Obama Not Giving Enough Ground On Tax Reform, Republicans Argue

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By Jonathan Nicholson  


The White House portrayed its fiscal 2014 budget submission April 10 as an olive branch to congressional Republicans intent on balancing the budget, but the details of the fiscal plan appeared to do little to narrow the difference between the two sides on three major issues: tax reform, entitlement reform and spending.

With the two major potential budget confrontations looming in upcoming months--the need to increase the government's debt limit and to enact spending bills to keep the government open past Sept. 30--the chilly reception from leading House Republicans to the budget plan may bode badly for attempts at future negotiations.

At the same time, the White House reiterated its stance that the concessions in the budget were not meant to be the subject of individual bargaining but only as part of a larger package with higher revenues that is widely seen as a nonstarter with Republicans.

In the budget, the administration takes aim at the so-called extenders package--temporary tax breaks that have been routinely extended on an annual or biennial basis at the request of businesses--to finance a long-sought lowering of corporate tax rates and simplification of the system.

“Because the President favors adopting these measures as part of revenue-neutral business tax reform that would also cut the corporate rate and comprehensively reform tax subsidies, the Budget does not count the net savings from the business tax proposals described below toward its deficit reduction targets. However, the President's proposal for revenue neutral reform would prevent hundreds of billions of dollars from being added to the deficit if the Congress continues to extend temporary business tax incentives without paying for them,” the budget said.

In its list of provisions described as “reserved for revenue-neutral tax reform,” the budget plan includes $157.5 billion over 10 years from overhauling the U.S. international tax system, including determining the foreign tax credit on a pooling basis, deferring the deduction of interest expenses related to deferred income of foreign subsidiary companies and taxing currently excess returns “associated with transfers of intangibles offshore” (see related story in this issue).

Disagreement on Tax Reform Scope

Another hefty portion of the cost of corporate tax reform would come from changes in the treatment of the financial and insurance industries and their products. Requiring derivatives contracts be marked to market and the resulting gain or loss treated as ordinary income would raise $18.9 billion over 10 years, according to the budget. Another $40.7 billion would come from repealing tax breaks, such as expensing intangible drilling costs and the manufacturing deduction for domestic oil and natural gas production, for fossil fuel industries.

But Rep. Dave Camp (R-Mich.), the chairman of the House Ways and Means Committee, took Obama to task for looking only at corporate tax reform. While Camp praised Obama for “stepping forward” on tax reform, he said Obama had not gone far enough.

“[A]s our economy continues to struggle and millions of Americans have given up looking for work altogether, the President's plan doesn't truly fix our broken tax code. In fact, while looking to help corporate America, the President's plan does not address how complex, costly and unfair the tax code is for American families and small businesses. If the President is willing to do tax reform for Wall Street, then he should be willing to do tax reform for Main Street,” Camp said in a statement. “Instead, the President chose to raise taxes again to fuel even more Washington spending. Tax reform should not be about making people pay more; it should be about strengthening our economy.’

In their budget resolution (H. Con. Res. 25), House Republicans assumed both the restructuring of the corporate and individual tax codes, but would keep the overall revenues at the level projected by the nonpartisan Congressional Budget Office over the 10-year budget window, $40.24 trillion (56 DTR G-2, 3/22/13). In contrast, the president's budget assumes revenues would rise by almost $1 trillion, to $41.23 trillion, if his policies were put in place, even as the amount of corporate receipts would remain stable.

Also, the House budget assumed the corporate rate would be taken down to 25 percent from its statutory rate of 35 percent, while the White House aims for a top corporate rate of 28 percent, and 25 percent for manufacturing.

The budget that was adopted by the Democratic Senate (S. Con. Res. 8), in contrast, included reconciliation instructions requiring the Senate Finance Committee report out a bill by Oct. 1 to raise revenues by $975 billion over 10 years (58 DTR G-4, 3/26/13). Those revenues would come from closing “loopholes” and “wasteful spending in the tax code that benefits the wealthiest Americans and biggest corporations.”

'Clarifying a Statistic.’

On entitlement spending, Obama set off concerns from liberal Democrats on Capitol Hill by offering to move to a new measure of inflation widely regarded as more accurate, the chained Consumer Price Index, for some non-means-tested entitlement programs and for tax purposes. The change would result in a combined deficit reduction from both lower spending and increased revenues of about $230 billion over 10 years.

In addition, Obama offered again--as he had in December 2012--to pare about $400 billion from health care spending over 10 years, with much of the savings coming from cuts to health care providers.

But Rep. Paul Ryan (R-Wis.), chairman of the House Budget Committee, told reporters neither of those moves met House Republicans' criteria for substantial entitlement reform that they are seeking.

“I don't see it as fundamental entitlement reform as much as clarifying a statistic, which does save money. But I would not call it a fundamental restructure of entitlement program preventing them from going bankrupt, like we in the House have proposed,” he said of the chained CPI.

Similarly, Ryan expressed doubt about cutting back on payments to health care providers without seeing fewer accept Medicare and Medicaid patients.

But Ryan did praise Obama for a proposing to boost income-related premiums for Part B and Part D under Medicare. “This will help improve the financial stability of the Medicare program by reducing the Federal subsidy of Medicare costs for those beneficiaries who can most afford them. This proposal will save approximately $50 billion over 10 years,” the budget said.

Medicare Possible 'Common Ground.’

In an appearance before the Economic Club of New York in May 2011, House Speaker John Boehner (R-Ohio) appeared to endorse the idea of reducing Medicare premium subsidies for what he called “people of means.”

“I know this, to some people is, 'Oh my goodness, we couldn't do this. We have to treat all Americans alike.’ Let me tell you: we're broke. For those who have substantial means, you can pay your own premium,” he said (91 DTR G-9, 5/11/11).

Ryan said the idea was a good one, but stopped short of saying it should be the starting point for new fiscal talks

“It's the one thing in here we all have common ground on. We put it in our budget, they're putting it in theirs,” he told reporters. “I'm not going to get into where they start and where they begin, but it is obviously one of the few pieces of common ground we have.”

But administration officials warned the entitlement changes they have proposed were not meant to be dealt with on an individual basis. Gene Sperling, the White House's director of the National Economic Council, repeated that during a briefing April 10.

“The offer that is there for Speaker Boehner is not an a la carte menu and you can't decide to only pick out the concessions the president has made and not include the concessions from the Republican side that need to be made to be part of a bipartisan deal that could pass both houses,” he said.

'Rationalize Expectations,' Ryan Warns

In addition to those two aspects, the sides are far apart on spending. The CBO baseline projects spending of $47.2 trillion from 2014 to 2023. Between the House, Senate, and White House proposals, the House would pare that back most sharply, to $41.47 billion, while the White House spending level, at $46.5 trillion, would make the smallest cuts of the three plans.

In addition, the White House budget includes several new initiatives, including a program to boost early childhood education, paid for with increased tobacco taxes, as well as a $50 billion infrastructure program intended to boost employment. Those ideas are unlikely to garner GOP support.

Ryan, who called the budget a “missed opportunity” upon its release, summed up his feelings: “The reason I'm disappointed is it's more of the same.”

Still, Ryan and his counterpart on the Senate Budget Committee, Chairwoman Patty Murray (D-Wash.) met late April 10 to discuss whether to name conferees and try to go to conference on their different budget proposals, now that the White House bid was on the table. But they agreed only to keep talking.

“We recognized the many differences between the House and Senate budget resolutions and the challenge we face in reaching an agreement. We are committed to working to find common ground. We look forward to continuing the conversation as we move toward a conference committee,” Ryan and Murray said in a joint statement.

Ryan, talking earlier in the day to reporters, advised keeping expectations contained. “I don't think we should talk about a grand bargain. A grand bargain implies you could actually fix the entire problem,” he said. “We're so far from that with what the Senate has passed and the president's put out that I think we should rationalize our expectations to getting a down payment on the problem.”

By Jonathan Nicholson  

Details of the president's budget are available at http://www.whitehouse.gov/omb/budget.