Progress report: Tax reform 2013

Over the past week, Washington has been filled with news about tax reform—some reflecting necessary but painful truths and some just bad. In no particular order, here is where reform stands as Congress leaves town for its extended summer vacation:

Big rates cuts are very expensive. The congressional Joint Committee on Taxation estimated that Congress would have to eliminate trillions of dollars in individual and business tax preferences over the next decade to fully offset the cost of tax reform. JCT told senior Ways & Means Committee Democrat Sandy Levin (D-MI)  that  a plan to cut the corporate rate to 25 percent and trim individual rates to 10 percent and 25 percent and repeal the Alternative Minimum Tax would add $5 trillion to the deficit from 2014-2013. The Tax Policy Center reached a similar conclusion in 2012. In nearly all reform plans lost revenue would be made up by slashing deductions, credits and other tax preferences.  

Dave Camp Speaks. In an interview with Bloomberg TV’s Al Hunt, House Ways & Means Committee Chairman Dave Camp (R-MI) acknowledged that he’s considering changes in popular deductions for mortgage interest and charitable gifts, and may favor taxing capital gains at ordinary income rates. While Camp did not say so explicitly, trimming the charitable deduction and boosting capital gains taxes are critical to any rate-cutting reform plan. These steps would not only raise needed revenue but also are necessary to prevent rate reductions from turning into a windfall for high-income households.

Camp also said he’d try to mark-up a tax code rewrite by the end of the year and would consider tying reform to the coming battle over extending the debt limit—a fight that is likely to happen in November or December. Unlike President Obama, who backed a stand-alone corporate reform last week, Camp wants a combined individual/corporate package.

Electoral politics. 2014 Senate races increasingly intrude on tax reform, and not in a good way. Camp, who is term-limited out of his chairmanship of Ways & Means (absent a waiver by his caucus) is reportedly mulling a Senate race. Camp’s campaign would not be enhanced if he becomes identified as the guy who wants to cut the mortgage interest deduction.

At the same time, Senate GOP Leader Mitch McConnell  (R-KY) seems to be in a very tough reelection race, with a well-funded tea party candidate challenging him in the GOP primary and a credible Democrat poised to give him a tough race in November. The tea party challenge in particular will severely constrain McConnell’s ability to cut a deal on tax reform that includes any new revenues (if he ever had any attention of doing so).

For his part, Senate Majority Leader Harry Reid (D-NV) shows no inclination to bend on his insistence that tax reform raise revenue. Last week, he said any reform would have to generate “significant” new revenue.  Thus, the key issue blocking progress—how much money the new code would raise—remains unresolved.  

Obamacare and the budget.  House Republicans left town last week vowing to shut down the government in the fall unless Congress defunds the 2010 Affordable Care Act. This is not a constructive step in the direction of bipartisan tax reform.     

The Max and Dave Roadshow. Camp and Senate Finance Committee Chairman Max Baucus (D-MT) continue their modest national tour to generate support for reform. This morning, NPR reporter Tamara Keith had a nice piece on the road with the two men. It could all be summed up in the words of a New Jersey appliance store owner. Asked by Baucus if she’d support a reform that trims rates to 25 percent in exchange for cuts in tax preferences, she said sure–as long as they “get rid of some of the ones… that don’t affect me.”