No Grand Bargain on Budget Raises Doubts for Code Rewrite

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Photographer: Andrew Harrer/Bloomberg

The Internal Revenue Service (IRS) in Washington.

Lawmakers seeking to rewrite the U.S. tax code have a narrower path to an agreement because of the partisan divide over how much money the federal government should collect.

For more than two years, congressional tax writers had looked to a bipartisan budget deal to provide them a starting point. A so-called grand bargain might have resolved the revenue debate up front and focused the tax discussions on figuring out which breaks could be trimmed.

Now, with such a deal fading amid fiscal feuding, top tax writers in the Republican-led House and Democratic-majority Senate will try to move forward while approaching a rewrite from conflicting perspectives. Even if they can agree on how to simplify the system, they must confront Democrats’ insistence on raising more revenue and Republicans’ refusal to do so.

“They’re talking past each other on what tax reform really is,” said Catherine Schultz, vice president for tax policy at the National Foreign Trade Council, which favors open international commerce. “You have to have some agreement on what you want to achieve.”

For individuals and businesses, failure to simplify the tax code would perpetuate a system that costs $168 billion and 6.1 billion hours a year in compliance, according to Nina Olson, the national taxpayer advocate, an independent office within the Internal Revenue Service. Corporations would continue to be subject to the world’s highest statutory rate of 35 percent, which combines with an array of tax breaks to impose widely varying effective rates on industries.

Riskier Approach

Without a so-called grand bargain, lawmakers will have to operate via regular congressional rules -- starting a bill in the House Ways and Means Committee and maneuvering it through both chambers. That’s a riskier approach than relying on a framework passed by Congress because there will be less assurance of support from lawmakers.

“Had the relevant decision makers actually signed onto something that had some degree of specificity, it would have been viewed as a sign of progress,” said Kenneth Kies, a Republican tax lobbyist whose clients include Caterpillar Inc. and Pfizer Inc. “The potential for it to happen is there, but it’s going to require all of the parties to make some substantial movement to one another that hasn’t happened yet.”

Representative Dave Camp, chairman of the House Ways and Means Committee, is undeterred. The Michigan Republican, who probably will have to give up his post at the end of 2014 because of party term limits, says his panel will pass a tax code overhaul this year that won’t raise more revenue and will lower marginal tax rates for individuals and corporations.

‘Move Forward’

“We’re just going to continue to move forward on how we can make our code simpler, how we can reform it and do that by broadening the base and lowering rates,” Camp said.

Camp isn’t trying to roll back the $630 billion tax increase that Congress passed last month.

He has released drafts of changes to international taxation and taxation of financial products and set up 11 bipartisan working groups within the committee.

Still, the divide over revenue hampers the process, said Michael Linden, director of tax and budget policy at the Center for American Progress, a Washington group that typically aligns with Democrats.

“I don’t think that it’s very plausible that we’re going to get actual, comprehensive tax reform in this Congress,” he said. If House Speaker John Boehner “said we will accept $600 billion in additional tax revenue but only through a process of tax reform, I think we’d start doing tax reform,” Linden said.

Mortgage Interest

Recognizing that Senate Democrats would try to add revenue to a House-passed bill could make Republicans nervous about voting for changes to popular tax breaks such as the mortgage interest deduction that may be necessary to reduce tax rates.

“Why would the House take the political pain of passing a tax reform bill, which is going to be difficult to do?” Linden said. “A tax reform package that came out of the House Republican caucus will be a political gift to the Democrats.”

That difficulty might lead lawmakers to temper their ambitions, he said, seeking changes where they can find common ground without rewriting the code.

Even without an agreement on revenue, the committees can work through structural issues on international taxation and other details, said Jon Traub, managing principal of tax policy at Deloitte Tax LLP in Washington.

A plausible path, he said, would involve the House passing a bill without new revenue, the Senate adding revenue and then the two sides reaching “some meeting of the minds” in a conference committee amid pressure.

‘Only Way’

“It’s easy to be a skeptic right now, but I’m not one,” said Traub, a former Camp aide. “Tax reform becomes the only way to square the circle of the desires of the House to do tax reform and the president to get additional revenue.”

Camp’s Senate counterpart, Max Baucus of Montana, has reiterated his commitment to revamping the tax code. He has been less specific than Camp about what he wants to do and how quickly he wants his committee to act.

“It has been close to 30 years since the last major overhaul of America’s tax code,” Baucus said today. “Our tax code is antiquated and acting as a weight on our economy.”

Like Camp, Baucus faces political constraints. He’s up for re-election in 2014 in a state that President Barack Obama lost. Because united Senate Republicans can block action, Baucus also won’t be able to take a one-party approach.

Coordinating Approach

Camp and Baucus meet and talk regularly, coordinating their approaches despite some disagreements.

For its part, the Obama administration has outlined a framework for business taxation. It has been less specific about what it wants to do about individual taxation.

At his confirmation hearing Feb. 13, Jack Lew, Obama’s nominee for Treasury secretary, said “it’s a very hard thing” to broaden the individual tax base. He noted the lack of fiscal accord and placed a much lower emphasis on rate reduction than Republicans do, signaling the gap between the parties.

“Under our concept of tax reform, nobody’s rates would go up,” Obama said yesterday. “But we’d be able to reduce the deficit by making some tough, smart spending cuts and getting rid of wasteful tax loopholes.”

The cloudy outlook for a tax code rewrite doesn’t foreclose the possibility that the current Congress would act before the end of 2014. The Jan. 1 tax deal, Kies said, would have seemed almost impossible if predicted six months earlier.

“As long as Dave Camp is moving forward,” he said, “he’s preparing for when the stars do align.”

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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