Code Revisions Await 2015 Turn With Election Year Stasis

Economics and politics are poised to change the landscape for a U.S. tax code rewrite if the chairmen of the congressional tax panels can’t overcome conflicts to push through changes by next year.

The details of a tax plan in 2015 probably will reflect an improved economy and shifts in congressional leadership after the 2014 election, analysts and lobbyists said, according to Bloomberg BNA.

“You change the cast of characters, and who knows?” Roberton Williams, an analyst at the Tax Policy Center, said in an interview. The nonpartisan, Washington-based group researches tax policy.

Passing a tax-code overhaul in both chambers in the next year will be difficult. Democrats and Republicans are dueling over taxes and spending. President Barack Obama wants more money for infrastructure, education and deficit reduction, and Senate Majority Leader Harry Reid, a Nevada Democrat, has said tax legislation must raise significant revenue.

Republicans have rejected tax increases. Although Chairman Dave Camp, a Michigan Republican, plans to draft a tax-code rewrite this year in the House Ways and Means Committee, his party’s leaders in the chamber show little enthusiasm for bringing it to a floor vote.

Improving Economy

With Democrats resisting budget cuts and Republicans dug in against tax increases, an improving economy might allow Congress to put the U.S. budget in better order, Williams said.

“The expansion should be in full swing by 2015,” Moody’s Analytics Inc. chief economist Mark Zandi predicted in an Aug. 6 report.

Forecasts for the economy in 2015 vary. The Congressional Budget Office has predicted annual gross domestic product to grow by an average of 3.6 percent from 2015 to 2018.

Economists surveyed by Bloomberg earlier this month were less optimistic, projecting that the economy will expand 3 percent in 2015, and that the unemployment rate will average 6.4 percent that year compared with 5.3 percent during the expansion that ended in December 2007.

By 2015, the government also will have a clearer sense of whether the Affordable Care Act is succeeding at lowering health care costs and reducing the number of people without medical insurance, Williams said.

If the law, which provides tax credits and also imposes a tax for noncompliance with the insurance mandates, notches victories, Congress could gain flexibility, Williams said.

“If the ACA is successful, maybe we can do different things on the tax side,” he said.

Mortgage Interest

A more robust housing market also might remove some of the roadblocks to tinkering with the $70 billion-a-year tax deduction for mortgage interest, Williams said. More than half the benefits from the deduction go to households earning between $75,000 and $200,000 a year, though reining it in would spark a political outcry.

A variety of ideas are being discussed to curtail the tax break without ending it. Options include lowering the $1 million cap on the size of deductible loans, eliminating the benefit for second homes and imposing limits on top earners’ itemized deductions, including mortgage interest.

Still, any plan that generates significant revenue would pinch the housing industry and upper-middle-class voters.

Home Sales

Williams said that while curbing the mortgage interest deduction would immediately hurt home prices, a more stable housing market might be able to take the hit.

Combined sales of new and existing homes in May and June were the strongest since mid-2007, excluding a short-lived rebound in 2009 when the government offered a first-time buyer credit. Home prices in 20 cities tracked by S&P/Case-Shiller rose 12.2 percent in May from a year earlier, the biggest 12-month gain since March 2006.

The politics of 2015 will depend on whether Democrats hold onto their Senate majority next year, as well as on who takes over leadership of the Senate Finance and House Ways and Means committees.

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, is retiring, and Camp has to give up his Ways and Means chairmanship under House Republican rules, although he could request a waiver.

Camp said in a Bloomberg Television interview this month that taxes for individuals and corporations should be lowered together. To pay for those changes and produce a revenue-neutral bill, he said he’s considering altering the deductions for mortgage interest and charitable contributions.

In Wings

Senator Ron Wyden, an Oregon Democrat, is first in line to succeed Baucus as chairman and is an enthusiastic supporter of reworking the tax code. In the House, Paul Ryan of Wisconsin, the 2012 Republican vice presidential nominee, and Texas Republican Kevin Brady are potential front-runners.

Complicating the picture is a lack of presidential leadership, Williams said, contrasting Obama’s approach with President Ronald Reagan’s support for a tax rewrite in 1986.

Also crimping a tax rewrite in 2015 is the run-up to the 2016 presidential election, which could make the window for legislation even shorter.

While Camp and Baucus are calling for tax legislation to be completed before 2015, some say the possible leadership changes make a delay more probable.

Neither Wyden nor the possible contenders for the Ways and Means chairmanship have much incentive to move quickly, knowing they could inherit the tax issue after 2014, John Buckley, a former chief Democratic tax counsel on the House Ways and Means Committee, said in an interview.

“Baucus’s retirement and Camp’s term limits created an incentive for them and only them to pursue tax reform,” Buckley said. “The rest of them, why would they take a difficult vote for the legacy of Max Baucus or Dave Camp?”

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