Tax Reform Faces Major Hurdles

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SAN FRANCISCO, CA - AUGUST 19:  Senate Finance Committee Chairman Max Baucus (L) (D-MT) and House Ways and Means Committee Chairman Dave Camp (R-MI) speak to reporters while touring the Square headquarters on August 19, 2013 in San Francisco, California. Senators Max Baucus (D-MT) and Dave Camp (R-MI) continued their Tax Reform Tour with a visit to the headquarters of mobile payment company Square. The tour is taking the two senators across the nation to speak to American people about how to fix the nation's broken tax code to benefit families and job creators.
National Journal
Nancy Cook
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Nancy Cook
Oct. 23, 2013, 4:30 p.m.

The pro­spects for passing a tax-re­form pack­age through Con­gress look even dim­mer now after the pro­trac­ted and bruis­ing debt-ceil­ing and gov­ern­ment-shut­down fights.

There’s noth­ing stop­ping House Ways and Means Com­mit­tee Chair­man Dave Camp, R-Mich., from for­ging ahead on his prom­ise to pass a tax-re­form pack­age out of com­mit­tee by the end of the year. But there’s not much help­ing him, either.

In­deed, polit­ics con­tin­ue to in­trude on Camp’s well-laid plans. Con­gress can­not muster the will to pass ma­jor le­gis­la­tion such as im­mig­ra­tion re­form, nor can it pass a budget. Moreover, Re­pub­lic­an lead­er­ship has al­ways been wary of mov­ing on a tax-re­form bill for fear that it will open the party to at­tacks that it pro­tects the rich, es­pe­cially if the le­gis­la­tion lowers tax rates in ex­change for cut­ting be­loved tax breaks that be­ne­fit a large swath of Amer­ic­ans.

There are also sub­stan­tial dif­fer­ences between the two parties on the goals of tax re­form. And there is the ques­tion of tim­ing: With fisc­al battles dom­in­at­ing the sched­ule every three to six months, when is the best win­dow to pur­sue tax le­gis­la­tion?

“Much of the at­ten­tion of the tax and budget writers between now and Decem­ber will be con­sumed by the dis­cus­sions of a budget deal, which will prob­ably take some time away from tax re­form,” says Ken Kies, a tax lob­by­ist and former Re­pub­lic­an tax coun­sel to Ways and Means dur­ing the 1986 tax re­form. “However, it would be a mis­take to think that [Camp and Sen­ate Fin­ance Com­mit­tee Chair­man Max Baucus, D-Mont.] will not pur­sue tax re­form be­fore their terms ex­pire.”

Aside from the poor polit­ics sur­round­ing tax re­form, there re­main a myri­ad of policy is­sues that di­vide the two parties. Chief among them is rev­en­ue: Camp would like any over­haul of the tax code to not raise any more or less money than the code cur­rently does. Sen­ate Demo­crats and the White House want ad­di­tion­al dol­lars to come in to fund stim­u­lus-like pro­grams for in­fra­struc­ture or to pay down the de­fi­cit. This ma­jor philo­soph­ic­al di­vide will make it im­possible for any tax-re­form le­gis­la­tion to ad­vance broadly through Con­gress without com­prom­ise or ma­jor policy con­ces­sions.

“I per­son­ally think that it would be more feas­ible — and still not a high de­gree of prob­ab­il­ity as­so­ci­ated with it, but more feas­ible — if you could de­tach the busi­ness part [of the tax code] in this dis­cus­sion from the per­son­al,” says Laura D. Tyson, a pro­fess­or at the Uni­versity of Cali­for­nia (Berke­ley) Haas School of Busi­ness and a former Clin­ton eco­nom­ic of­fi­cial. “I think the per­son­al tax-re­form dis­cus­sion — polit­ic­ally there’s just no place to go.”

The lone bright spot for tax re­form now is that it of­fers law­makers a chance to steer the con­ver­sa­tion away from the on­go­ing budget battles. “One reas­on that the 1986 tax re­form suc­ceeded was that Con­gress had been in budget battles in 1982 and 1984 over the Re­agan budget. It turned out that people were des­per­ate for an al­tern­at­ive agenda,” says Eu­gene Steuerle, a fel­low at the Urb­an In­sti­tute and a Treas­ury of­fi­cial at the time of the 1986 tax-re­form de­bate.

TRICKY POLIT­ICS

None of this fazes Camp, who re­mains op­tim­ist­ic that tax re­form is one key way to re­start the slug­gish eco­nomy. “The goal of tax re­form is ob­vi­ously to get back to a growth eco­nomy so that we’ll have jobs and wages and prosper­ity that Amer­ic­ans need to have to really live the Amer­ic­an Dream,” Camp re­cently told Na­tion­al Journ­al Daily. “So the Amer­ic­an Dream is not some rem­nant of the past, but it’s a vi­brant dream for the fu­ture as well. That’s the ul­ti­mate goal for the com­mit­tee.”

Camp should know, be­cause he’s been pur­su­ing a tax over­haul for al­most three years, sim­il­ar to the way he ag­gress­ively pur­sued wel­fare re­form in the 1990s. He and Baucus have held three joint hear­ings on the sub­ject. They’ve toured the coun­try to talk up the idea, vis­it­ing small busi­nesses, Sil­ic­on Val­ley be­hemoths, and blue-chip cor­por­a­tions like 3M.

They’ve even tried to build mo­mentum for tax re­form by re-cre­at­ing some of the tableaux from the 1986 tax-re­form act. Their lunches with law­makers at the Ir­ish Times, a bar near Cap­it­ol Hill, were meant to in­voke the mo­ment lead­ing up to the 1986 le­gis­la­tion, when then-Sen­ate Fin­ance Com­mit­tee Chair­man Bob Pack­wood mapped out a plan for a tax over­haul over beers at that very same bar.

Yet, even this close at­ten­tion to op­tics and bi­par­tis­an co­oper­a­tion can­not change the tough polit­ic­al cal­cu­lus. A huge part of Camp’s chal­lenge is to get House Demo­crats to sup­port the le­gis­la­tion so that it does not simply look like a Re­pub­lic­an-only ef­fort. So far, Demo­crats on the Ways and Means Com­mit­tee have not par­ti­cip­ated in any re­cent closed-door dis­cus­sions to craft le­gis­la­tion, ac­cord­ing to a Demo­crat­ic com­mit­tee aide.

At a com­mit­tee meet­ing in late Ju­ly, Camp faced skep­ti­cism from the Demo­crats. After he read a writ­ten state­ment about the status of tax re­form at the meet­ing of law­makers and aides, he took a num­ber of poin­ted ques­tions from Demo­crats who wanted to know how Camp planned to re­duce the top tax rate to 25 per­cent without los­ing money, ac­cord­ing to an aide present at the meet­ing.

The con­ver­sa­tion did not bode well for get­ting Demo­crats to sign onto whatever Camp re­leases this fall. “I don’t see how the Re­pub­lic­ans think they’ll en­act tax re­form without ser­i­ous en­gage­ment from Demo­crats,” says a Demo­crat­ic aide, who re­ques­ted an­onym­ity to speak freely.

In this par­tis­an en­vir­on­ment, it’s dif­fi­cult to ask any law­maker to take tough votes that would al­ter the way Amer­ic­ans pay taxes — es­pe­cially if the le­gis­la­tion tar­geted pop­u­lar tax breaks such as the de­duc­tions for mort­gage in­terest, state and loc­al taxes, or char­it­able con­tri­bu­tions. Yet these re­main some of the cost­li­est breaks on the books, ac­cord­ing to data from the Joint Com­mit­tee on Tax­a­tion.

“Who are the win­ners from tax re­form? Are they sym­path­et­ic?” asked former Treas­ury and White House of­fi­cial Tony Fratto at a re­cent pan­el dis­cus­sion. “Are they go­ing to mo­bil­ize sup­port in the coun­try for votes? I don’t think so — there aren’t enough of them.”

PUB­LIC SEN­TI­MENT

Even if Camp musters the will to re­lease a tax-re­form pack­age and pass it out of com­mit­tee by the end of 2013, there’s no guar­an­tee that the pub­lic will rally around it. Polling con­sist­ently shows that Amer­ic­ans put the eco­nomy and job cre­ation as their first pri­or­it­ies for the fed­er­al gov­ern­ment, fol­lowed in­creas­ingly by re­du­cing the de­fi­cit, ac­cord­ing to data from the Pew Re­search Cen­ter.

Even when Amer­ic­ans do think about chan­ging the tax code, there is little con­sensus on the right way for­ward. Ac­cord­ing to a Pew study from the spring of 2013, 72 per­cent of Amer­ic­ans would like to change the tax code — but they can’t agree at all on the best meth­od.

Just 11 per­cent com­plained that they pay too much in taxes, the study found. Yet about 57 per­cent were dis­sat­is­fied with what they called the sys­tem’s un­fair­ness, or the idea that wealthy people get away with not pay­ing their fair share in taxes. And while a ma­jor selling point in Camp’s pitch to the pub­lic at large is that the tax code is too com­plex, just 28 per­cent of Pew re­spond­ents said they were con­cerned about that.

It’s evid­ent that Amer­ic­ans out­side of D.C. over­whelm­ingly worry about the state of the eco­nomy and the de­fi­cit — and that those is­sues trump con­cerns over the state of the tax code.

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