Like baseball fans whose team came up short, those hoping for an overhaul of the tax code by the congressional deficit-cutting supercommittee likely will have to wait until next year
Like baseball fans whose team came up short, those hoping for an overhaul of the tax code by the congressional deficit-cutting supercommittee likely will have to wait until next year.
As the bipartisan panel struggled last week to meet Wednesday's deadline to come up with some combination of budget cuts and tax revenue equaling $1.2 trillion over 10 years, the prospect that meaningful tax reform would be part of their plan seemed a distant possibility.
LITTLE OF SUBSTANCE
“I'm hearing very little in terms of substantive tax reform,” said Joe Gulant, a partner at Blank Rome LLP.
What was on the table last week was a Republican proposal written by supercommittee member Sen. Patrick Toomey, R-Pa., which would include $250 billion in new tax revenue from limiting itemized deductions, according to a congressional aide familiar with the details. The plan also would cut marginal tax rates across the board by 20% and include $750 billion in spending cuts.
A Democratic counteroffer was widely reported to include about $400 billion in new revenue and about $900 billion in budget savings but would not extend Bush administration tax cuts.
Neither party had warmed up to — let alone embraced — the other's offers as of late last week. For the most part, congressional Republicans don't want to include tax increases as part of the package, while Democrats insist on some kind of tax increase on high-income earners.
A measure approved over the summer to raise the debt ceiling created the deficit committee and gave it until Nov. 23 to make a proposal. If it is able to come to an agreement, the legislation will have to be approved by the House and Senate by Dec. 23 under special rules that prevent amendments and prohibit a Senate filibuster.
Even if the supercommittee can agree on a plan, Washington will be consumed between Thanksgiving and Christmas trying to determine whether there are enough House and Senate votes to approve the blueprint.
If the deficit committee fails to generate a plan, automatic spending cuts of $1.2 trillion over 10 years — equally split between defense and non-defense spending — will go into effect in 2013.
Late last week, all signs pointed to a supercommittee failure. If an agreement is reached, Washington observers expect it to involve a two-step process. The panel would make a recommendation for spending cuts, coupled with guidance to the House Ways and Means and the Senate Finance committees, to work on a tax code overhaul next year.
The directive likely would include a specific deadline for a tax plan and a vote by Congress.
“I suspect that it will be a very broad instruction to do tax reform — little or no details but with a specific revenue target,” said Brian Graff, executive director and chief executive of the American Society of Pension Professionals and Actuaries. “This could be a precursor for a very robust tax reform debate next year.”
First, however, the GOP has to define “tax increase.”
INCREASING REVENUE
Rep. Marlin Stutzman, R-Ind., a GOP freshman who helped his party gain control of the chamber in January, said that he wouldn't support a supercommittee proposal boosting tax rates. However, he isn't opposed to increasing tax revenue.
Raising tax rates isn't the only way to increase revenue, he said.
“I disagree with the premise that raising tax rates increases revenue,” Mr. Stutzman said. “A broad tax base will increase our revenue.”
That formula — reducing tax rates, broadening the base — has become a bipartisan mantra. It is an approach that was recommended last year by the bipartisan presidential deficit commission as part of its plan to cut the deficit by $3.7 trillion over 10 years.
It isn't a cost-free exercise. If rates are lowered, the revenue has to be made up somewhere.
The most promising target is reducing or eliminating so-called tax expenditures, such as deductions for mortgage interest and tax deferrals for contributions to retirement savings plans.
“It becomes a math problem,” Mr. Graff said. “That's what we're concerned about.”
Mr. Graff and his organization have been urging members of Congress to protect retirement tax breaks, arguing that they are crucial to helping Americans build nest eggs. Some advocates of tax expenditure reform assert that the retirement tax deferrals mostly benefit the wealthy.
Members of Congress will face that kind of push-and-pull next year if tax reform is on the agenda. Coming to an agreement will require bipartisan cooperation, which has been scarce.
Tax reform can be excruciating, said Rob Leonard, a partner at Akin Gump Strauss Hauer & Feld LLP.
“It's hard politically and substantively. It involves a lot of trade-offs,'' said Mr. Leonard, who was on the staff of the House Ways and Means Committee when Congress and the Reagan administration agreed to major tax reform in 1986. That legislative effort lasted about two years.
“High-level tax reform requires a high level of bipartisan trust, bipartisan cooperation and bipartisan commitment,” Mr. Leonard said.
Next year, tax reform would have to be accomplished in the middle of a presidential campaign. Adding to the pressure, the Bush administration tax cuts are scheduled to expire at the end of next year.
On the other hand, Senate Democrats could lose their majority in the election, which might spur them to complete tax reform while they are still in charge.
“There are a lot of factors that would give it a good chance, even though it's an election year,” Mr. Graff said.
“It's conceivable they could do [tax reform] in six months,” he said. But “given the politics, it's by no means a slam-dunk.”
Email Mark Schoeff Jr. at mschoeff@investmentnews.com
