Both parties in Congress agree the U.S. tax code is a mess and needs to be revamped. That doesn’t mean it will happen.
The Republican takeover of the Senate in Tuesday’s election alters the political dynamics in tax policy, with Senator Orrin Hatch of Utah poised to become chairman of the Finance Committee starting in January.
What hasn’t changed is the disagreement between Democrats and Republicans on fundamental questions such as whether a new tax code should raise more money for the federal government. The parties also must resolve which tax breaks should survive.
It’s difficult to see a tax revamp becoming law before 2017, said Marc Gerson, a tax lawyer at Miller & Chevalier in Washington, with a presidential election in 2016 and the absence of the issue from President Barack Obama’s top priorities.
“We’ll see another two years of healthy debate and discussion and hearings and maybe drafts and work on tax reform,” said Gerson, a former Republican aide to the House Ways and Means Committee.
Two years ago, Ways and Means Chairman Dave Camp, a Republican, and Senate Finance Chairman Max Baucus, a Democrat, made a push for a tax-code revamp, partnering for a “Max and Dave” tour across the country and putting out draft plans.
That effort fizzled.
Baucus of Montana left Congress earlier this year to become ambassador to China. Camp of Michigan, approaching Republicans’ six-year limit for House committee chairmen, decided not to seek re-election.
The divides they hoped to bridge remain, even without delving into the finer points of home-mortgage interest deductions and depreciation schedules.
Democrats want to use a new tax code to raise more revenue, and are reluctant to reduce the top individual rate they managed to increase to 39.6 percent. They’re also open to rewriting only the tax laws affecting businesses.
Republicans want a revenue-neutral bill that limits deductions and reduces marginal tax rates for individuals and companies. Some propose changing the rules for analyzing tax proposals to assume that rate cuts would generate economic growth and partly pay for themselves.
“It’s pretty clear Republicans have run on no revenue increase ever, especially the Tea Party group,” said Kent Conrad, a former Democratic senator from North Dakota. “So I think it would be pretty hard to put anything together that’s bipartisan.”
Business groups are preparing a push for a major tax bill in 2015, and John Engler, president of the Business Roundtable, called the outlook “very promising.” The Washington-based group is an association of large-company chief executives.
He said public attention on inversions — transactions in which U.S. companies move their legal address to a lower-tax foreign country — has created awareness about the need to reduce the U.S. corporate tax rate, which at 35 percent is the highest in the industrialized world.
Engler and others are urging Congress to adopt a so-called territorial tax system, under which U.S. companies’ foreign income would be taxed lightly or not at all.
Hatch and Ron Wyden of Oregon, who will move from Finance chairman to become the panel’s top Democrat, may work well together. Engler said they will gain more support from Senate leaders when current Majority Leader Harry Reid, a Nevada Democrat, no longer controls the agenda.
In the House, Budget Committee Chairman Paul Ryan, a Wisconsin Republican, is poised to take over the Ways and Means Committee from Camp.
Ryan told the Washington Post last week that he wants Obama to agree to reduce tax rates for individuals. Lowering the corporate rate to 25 percent while leaving the individual rate untouched could put smaller companies that pay taxes through their owners’ tax returns at a disadvantage, he said.
“I don’t know if we’ll be able to get there with this president,” Ryan told the Post. “I tell people that we’re anywhere from one to three years away from getting tax reform.”
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