+1 212 318 2000
Europe, Middle East, & Africa
+44 20 7330 7500
+65 6212 1000
Jan. 27 --Proponents of a tax overhaul may have to settle for a tax tinkering instead in 2014.
The promise of a broad rewrite of the U.S. tax code is fading amid the politics of midterm elections and the sheer challenge of cutting corporate and individual tax rates while maintaining government revenue.
Add the looming departure of Sen. Max Baucus (D-Mont.) as chairman of the Senate Finance Committee, nominated to be U.S. ambassador to China, and prospects for major tax legislation seem especially dim, tax lobbyists and former congressional aides told Bloomberg BNA.
In 2014, tax lobbyists and lawmakers said, the most Congress may accomplish is setting the groundwork for an eventual overhaul while renewing dozens of tax provisions that expired in December 2013.
“Chances of tax reform are very low now,” said Eric Solomon, principal in EY LLP's National Tax Department.
On the Finance Committee, the job of leading on tax legislation will fall to the next chairman, most likely Sen. Ron Wyden (D-Ore.). Baucus told Bloomberg BNA his work on a tax overhaul is mostly done.
“There isn't time for that,” Baucus said.
Instead, Baucus said, he considers the work he and his staff have completed to be a framework for an eventual deal, similar to their November 2008 white paper on health care that became a basis for the Affordable Care Act.
“I would like to do something to give a similar perspective to tax reform,” he said. “That's the whole point of the discussion drafts.”
Baucus could exit by the end of January, or soon thereafter, tax lobbyists said, depending on the Senate's schedule for bringing his nomination to the floor.
The tax effort would receive a boost if House Ways and Means Committee Chairman Dave Camp (R-Mich.) can pass a bill in the committee or if President Barack Obama's administration expresses support, either through public comments from the president or in the administration's budget request for fiscal year 2015, said Marc Gerson, a former majority tax counsel to the Ways and Means Committee who is vice president of the tax department at Miller Chevalier, a Washington law firm.
The tax-writing committees' most important work may be in laying the foundation for when the political climate better supports a broad tax overhaul, lobbyists told Bloomberg BNA.
“I do think it's important for folks to really understand that there is groundwork that can be laid,” said Matthew Beck, a former senior Democratic aide on the Ways and Means Committee who is now vice president for public affairs at the Glover Park Group, a lobbying firm in Washington.
With Wyden likely taking the top slot, tax lobbyists and policy analysts will be turning their attention to similarities and differences between his approach to taxes and that of Camp. Wyden sponsored his own tax overhaul with Sen. Dan Coats (R-Ind.) in 2011 and, before that, with former Sen. Judd Gregg (R-N.H.). The focus is also turning to the so-called tax extenders that are more likely to face action in 2014 than any tax code overhaul.
On a broader rewrite of the tax code, Wyden could choose to wait until Camp steps aside as chairman after 2014, as Camp must by House Republican term limits, said Caroline Harris, tax counsel at the U.S. Chamber of Commerce. Rep. Paul Ryan (R-Wis.) has said he plans to seek the chairmanship, although others could come forward.
Wyden's previously introduced tax legislation includes elements that some in the business community like, including a 24 percent corporate tax rate, revenue neutrality and simplicity.
But other provisions are far less popular in the corporate world, particularly among U.S. companies with a multinational presence. Among the unpopular provisions is Wyden's proposal to end deferral on foreign earnings and institute more of a worldwide tax system. Opponents also dislike that the Wyden bill would eliminate accelerated depreciation and Section 199 deductions for qualified production activities.
Harris called Wyden's language “particularly punitive to certain industries.”
Camp, in contrast, proposes a top corporate rate of 25 percent, down from 35 percent in current law, achieved in large part by eliminating tax deductions and credits. He hasn't detailed which tax preferences he would consider cutting. The Obama administration has called for a top corporate rate of 28 percent and elimination of some corporate tax preferences, without proposing changes to the individual side of the code.
Where the top tax rate ultimately falls remains to be seen. Camp may have made his job harder by insisting on a top rate of 25 percent on both sides of the tax code, which is especially difficult to achieve without considering changes to big deductions such as those for mortgage interest and employer-sponsored health insurance, lobbyists and tax policy analysts said. Baucus wasn't as specific in his proposals, which he introduced in late 2013.
In an interview with Bloomberg BNA, Wyden suggested his efforts to revamp the tax code for the first time since the 1986 overhaul have helped him establish a starting point.
“I've always thought that the past is something of a prologue, and Judd Gregg and I sat on a sofa next to each other every week for two years to get that bill,” Wyden said. “It is the first bipartisan income tax bill for a quarter century, since the bill in 1986. Sen. Coats picked up where Sen. Gregg left off when he retired. That gives you some inkling into my thinking.”
How the Finance Committee will approach taxes depends in part on who comprises the staff, which won't be known until a new chairman takes the seat. Harris predicted departures from Baucus's committee staff once a tax overhaul appears stalled for 2014.
Camp, for his part, has signaled a new push on a comprehensive overhaul. In January, he stepped up his campaign with a video touting the effort, a news conference call with the International Franchise Association and a pledge to use an annual House Republican members' retreat to take his message to fellow lawmakers.
In a brief interview, Camp told Bloomberg BNA he isn't settling for less than passing a bill in 2014.
“This is the beginning of the year,” Camp said. “My goal right now is to advance the issue of tax reform, however I can, so I'm not going to suggest an endgame short of final passage and signature by the president. As you know, it's step by step here, and you try to move ahead.”
Camp faces hurdles of his own.
Democrats on the committee haven't endorsed Camp's proposals, and the ranking Democrat, Rep. Sander Levin (D-Mich.), has told reporters that after initially reaching across the aisle, Camp turned toward a Republicans-only strategy of writing a bill that helped kill its chances for 2013.
Camp also faces a political climb within his own party in convincing House Speaker John Boehner (R-Ohio) that a tax rewrite that lowers rates by eliminating popular tax deductions makes political sense in a congressional election year, tax lobbyists told Bloomberg BNA.
So far, Boehner and House Majority Leader Eric Cantor (R-Va.) haven't committed to that approach, focusing instead on the troubled rollout of the Affordable Care Act and other issues as more politically attractive.
“The more the conversation is on health reform, that's not helpful,” Beck said.
The Ways and Means Committee's internal politics come into play as well, some lobbyists said; as time goes by, the focus will increasingly turn to the shuffle for the chairmanship in 2015.
Other stumbling blocks are grounded in policy. Most lawmakers wholeheartedly support simplifying the tax code and lowering tax rates--until the specifics of how to do that come into play, Rep. Tom Reed (R-N.Y.), a Ways and Means member, told Bloomberg BNA.
Particular tax deductions become so entrenched that they aren't politically easy to remove, Reed said. One of those is the deduction for employer-sponsored health insurance, the biggest tax expenditure on the individual side of the code. To eliminate that provision, Reed said, “there would have to be a significant upside.”
Debate about tax deductions and credits will heat up as Congress deals with the tax extenders. Camp has said little about them, telling reporters he is more focused on a big picture tax rewrite. On the Finance Committee, Baucus said, extenders are the only item left on his tax agenda, and Wyden seems more likely to steer the committee in that direction whenever he takes the reins, although he has said he would prefer to address the provisions through a tax overhaul.
If extenders are the committee's likely focus, timing remains uncertain.
Just before departing for recess in December 2013, Senate Democrats tried to renew all of the extenders but Republicans blocked the maneuver. The Finance Committee's ranking member, Sen. Orrin Hatch (R-Utah), said at the time that they deserved more scrutiny and that his and Baucus's staffs would work together to craft extender legislation.
Some Republicans would like to scuttle at least some of the nearly 60 provisions that expired, and there is precedent for trimming the list. Lawmakers let an ethanol provision go a couple of years ago, for example, said Donald Marron, director of economic policy initiatives at the Urban Institute.
Hatch said he won't just rubber-stamp the expired provisions.
“The extender package is a very difficult thing to do, and I'm going to insist that we cut back rather than just keep all of them,” Hatch told Bloomberg BNA. “We should do only the ones that we really should do.”
As lawmakers examine the expired provisions, revenue offsets could complicate the issue of renewing extenders, Solomon said. A Republican aide to the Ways and Means Committee told Bloomberg BNA there is no history of paying for extenders, though it is common for lawmakers to demand that the costs to the government be offset.
Wyden, who has been careful not to say much about his priorities since the Baucus news broke, has long been an ardent supporter of provisions that benefit renewable energy sources such as the $1-per-gallon tax credit for biodiesel producers and the $1.01-per-gallon credit for cellulosic ethanol, among others.
Days before Obama said he would send Baucus to China, Wyden said he would prefer that newer energy sources receive the same tax treatment as older, more traditional energy sources in a rewrite of U.S. tax laws, but extending the temporary provisions would again be necessary because House Republicans in particular slowed down efforts for a tax overhaul.
“If that's the case, I'm not going to let wind and solar and renewable get clobbered because the extenders expire and all those investments in the pipeline get sacrificed,” Wyden said.
Pressure from businesses and other outside groups could force action before the November elections because lawmakers have no major incentives to push them in the last two months of the year, said the co-director of EY's tax group, Michael Mundaca.
He and others predicted that Congress would renew all of them, as has happened frequently in the past.
“I would expect outside the context of tax reform, that's what we would see again,” Mundaca said. “There is some feeling in Congress that extenders should be looked at more carefully. Again, I do think that will happen, only in the context of overall tax reform as opposed to a focus in the current environment of extending one year back and one year forward of more specific, individualized attention to the provisions in the extender package.”
To contact the editor responsible for this story: Brett Ferguson at firstname.lastname@example.org
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).