National debt talks: Signs some in GOP may yield on tax 'loopholes'?

When President Obama invited congressional leaders to resume debt talks at the White House on Thursday, he added a call to “check their ultimatums at the door” – and some fixed partisan taboos indeed appear to be shifting.

For Republicans, the key ultimatum has been that all tax increases – marginal rates and loopholes in the tax code – are off the table. Democrats, for their part, have aimed to shield entitlements, such as Medicare and Social Security, from cuts as part of a debt-and-deficit deal.

But even these taboo topics may now be grist for a grand bargain to cut the federal deficit by as much as $4 trillion over the next 10 years and to avert default on the national debt by an Aug. 2 deadline. For Republicans, the danger here that they would appear to run afoul of the "taxpayer protection pledge" of Americans for Tax Reform, which 236 current House members and 41 senators (mostly Republicans) have signed.

But the prospect of a $4 trillion deficit-reduction deal, which would include raising the national debt limit to avert the first-ever US default on debt repayment, is tantalizing, too – even for some antitax Republicans. They are hoping that closing tax loopholes and then using that new revenue to reduce overall tax rates and pay down the national debt would make sense to their constituents, even if it is technically a violation of the taxpayer protection pledge because the revenue change does not net to zero.

“If we could come up with two or three things that made sense to the American people, then I think not only would we raise the debt ceiling but Republicans would win this debate,” said Sen. Lindsey Graham (R) of South Carolina on Wednesday. “I’m willing to close loopholes for upper-income Americans and recapture that income to lower [tax] rates and pay down the debt.

“If you took the ethanol subsidy and [then] paid down the debt [with the resulting revenues], I’d be OK with that. To lower tax rates to create more jobs but also pay down the debt, that makes perfect sense to me,” he added.

Until recently, GOP opposition to tax breaks has strictly followed Americans for Tax Reform (ATR) pledge, crafted in 1986. The pledge commits lawmakers to two positions: The first is opposition to “any and all efforts to increase the marginal income tax rates for individuals and/or businesses.” The second – and the crux of the current debt negotiations – rejects “any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.”

First to break with GOP antitax orthodoxy, in December 2010, were Sens. Tom Coburn of Oklahoma (R) and Michael Crapo (R) of Idaho, who backed the Bowles-Simpson deficit commission’s plan to cut $4 trillion from the federal deficit over 10 years through a mix of spending cuts, entitlement reform, and net tax increases. The Republicans said America’s fiscal situation is so dire that additional revenue had to be part of the mix.

Since then, Senator Coburn has launched efforts in the Senate to cut tax loopholes in a bid to direct savings to debt reduction. On June 16, 33 Republicans joined 38 Democrats to eliminate the 45-cents-per-gallon tax credit for refiners who blend ethanol with gasoline. In the runup to this vote, ATR president Grover Norquist sent senators letters outlining options that would allow them to send a “symbolic message” on ethanol, without violating the ATR tax pledge, including voting down the underlying bill.

“That’s exactly what happened,” says Mr. Norquist, who also briefed GOP senators. “Everybody knew the rules. Every pledge-taker voted to kill the underlying bill.”

Meanwhile, Democrats are focusing most of their fire on Republicans on the issue of tax loopholes.

“We need to look for wasteful spending everywhere in the budget. But the Republicans stubbornly insist that spending on tax earmarks for special interests or special treatment for millionaires should not even be part of the discussion,” said Sen. Debbie Stabenow (D) of Michigan, in a briefing on Wednesday. “The choice we face is very clear. Republicans target seniors and the middle class while protecting special treatment for special interests and millionaires and billionaires.”

After taking a pounding from Democrats over defending “tax breaks for billionaires,” House majority leader Eric Cantor (R) of Virginia said Wednesday that tax loopholes were not the reason he walked out of debt-limit negotiations with Vice President Joe Biden on June 23, prompting the talks to grind to a halt.

“If the president wants to talk loopholes, we'll be glad to talk loopholes,” he said in his first public remarks since the walkout, and his first indication that tax breaks or subsidies were open for discussion. “We've said all along that preferences in the code aren't something that helps economic growth overall. But, listen, we are not for any proposal that increases taxes, and any type of discussion should be coupled with offsetting tax cuts somewhere else.”

Democrats, too, face tough choices on issues they had hoped to shield during debt negotiations, such as entitlements.

On Wednesday, House minority whip Steny Hoyer said everything must be on the table, including entitlements.

“The Republicans need to put everything on the table and understand you cannot get there from here without putting everything on the table, which includes revenues and, from our perspective, includes entitlements and includes discretionary spending, both on the defense side and on the nondefense side,” he said.

Sen. Jon Kyl (R) of Arizona, who also walked out of the Biden talks over taxes, said that Democrats, too, had their taboos in the talks.

“Republicans have proposed means testing – we have proposed that wealthier people should pay more for benefits or not get as many of them as others. That is something we have proposed and the other side has generally not been willing to consider,” he said Wednesday.

At the White House on Thursday, that could change.