CQ TODAY ONLINE NEWS
Updated July 10, 2011 – 11:09 p.m.
Seeds Sown for Future Tax Overhaul Debate
By Sam Goldfarb, CQ Staff
But that does not mean that a comprehensive overhaul of the tax code — which many Republicans and Democrats say is necessary — is off the table forever. There is a difference between changing the code in a way that would boost net revenue collections and changes designed to level the playing field and enhance the economy. Ruling out the former does not necessarily mean the latter is dead.
If anything, the past week demonstrated that congressional leaders are willing to engage on tax questions that often have made them uncomfortable. Republicans showed they will consider eliminating or curtailing some tax breaks and Democrats entertained the idea of bringing down top tax rates for individuals and companies.
Those are the sorts of changes that most tax experts say would be central to a major tax code revision that might win bipartisan support in Congress, just as they were with the landmark overhaul enacted in 1986 (PL 99-514).
Underlying factors that have been driving lawmakers to consider an overhaul recently have not gone away. Dissatisfaction with the current state of the tax code remains high and the economy remains weak. Concerns about the nation’s fiscal situation are likely to persist even if lawmakers can agree to a deficit-reduction package. And business groups in particular will keep up the pressure on lawmakers to overcome their differences and create a more predictable tax environment.
Economists from across the political spectrum have long extolled the benefits of a tax system that picks fewer winners and losers and allows more room for the marketplace — not peculiarities of the tax code — to determine where resources should be allocated. Many, if not all, tax experts also have urged Congress to consider the structure of the tax system separately from their efforts to reduce the federal budget deficit.
Finding cause for optimism, Senate Minority Leader
The decision of Boehner and other leaders not to travel the path of tax overhaul as part of a big debt-limit deal is not likely to stop a slow build-up similar to what led to the 1986 law.
Already this year, House Republicans have included the broad outlines of a tax overhaul in their fiscal 2012 budget resolution (
And, although it has yet to see the light of day, Treasury Department officials have spent months working on a report that focuses on how lawmakers could reduce the corporate tax rate without adding to the deficit. As a result, the administration and congressional Republicans entered the debt limit negotiations somewhat more prepared to discuss the possibility of a tax overhaul than might have been apparent at first.
Many challenges remain to reaching a bipartisan agreement on broad changes to tax law.
At the very least, after Boehner announced he had abandoned negotiations with President Obama on a far-reaching deficit reduction package and would instead focus on a smaller deal that would permit raising the $14.3 trillion debt ceiling, tax policy discussions have returned to a familiar place.
Seeds Sown for Future Tax Overhaul Debate
Republicans are opposed to any tax increases. Democrats want to increase taxes on the higher-income earners. And the two sides are once again headed toward what could be an ugly clash at the end of next year when individual tax rates first enacted in the early years of George W. Bush’s presidency expire.
Before this past weekend, Boehner and Obama seemed to have at least entertained ideas for avoiding that scenario. Under one plan, Republicans would have agreed to “decouple” the Bush-era tax cuts by permanently extending current rates for individuals with incomes below $250,000 while remaining quiet on the fate of tax rates for taxpayers with incomes above that threshold. In exchange, Democrats would have pledged to join Republicans in pursuit of a tax overhaul that would eliminate breaks and reduce rates for individuals and corporations.
Vague outlines of such a plan first surfaced July 5 after Boehner secretly met Obama at the White House the day before. The terms of an overhaul remained a serious topic of conversation at least until July 7, when the top eight congressional leaders gathered with Obama for a high-profile meeting.
Ultimately, mounting resistance from Republicans to a compromise on taxes, as well as shaky support among Democrats for deep spending cuts, sank the deal. On July 8, according to a Republican familiar with the discussion, Boehner came to Obama with stricter demands for an overhaul than he had offered before. Large-scale spending reductions would need to be triggered if Congress did not pass major tax legislation by the end of 2011. The overhaul also would have to be “revenue-neutral” as measured against an extension of all current tax rates, not just those on income below $250,000.
Economic Benefits Touted
Pursuit on a tax overhaul is based in part on a belief that it might foster economic growth and indirectly raise revenue. But Democrats are skeptical of such claims. And the possibility does not readily stand out because the Joint Committee on Taxation, which measures the budgetary impact of tax legislation for Congress, does not use “dynamic scoring,” which might show such effects, in its official revenue estimates.
For now, most Democrats who support a tax overhaul want it to raise as much revenue, based on official score-keeping, as would occur by letting the Bush-era tax cuts expire for high-income taxpayers. That would amount to about $1 trillion over 10 years, equal roughly to a proposal from the president’s fiscal commission, which last year got some support from Senate Republicans but was rejected by more anti-tax House Republicans.
In effect, raising $1 trillion over 10 years is a compromise between a revenue baseline that is based on extending all current tax rates and one based on letting all tax cuts expire, which would raise close to $4 trillion over 10 years. Collecting that $1 trillion by restructuring the tax code is also something that some budget analysts have thought might be more appealing to Republicans than a direct levy on high-income earners.
Even apart from questions about raising revenue, any tax overhaul faces concerns about the loss of cherished tax breaks. Democrats, in particular, have voiced concern about removing or altering benefits such as the tax-free treatment of employer-provided health care that they view as important social programs for the middle-class.
Still, in recent months, few close observers of tax policy have been willing to rule anything out.
“Clearly this is the first serious discussion since ’86 when it comes to reform,” said John Buckley, a former Ways and Means chief counsel who teaches at Georgetown University’s law school, during a panel discussion in May.
Anticipating the turn of the debt-limit negotiations, Buckley said “fiscal issues will drive changes to our tax law — whether they are done in the context of overall reform or whether they are done separately.”
First posted July 10, 2011 6:11 p.m.