Republicans Buoyed by Freshmen Seek Rewrite of Tax System

U.S. House Republicans will vote this week to create a process for a tax-code overhaul in 2013, satisfying restless first-term members who want to show they’re moving forward on the issue.

The Republican plan would simplify and flatten the income tax system, requiring lawmakers to remove or curtail tax breaks to cover the cost of lowering the top individual and corporate rates to 25 percent from 35 percent.

“If you were to distill down the single adjective that was to describe what members are looking for in tax reform, it would be bold,” Representative Peter Roskam, an Illinois Republican, said in an interview this week.

The Republicans who helped the party take the House majority in 2010 came to Congress eager to revamp the tax system and its tangle of exemptions, deductions and credits. Senior Republicans on the Ways and Means Committee have taken a more deliberative approach, holding hearings and waiting to produce legislation until they sense an opportunity to advance their plan through both chambers of Congress.

The Republican bill outlining a tax overhaul, which drew a veto threat from the White House, is set for House passage tomorrow. Today, the House will pass a one-year extension of the George W. Bush-era tax rates for all income levels. Democrats oppose continuing the tax cuts for top earners.

Simpler Code

The Republican tax overhaul plan sets broad principles for a simpler law that would generate from 18 percent to 19 percent of gross domestic product, higher than this year’s collections and at about the same level the U.S. government would collect if current tax rates were extended permanently.

The current six individual tax brackets would be combined into two. The top individual and corporate rates would drop to 25 percent from 35 percent. The alternative minimum tax would be abolished, and U.S. corporations would face lighter taxes on income they earn outside the country.

Important details and politically difficult choices -- including how progressive the tax code should be, the fate of popular deductions and tax rates for investment income -- aren’t included in the legislation and would be left to the House Ways and Means Committee to determine next year.

Republican freshmen support the two-bill approach and many of them endorsed it in a letter to Republican leaders this week.

“We have a tendency to start with 10,000 pages, add 2,000 pages and say we fixed it,” Representative Reid Ribble, a first-term Wisconsin Republican, said in an interview earlier this year. “We should stop nibbling around the edges.”

Procedural Hurdles

The bill would remove some procedural hurdles that could otherwise slow a tax overhaul proposal, though it would let the Senate minority insist on a 60-vote threshold, rather than a simple majority, for passage.

The Republican proposal would provide a “huge additional tax cut” for millionaires with no details about changes to such tax breaks as the mortgage interest deduction to cover the cost, said Representative Sander Levin of Michigan, the top Democrat on the Ways and Means Committee.

“Doing that would in most cases very much hurt the middle class of America,” Levin told reporters on a conference call July 30. “I’m glad they’re introducing both, because when you combine them you compound the potential injury.”

Veto Threat

The White House veto threat focused on the combination of rate reductions and changes to tax breaks that could shift the tax burden away from top earners.

“The president believes that tax reform presents an opportunity to make the tax code fairer, simpler and more pro- growth and that it should contribute to balanced deficit reduction, not provide another expensive giveaway to the wealthiest at the expense of the middle class,” said the statement, released yesterday.

Representative Dave Camp of Michigan, the Ways and Means chairman, held a series of meetings with lawmakers earlier this year to gather ideas for a tax-code overhaul.

The principles would in effect prevent creation of two tax plans supported by a number of Republicans: a flat tax and a national retail sales tax. That’s a concession to the political reality of needing a progressive tax system, said Representative Patrick Tiberi, an Ohio Republican on the Ways and Means Committee.

The so-called fair tax, which would replace many existing taxes with a national retail sales tax, is sponsored by 70 House members, almost all of whom are Republicans.

International Tax

Last year, Camp released a draft of his international tax proposal. He hasn’t specified how Republicans would offset the budget cost of lower rates.

Representative Todd Young, an Indiana Republican in his first term, said he wants to move “as soon as possible” on an overhaul that examines all tax breaks while preserving popular ones such as the mortgage interest and charitable deductions at some level.

“People are ready for leadership right now,” he said in an interview earlier this year. “They want bold decisions and they want some actions in Washington, so they want fair-minded people to put all options on the table.”

The newer members are willing to give their leaders some time because they don’t want the equivalent of the Democrats’ 2010 health care law, which they view as the product of a flawed, rushed process, Roskam said.

Pointing Blame

Republicans also criticize the Senate and the White House, saying they need willing partners to move major legislation.

“It is very, very frustrating because we came here with a lot of zest to turn things around,” said Representative Diane Black, a first-term Tennessee Republican who said the tax overhaul is among the priorities of the freshman class and “job creators” in their districts.

Presidential candidate Mitt Romney supports lower tax rates and paying for them by reducing tax breaks. He would keep the six-bracket structure and cut each tax rate by 20 percent.

If President Barack Obama returns for a second term, he won’t have to face voters again, Tiberi said, so the president’s agreement in 2010 on a two-year extension of tax cuts for all income levels gives him some optimism about prospects for a bipartisan agreement.

“The key is: Do you have a president who is going to be in a position to lead on this issue rather than play politics?” Tiberi said.

The House bills to be considered this week are H.R. 8 and H.R. 6169. The national retail sales tax measure is H.R. 25.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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