June 28 (Bloomberg) -- The Democratic chairman and top Republican on the Senate Finance Committee are putting pressure on their colleagues and lobbyists, asking senators to justify every break in the U.S. tax code or risk its elimination.
The “blank slate” approach unveiled yesterday by Senators Max Baucus and Orrin Hatch marks the bipartisan pair’s biggest step yet toward a revision of tax policy even as they defer a central question: whether to raise more revenue.
“They’re trying to smoke people out and not let them have it both ways,” said Jonathan Traub, a managing principal at Deloitte Tax LLP in Washington. “It does put the onus on the business community and those who want to save their expenditures.”
Starting from zero makes the tradeoffs inherent in a tax rewrite more explicit, because every break that’s added would mean higher tax rates. Every $2 trillion over 10 years in individual tax breaks would cause rates to rise between 1.3 and 2.2 percentage points and every $200 billion in corporate tax breaks means a 1.5 percentage-point increase.
The Baucus-Hatch letter, which asks senators to submit comments by July 26, started a lobbying frenzy. Backers of tax breaks for retirement savings, charitable contributions and credit unions yesterday immediately outlined the importance of keeping those provisions.
The interest groups and corporations may never know which senators support them. The finance panel won’t release senators’ submissions.
“We’ve seen how hard it is once you use the existing tax code, to sort of give it a haircut, and everybody’s got a constituency fighting for what they’ve got,” said John Cornyn of Texas, the second-ranking Republican in the Senate. This way, “they’ve got to justify adding it back in and its influence on raising the marginal rate.”
Baucus, a Montana Democrat, and Hatch, a Utah Republican, set no deadline for committee action other than declaring their effort in the “home stretch” and saying they wanted a tax law by the end of this Congress, which is Jan. 3, 2015.
“It is time to simplify this doggone mess,” Hatch said on the Senate floor yesterday during a joint appearance with Baucus. “We can do it, but it is going to take a bipartisan effort.”
The fate of the Baucus-Hatch effort will be linked to the broader debate -- which isn’t resolved -- over whether the tax code should raise more revenue.
“Little steps for little feet,” Cornyn said. “I think we’ll take baby steps right now.”
Democrats insist that some of the revenue raised from curtailing breaks should go toward deficit reduction. Republicans resist that approach and say spending cuts alone -- particularly for entitlement programs -- should be used for deficit reduction.
“If Republicans are actually serious about wanting to do tax reform, then they need to give up their allergy to tax revenue,” said Michael Linden, managing director of economic policy at the Center for American Progress, a Washington group founded by former aides to President Bill Clinton.
Baucus and Hatch are moving ahead without an agreement on the revenue issue in an attempt to figure out the best policies and then engineer tax rates to meet that goal.
“The architecture of the bill doesn’t look all that different” with or without an agreement on revenue, said Traub. He was staff director for the House Ways and Means Committee under Representative Dave Camp, a Michigan Republican.
Even under the blank slate, some tax breaks for low-income households would remain, such as the earned income tax credit. Otherwise, the proposal would shift the tax burden away from higher-income households.
Linden said the blank slate approach isn’t workable, in part because lawmakers will have to spend time justifying breaks that almost everyone supports, such as the exclusion of veterans’ disability benefits.
“I understand the seeming elegance of it, but it’s not really practical,” he said. “If they thought something really serious was going to happen, you might expect to see a discussion draft that was a little more fleshed out than this.”
The instant focus on which breaks should remain obscures the fact that many of the most difficult decisions lawmakers will face have nothing to do with the rates-for-breaks trade.
For example, a tax code rewrite might address the rules governing political activity of nonprofit groups that have been at the center of the controversy surrounding the Internal Revenue Service.
Lawmakers must decide how to manage the transition between the current tax system and a revised one. That’s particularly difficult in areas of the tax code where breaks affect long-range investments, such as the depreciation of capital equipment and the exclusion of interest on municipal bonds.
Congress is also considering changes to the taxation of the foreign income of U.S.-based multinational corporations and companies that pay their taxes through their owners’ individual returns.
Baucus and Hatch wrote the letter after committee members spent several months in a series of closed-door meetings, reviewing different parts of the tax code.
“The fact that Baucus and Hatch are working together on this and want to try to get as much committee involvement as possible can only be a good thing, can only move the process forward,” said Arshi Siddiqui, a tax lobbyist at Akin Gump Strauss Hauer & Feld LLP and a former tax aide to House Democratic Leader Nancy Pelosi.
In the House, Camp has said his panel will approve a bill revising the tax code this year. He called yesterday’s announcement a “significant step forward.”
Camp and Baucus have been working together, too. They’ve set up a joint Twitter account and a website to invite comments, and announced that they will hold a series of events across the country in the next few months.
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