April 4 (Bloomberg) -- U.S. House Republicans just passed a budget that would require eliminating $4.6 trillion in tax breaks over the next decade. They’re in no rush to show which benefits they would cut.
Republicans cite political wariness during an election campaign, slim prospects for an agreement with President Barack Obama and a lack of consensus within their own party for their reluctance to say before November whether they would drop popular items such as the home mortgage interest deduction to make up for lower tax rates.
“The president and the Senate would love for us to do that, because they would release every special interest group they could get onto us and say, ‘Go sic ‘em,’” said Representative James Lankford, a freshman Republican from Oklahoma on the Budget Committee. Lawmakers need to “let Americans start talking about what does that really mean, which deductions are appropriate and what’s not appropriate.”
When House Republicans return from a two-week recess in mid-April, they will begin planning sessions on details of their tax overhaul. Because prospects for a tax rewrite are dim before the election, they also will discuss dozens of tax breaks that ended in December and begin crafting a strategy for extending the George W. Bush-era income tax cuts that expire at the end of this year.
The budget that passed the House 228-191 on March 29 with no Democratic support would replace the six individual tax brackets -- and the 35 percent top rate -- with two brackets at 10 percent and 25 percent. The alternative minimum tax would be repealed. The corporate tax rate would drop to 25 percent from 35 percent.
The budget would raise $37 trillion over the next decade, about the same as would be generated by the current tax code if Congress extends the 2001 and 2003 income tax cuts permanently.
To hit their revenue target with the lower tax rates, Republicans would need to find $4.6 trillion from broadening the tax base or making other structural tax changes, according to the Tax Policy Center, a nonpartisan research group in Washington. Tax breaks cost the government about $1 trillion a year, meaning the largest items -- such as the mortgage interest deduction and the tax-free status of employer-provided health insurance -- would have to be on the table.
In interviews, Republicans said they can mold a winning election-year message by talking generally about the economic growth that would flow from lower tax rates and a simpler system.
‘Full Speed Ahead’
Representative Dave Camp of Michigan, chairman of the House Ways and Means Committee, said he is moving “full speed ahead” on overhauling the tax code though he hasn’t set a timetable for releasing a bill or getting a House vote. Camp said he foresees an “open process” with many public hearings and consultations among Republicans to create a party consensus.
“Part of it is trying to find a path forward that will allow a bill to pass,” Camp said.
Last year, Camp released proposed changes to international taxation, including options to pay for ending most taxes on the foreign income of U.S.-based companies. He hasn’t said how he would cover the cost of reducing income-tax rates.
“The big money is in the big ones,” said Michael Graetz, a tax law professor at Columbia University in New York. “Camp understands the difficulties, and I don’t think he wants to say too much until he can see a way forward.”
Democrats have been urging Republicans to be more specific about their proposals, particularly on what tax breaks would be eliminated.
“I’ve been at this for a year trying to get them to indicate what they would do, and they’ve never done it,” said Representative Sander Levin of Michigan, the top Democrat on the Ways and Means Committee.
In a speech yesterday, Obama said there was “no way” Republicans could reach their target without affecting middle-class tax breaks for retirement, health care and homeownership.
“We’re told that these tax cuts will supposedly be paid for by closing loopholes and eliminating wasteful deductions,” he said at an Associated Press luncheon in Washington. “But the Republicans in Congress refuse to list a single tax loophole they are willing to close, not one.”
28 Percent Rate
The Obama administration has proposed a top corporate rate of 28 percent and elimination of most tax incentives except those for manufacturing, renewable energy and research. The administration’s framework doesn’t show how such a proposal would add up, and it includes no details on potential changes such as limiting companies’ interest deductions.
On individual taxation, Obama has talked about making the tax code simpler while focusing on proposals to raise taxes on the highest earners as part of his deficit-reduction plan. Treasury Secretary Timothy Geithner told Camp in a February hearing the administration won’t propose a comprehensive tax code overhaul because Republicans aren’t ready to discuss it.
Several House Republicans said they don’t want to engage too deeply in the details of a tax code rewrite until they’re sure they have a willing partner in the White House.
“We’re prepared to go when others are serious about it,” said Representative Patrick Tiberi of Ohio, chairman of the Ways and Means panel’s tax subcommittee. “There’s enough meat on the bones here for members who are thirsty for tax reform.”
Broadening the tax base isn’t hard, and there are blueprints available from presidential commissions in 2005 and 2010, said Lawrence Zelenak, who teaches tax law at Duke University in Durham, North Carolina.
‘Where to Start’
“Any tax expert could tell you where the bodies are buried, and if you were seriously interested in base broadening, where to start,” Zelenak said. “The problem is entirely a question of politics. Any time you broaden the base, you’re obviously raising somebody’s taxes.”
Representative Devin Nunes of California said he wants to have detailed plans ready so Congress can move quickly when the political climate allows it, perhaps in the “lame-duck” session between the Nov. 6 election and the end of the year. Lawmakers will also have to address scheduled spending cuts and a debt-limit increase.
“Who’s going to win? What’s going happen in the Senate?” said Nunes, who is on the Ways and Means panel. “That’s why we have to do our work now getting the ideas out there so we’re ready to go, if we have to, ready to go in the lame duck.”
Camp and several Ways and Means Republicans, who have spent more time on the issue than others in the House, said they need to build consensus among Republicans about what to do with the tax code.
Refine the Standards
“We need to continue to refine the standards and the criteria and the metrics on what should be retained in the tax code and what should be removed,” said Representative Jim Gerlach, a Pennsylvania Republican.
Mitt Romney, the front-running Republican presidential candidate, has been similarly circumspect. He wants to cut all six individual brackets by 20 percent each without increasing the budget deficit yet hasn’t said what he would do about tax breaks.
Tax analysts say many of the breaks Republicans want to keep, especially preferential rates on capital gains and dividends, benefit higher-income taxpayers. Others up for discussion, such as the mortgage interest deduction and the child tax credit, provide benefits more evenly spread along the income scale.
Representative Paul Ryan said on MSNBC television on March 20 that he would limit or end some tax breaks for high-income taxpayers and retain them for others. Ryan, chairman of the Budget Committee and a Ways and Means member, didn’t specify where those limits would take effect or the break point between the 10 percent and 25 percent brackets.
As Republicans sort through these questions, they’ll face a decision that bedeviled Democrats in 2010 when they controlled the House: Should they vote before the election on extending the Bush-era tax cuts that expire at year’s end?
Democrats didn’t do so, in part because they worried they would be painted as tax-raisers for allowing some tax cuts to expire. They lost the House anyway and then extended all the tax cuts for two years after the election in a bipartisan bill.
“It was very difficult, very difficult for us to do,” said Bill Pascrell, a New Jersey Democrat. “They will proceed at their own peril.”
Republicans face a different calculation. Even though few lawmakers want to let all the tax cuts expire, extending them would be seen as increasing the budget deficit.
“I’d like to see us have strong votes to clearly show where we stand on taxes,” said Representative Kevin Brady, a Texas Republican, who said votes on capital gains and dividend rates would help provide certainty to markets.
“We need to continue to lay out the framework and how we can get there,” Brady said. “This is inherently difficult, or else it would be done more than once every quarter-century.”
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