legislation, let alone a controversial tax bill, the fiscal cliff package was the only vehicle for such tax breaks in the final hours of the session that ended Wednesday. A new Congress, including House and Senate members just elected in November, began meeting Thursday.
Critics and supporters alike said that tucking expensive tax incentives into last-minute bills is how Washington has worked for years.
"They always do this," said Tom Schatz, president of Citizens Against Government Waste. The difference this time was that more people were watching the high-stakes talks over the fiscal cliff bill, he said.
"Many people are being made aware of these tax breaks," Schatz said.
Republican strategist John Feehery, who favors the wind energy tax credit, said the fiscal cliff deal was never expected to reform the U.S. tax code, as some in Washington had hoped.
"This was not going to be a tax reform package. This was going to be an agreement or disagreement over whether we keep the current tax policies in place. And these extenders are, by and large, keeping current policy in place," said Feehery, who leads a group called the Red State Renewable Alliance, which touts the benefits of the wind industry in conservative states.
Like Feehery and White House spokesman Carney, supporters of tax credits for wind energy and other industries argue that such incentives often boost the economy and create jobs.
Critics argue that the breaks are "corporate welfare," handed out to whoever can hire the best lobbyists or contribute the most to lawmakers' campaigns.
During the past two years, the American Wind Energy Association spent $4.5 million lobbying and gave more than $335,000 in campaign contributions to federal candidates, most of them members of Congress, according to the Senate's lobbying database and the watchdog group Center for Responsive Politics.
Fiscal conservatives aren't the only ones lobbying against such tax breaks.
Those opposing the wind energy credits include some in the nuclear power industry, which itself has received more than $100 billion in federal subsidies since the 1940s, according to the watchdog group Taxpayers for Common Sense.
Chicago-based Exelon Corp, the largest nuclear power operator in the United States, spent $6.4 million on lobbying during the first 10 months of 2012, according to the Center for Responsive Politics.
Exelon also is investing in wind energy but was a vocal voice against the tax credit approved by Congress, saying in a statement that "wind energy can and should stand on its own in competing with other clean energy alternatives."
Republican Senator Chuck Grassley of Iowa, a member of the Senate Finance Committee who first proposed the wind energy tax credit back in 1992, said that such provisions are not a giveaway by the U.S. Treasury because they encourage investments that might not otherwise be made.
"Using the tax code to stimulate investment is altogether different than appropriating money," he said.
Even so, Grassley's vote on the fiscal cliff bill reflected how some lawmakers were torn over the legislation to prevent income tax increases on most Americans.
Last summer, Grassley joined five other Republicans and 13 Democrats on the Senate Finance Committee in voting for the package of tax credits that wound up being included in the fiscal cliff bill.
But when the Senate voted 89-8 last week to approve the bill, Grassley was among the eight senators opposing it even though it included the wind energy credits he calls crucial to a developing industry in his state.
"The big picture is what ruled as far as I was concerned," Grassley told Reuters in an interview. "The bill does nothing on the expenditure side. ... It didn't cut down on the deficit."
By contrast, Arizona Republican Senator John McCain, a longtime critic of special-project spending known as "earmarks," said he reluctantly voted for the "flawed" agreement because he didn't want to see income taxes go up on all Americans.
Without action by Congress, the Bush-era tax cuts that save middle-class families about $2,000 a year would have expired at the end of 2012.
McCain's distaste for the tax credits in the bill was clear.
"It's hard to think of anything that could feed the cynicism of the American people more than larding up must-pass emergency legislation with giveaways to special interest and campaign contributors," he said in a statement.
After the Senate approved the fiscal cliff deal early on New Year's Day, it moved to the House, where some Republicans complained about the "bloated" package during a closed-door party meeting. But the objectors decided they did not have the votes to amend the bill, House Republican aides said.
The deal passed the House on a vote of 257-167, with opponents of the wind energy credit making up a good chunk of the Republicans' "no" votes. Some are vowing to return to the issue in the new congressional session.
"With taxpayers on the hook for unsustainable corporate welfare, there's no question we're going to come back to it in the new Congress," Representative Mike Pompeo, a Kansas Republican, said in an e-mail.