CQ TODAY ONLINE NEWS – TAXES
June 22, 2011 – 8:58 p.m.
Democrats May Have to Settle For Modest Tax Code Changes in Debt Talks
By Sam Goldfarb, CQ Staff
If congressional debt negotiators manage to find common ground on new taxes, any changes to the code are likely to be relatively modest and offer Democrats more of a symbolic victory.
Democrats have insisted that any deficit-trimming plan to accompany an increase in the $14.3 trillion debt limit needs to include new revenues. Republicans, particularly House GOP leaders, have been equally adamant that taxes must be left out of any deal.
But if the two sides manage to bridge that divide, there are signs that Democrats could be satisfied with relatively small concessions from Republicans.
One obstacle for Democrats: Some of the biggest potential revenue raisers, such as eliminating the tax break for mortgage interest payments, are off-limits for rank-and-file members of both parties.
Democrats have made clear that they want to eliminate tax incentives for large oil and gas companies. Yet doing so would raise only about $20 billion over 10 years, or less than 1 percent of $2.4 trillion, which negotiators have set as a minimum target for deficit reduction.
But Majority Leader
Stumbling Blocks
Some of the Democrats’ primary demands are clear non-starters, such as increasing taxes on individuals in the top two tax brackets. While such a move could raise nearly $1 trillion over 10 years, Republicans would almost certainly never agree to such a change.
As Republicans have closed the door to that proposal, at least some in the GOP have opened another by expressing a willingness to take a closer look at certain tax breaks.
As attractive as it sounds, though, eliminating “special interest” tax breaks is not likely to lead to a significant increase in revenue, according to tax experts.
For one thing, many Democrats have said that they are against removing prominent tax breaks for individuals, such as the mortgage interest deduction and the employer-provided health insurance exclusion, on the grounds that they provide critical assistance to middle-class taxpayers.
Senate Democrats seem to be coalescing around a budget resolution that would raise approximately $2 trillion by ending tax breaks. But they also have said that the fiscal blueprint will not include details about which incentives would be targeted.
Democrats May Have to Settle For Modest Tax Code Changes in Debt Talks
In an average year, according to the Joint Committee on Taxation, about $100 billion is lost to the government through corporate tax breaks, considerably less than the $900 billion or so that is lost through various credits and deduction for individuals.
Complicating matters, some of the largest corporate tax breaks, such as the research and development credit that is expected to “cost” almost $6 billion this year, receive strong bipartisan support.
Moreover, some of the most controversial business tax breaks — including the 45-cents-a-gallon credit for blending ethanol with gasoline, which a large majority of senators have voted to repeal — are temporary and due to expire in the next year or two. As a result, even though they are regularly renewed by Congress, ending them early would yield almost no official savings.
Taking into account all of these factors, most tax experts are skeptical that any significant new revenue proposals will be brought forward before the Aug. 2 deadline that the Treasury Department has set for raising the debt ceiling.
“There are probably little things that are inconsequential enough that wouldn’t provoke a whole lot of opposition, like tax breaks for bow-and-arrow manufacturers, but there’s no money there,” said Leonard Burman, who teaches tax policy at the Maxwell School of Syracuse University. “We’re talking about trying to raise hundreds of billions or trillions of dollars, and the things that raise lots of money are controversial.”
Sending a Message
Democrats still hope to win a victory on the tax front.
“It’s the principle,” he said, noting that large oil companies are recording outsized profits at a time when consumers are struggling to deal with high gas prices.
Overall, Democrats are intent on sending the message that the rich and powerful bear special responsibility in an era of fiscal austerity.
To that end, in addition to oil and gas tax breaks, Van Hollen has talked about ending a tax break for corporate jets. While he has not explained the proposal in-depth, indications are that the tax break in question is a temporary incentive for businesses to invest in new equipment. That incentive is set to be phased out over the next couple of years.
Removing private jets from the list of qualified equipment under that incentive would not have much effect on the deficit. But it would, at least, give Democrats a talking point, and possibly some momentum, heading into future budget battles.
Similarly, Democrats are trying to ensure that any budget “triggers” that lawmakers could put into place to lock in budget savings would include tax increases as well as spending cuts.
Democrats May Have to Settle For Modest Tax Code Changes in Debt Talks
Of course, Republicans have not explicitly said that they are even willing to consider oil and gas tax preferences in a debt limit agreement. The Senate, in fact, rejected an attempt to curtail those tax breaks earlier this year, and House GOP leaders have been adamant that increasing revenues is not an appropriate way to reduce the deficit under any circumstances.
Still, any deal that Republican negotiators strike with the Obama administration and congressional Democrats could prove hard to swallow for conservative Republicans in the House.
That could mean that Speaker
Boehner, he said, recognizes that he could need to “get 100 or more votes on our side.”