Tax reform progressing in spite of fiscal gridlock

March 11th, 2013

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President Obama and his Republican dining companions showed last week that bipartisan schmoozing is back. Whether bipartisan deal-making will follow is anyone’s guess. But if it does, there are reasons to believe tax reform will be on the menu.

The most visible movement on tax reform is in the House of Representatives. Speaker John Boehner (R-OH) last week announced that the bill name “H.R. 1” would be reserved for tax reform. Traditionally, House speakers have given that title to bills that are among their top priorities. Consider some of the recent bills with that name: the stimulus package of 2009 and the Medicare prescription drug law of 2003.

The H.R. 1 designation signals the end of an internal Republican dispute over whether to proceed with tax reform. Majority Leader Eric Cantor (R-OH) previously advised the party to avoid the issue, because its progress could require votes on controversial topics like the mortgage and charitable deductions. But now, with Boehner’s blessing, House Ways and Means Committee Chairman Dave Camp (R-MI) has a green light to pursue his priority issue.

And Camp is off and running. Last month, he and Ranking Member Sandy Levin (D-MI) announced the formation of 11 tax reform working groups. Each group, led by one Republican and one Democrat, is charged with researching and compiling feedback on one area of tax policy by—fittingly—Tax Day on April 15. Those issues range from energy to small businesses to tax distribution.

In addition to the working groups, Camp released a discussion draft outlining proposals to update the tax treatment of financial products January 24. He also held an expansive hearing on tax reform February 14, which featured six panels and more than 40 witnesses.

The Senate Finance Committee, under Chairman Max Baucus (D-MT), is also weighing tax reform ideas, although less publicly than its House counterparts. Baucus has held one-on-one tax discussions with committee members, whose staffs are developing policy options.

In the Administration, officials continue to support tax reform, but whether it becomes a legislative priority is yet to be seen. Treasury Department Assistant Secretary for Tax Policy Mark Mazur, speaking at a tax conference March 1, said Camp’s discussion draft provides the foundation for “a serious dialogue.” Mazur called many of Camp’s proposals “sensible steps” that have secured support from a range of tax experts.

Yet, amid this progress, the sequester fight over the last few months demonstrated some of the difficulties going forward.

First, the level of revenue continues to be a major unresolved issue. While the White House and Democrats seek more revenue to replace the sequester, many leading Republicans oppose new revenue, insisting that issue was settled by the January 1 tax deal.

Second, the White House’s proposal to replace the sequester partly with business tax loophole closures broke with what has become a consensus in tax reform circles: that revenue from closing business tax loopholes should go toward lowering the corporate rate.

Third, the scope of reform is uncertain. The White House has not ruled out individual reform but has focused publicly on corporate changes. Republicans say corporate reform would necessitate individual reform because, they argue, a lower corporate tax rate paired with the current individual rates would unfairly favor corporations over many small businesses, which pay under the individual code.

In addition to these big-picture questions are plenty of thorny issues sure to cause problems. Should tax reform, for example, move the United States away from its primarily “worldwide” system to the increasingly common “territorial” system? Should tax reform touch the medley of low-income and family tax credits in the individual code?

Despite these questions, Congress and opinion leaders continue to push forward. This month, the RATE Coalition, an organization of businesses and associations pushing for tax reform that lowers the corporate tax rate and broadens the corporate base, released a letter, signed by 20 economists and addressed to Camp and Baucus. The letter makes clear why tax reform remains a big issue: the United States’ 35% corporate tax rate—the highest among OECD countries— impairs our ability to attract investment, create jobs, and raise wages.

If bipartisanship is in fact returning to Washington, the compelling economic arguments for tax reform mean this issue still stands a chance to move in 2013.

—Katy Fairl contributed to this post.