The short time frame and political realities facing Congress’s deficit-reduction supercommittee limit its ability to revamp the tax code now, leaving the group looking for an overhaul that could be completed next year.
The 12-member supercommittee holds its first meeting today in an effort to find $1.5 trillion in cuts in areas including defense spending and Medicare. On taxes, the group is likely to consider setting targets for major changes to be considered over the next year, before Bush-era income tax cuts are set to expire at the end of 2012.
“That’s certainly possible,” said Representative Dave Camp, a Michigan Republican who chairs the House Ways and Means Committee and serves on the supercommittee. Such an approach “would have a date certain for tax reform that would be outside of the 100-day window” for the panel to agree on a plan, he said. Camp has been holding hearings on a tax overhaul and said he wants to keep major tax legislation out of the supercommittee’s proposal.
Congress created the committee last month in legislation raising the federal debt limit. The panel was instructed to recommend, by late November, a 10-year deficit-cutting plan that would get an up-or-down vote in the House and Senate in December. If the panel can’t agree or Congress doesn’t enact its proposals, across-the-board budget cuts will take effect in 2013.
A tax-code plan that only sets overall targets would push much of the substantive work into the 2012 election year. Still, the panel would have to set the overall amount of money raised and structure of a tax plan, matters that already divide the political parties.
‘Number of Options’
“There are a number of options available to us which would allow us to do a serious initiative on tax reform,” Senator John Kerry, a Massachusetts Democrat on the supercommittee, told reporters. “And I think it’s very difficult to see how you’re going to do the adequate job without some consideration of that.”
Other lawmakers have attempted this year to propose targets and deadlines to spur a tax code overhaul.
The bipartisan “Gang of Six” Senate members in July called for a plan that would have set tax-cut targets and instructed the Finance Committee to report a bill to fit the overall plan.
Those targets included a three-rate tax structure for individuals with a maximum top rate of 29 percent and retention of some tax breaks for health, charities, homeownership, retirement and low-income workers. The corporate rate would have been between 23 percent and 29 percent. Members of that group included Virginia Democrat Mark Warner and Idaho Republican Mike Crapo.
“We ought to force the reform to take place and set the parameters that require it to happen, but then let us have the time in the appropriate committees of jurisdiction to build it correctly,” Crapo said in an interview yesterday.
Similarly, as part of budget talks that collapsed in July, President Barack Obama and House Speaker John Boehner, an Ohio Republican, discussed targets for a tax overhaul. They couldn’t agree on a plan or what would happen if Congress didn’t meet the goals.
Obama and congressional Democrats have sought to let the Bush-era income-tax cuts expire for high-income earners after 2012 while keeping them for everyone else. Separating the tax cuts into the two income categories should be the enforcement mechanism for tax changes, said a Democratic aide who couldn’t speak publicly about internal deliberations. Republicans have resisted that approach.
Republicans aren’t likely to agree to a tax overhaul that would generate new revenue, unless the money can be seen as coming from economic growth, said a Republican aide on condition of anonymity. Official scoring rules prohibit Congress from considering a tax proposal’s economic growth effects in estimating how much money it would raise.
Bridging the gap on revenue targets will be the toughest problem, Crapo said.
“There’s not an easy answer to several pieces of this,” he said.
Another potential risk in setting targets for a tax overhaul is that reaching them might prove mathematically or politically impossible.
The Gang of Six and Obama’s 2010 fiscal commission led by Alan Simpson and Erskine Bowles used an overall approach that has never been scored by the congressional Joint Committee on Taxation. Their approach would lower tax rates, eliminate a number of deductions and raise about $1.1 trillion more revenue than would a plan that allowed the tax cuts for high-income taxpayers to expire.
John Buckley, former chief tax counsel to Ways and Means Democrats, said the interactions among various provisions could make it hard to get such a proposal to add up.
“I could be very wrong, but I don’t see where the revenue comes from, either in the Bowles-Simpson thing or the Gang of Six, unless they are willing to repeal the mortgage interest deduction today with no transition rules,” said Buckley, who now teaches at Georgetown University’s law school.
Even setting a target that assumes the elimination of tax deductions picks a political fight, because it would address popular provisions such as the tax breaks for home-mortgage interest and charitable contributions.
Senator Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, has warned colleagues for several months that the biggest tax breaks are not loopholes that somehow sneaked in.
“They are talking about your ability to purchase a home, or save for retirement, or give to your church, or put away money for your children’s education,” Hatch said in a Senate floor speech July 11. “That is what we are talking about. That is where the money is.”
Hatch’s adviser on tax policy, Mark Prater, has been appointed staff director of the supercommittee.
--With assistance from Steven Sloan in Washington. Editors: Jodi Schneider, Laurie Asseo.
To contact the reporters on this story: Richard Rubin in Washington at email@example.com; Heidi Przybyla in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Mark Silva at email@example.com
© Copyright 2014 Bloomberg News. All rights reserved.