Desire for Tax Revamp Mired in Dysfunctional Congress

The 23 Republicans on the House Ways and Means Committee have been huddling in the Capitol for two weeks, identifying potential disagreements as they consider the biggest U.S. tax changes in 27 years.

They’re promoting an emerging plan to simplify U.S. taxation with an optimism countered by what’s outside that first-floor meeting room. They’re operating inside a polarized Congress that can’t agree on how to keep the government open past Sept. 30 or prevent the U.S. from being able to pay all its bills past mid-October.

“There are these mega-issues that can just supersede all the hard work that’s been done,” said Dave Kautter, managing director of the Kogod Tax Center at American University in Washington.

The details of Chairman Dave Camp’s bill, which he plans to push through the committee this year, remain either unwritten or shrouded in secrecy as he tries to curb enough tax breaks to reduce top individual and corporate rates to 25 percent. The Michigan Republican is seeking to do that without increasing the budget deficit or making the tax code less progressive.

Camp and Senate Finance Chairman Max Baucus, a Montana Democrat, have been “thoughtful” and “methodical,” cooperating across party lines, inviting input and laying the groundwork for success, Kautter said. Acknowledging that he is more optimistic than others, Kautter said he thinks the two lawmakers have a greater than 50 percent chance of success, hampered largely by the partisan environment.

‘Crisis Mode’

“It’s a long-term project with lots of steps and when you get to the end, you get to the goal,” Camp said in an interview yesterday. “It’s just different than crisis mode.”

Some of the most ardent advocates of simplifying the tax code say the effort will have a tough time.

“We hope, perhaps, tax reform can be the sweet spot” that propels Congress toward a bipartisan budget agreement, Senator Ben Cardin, a Maryland Democrat, said yesterday. “The prospect of major progress is not encouraging.”

The House plans to include language for expedited consideration of major tax changes in a bill next week that would increase the $16.7 trillion debt limit, Camp said, citing that step as an encouraging sign because it means that tax bills won’t get “bogged down.”

Representative Kevin Brady, a Texas Republican on Ways and Means, said lawmakers are looking at which special provisions might have a big enough economic impact to justify keeping them as they look at the tradeoff between rate reduction and base broadening. He said Camp hasn’t given committee members a specific date for when they will vote on a bill.

‘Steady Ship’

“At some point, we start turning the Rubik’s Cube until it all fits together,” Brady said. “We hope to be a steady ship, continuing plowing forward as the storms rage around us.”

Representative Kenny Marchant, a Texas Republican and Ways and Means member, said the panel was “weeks away” from developing a draft. Republicans have been briefed on what it will take to reduce the corporate rate to 25 percent and change international tax rules.

Committee members are engaged in “conceptual discussions,” Camp said.

Marchant said the group is awaiting estimates from the nonpartisan congressional scorekeeper, the Joint Committee on Taxation, before going through the same process of determining how it could reduce individual tax rates.

At that point, Marchant said, Ways and Means Republicans will try to reach consensus on a plan and then sell it to their party colleagues in the House.

“We’re hopeful that when we come out with a product,” he said, grinning, “it’s such a good product it will sell itself.”

Targeting Breaks

A plan that meets Camp’s criteria probably would require lawmakers to support curtailing popular tax breaks and potentially displeasing businesses and interest groups that would lose tax advantages.

In the House, where Republicans have a 233-200 majority, passing a tax bill requires satisfying 40 or 50 small-government advocates who are often willing to vote against their leaders’ priorities, or writing the bill to attract Democratic votes.

The challenges are similar in the Senate. Baucus must cope with leaders in his own party who want as much as $1 trillion in additional revenue over the next decade from tax-policy changes, while Republican leaders want zero.

His task, for now, is mustering a majority on his Senate Finance Committee to support any particular approach. He says he will bring a plan to the panel this year.

Camp’s Challenge

The first step for Camp will be demonstrating how the arithmetic can work. Achieving 25 percent top rates for corporations and individuals probably would require changes to some of the biggest U.S. tax breaks, such as the mortgage interest deduction and the exclusion of employer-provided health insurance.

The panel also might need to alter the tax treatment of items that aren’t technically considered breaks, including the deduction of business interest and advertising expenses.

Camp and Baucus remain publicly optimistic.

Both men have resisted the Obama administration’s requests to focus solely on business taxation, where there is more possibility for agreement.

Because many businesses pay taxes through their owners’ individual returns, the two sides of the tax system are linked. Cutting the corporate rate without touching individual rates could cause economic distortions.

“We’ve got a lot of days left before game day,” said Representative Jim Renacci, an Ohio Republican who is on the Ways and Means panel.

Lobbying Help

Camp and Baucus, who promoted their work during a “Simpler Taxes” tour that visited five states, have been bolstered by business groups.

Camp met with dozens of business executives and lobbyists yesterday in the Capitol. And two business coalitions -- one supporting more uniform taxation of different types of businesses and another focused on the statutory corporate rate - - held a joint event yesterday urging Congress to act.

“It is drastically needed,” said Dan Danner, president of the National Federation of Independent Business, the lobbying group for small companies. “The how, we don’t have a clear path. It’s up to the chair.”

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.