Cooler heads on Capitol Hill as 'super committee' toils to cut US deficit?

Washington these days is in a state of suspended animation: Everyone is watching and waiting to see if Congress's deficit "super committee" can defy huge odds and come up with a way – by Nov. 23 – to yank the federal balance sheet back from the abyss.

The panel has labored mostly behind closed doors, and the six Republicans and six Democrats serving on it have not divulged much – beyond lamenting how difficult the deficit-reduction task is and how slim their chances of success are.

But just when expectations could hardly get darker ... enter some glimmers of bipartisan hope.

The first comes from 100 House members – 40 Republicans and 60 Democrats. On Nov. 2 they sent a letter urging the super committee to "put all options on the table" to cut deficits by $4 trillion over 10 years. That's akin to the scale of the "grand bargain" that President Obama and House Speaker John Boehner tried, but failed, to achieve over the summer during a showdown over the national debt ceiling – and it's much more than the $1.2 trillion in deficit reduction the panel is mandated to produce.

A second comes from the Senate, where the bipartisan "Gang of Six" senators working on deficit reduction has ballooned to 45. They, too, call for a $4 trillion deficit-reduction deal – one that includes reform of both entitlements and taxes.

Yet another glimmer comes from within Republican ranks. A behind-the-scenes discussion is under way, on and off Capitol Hill, that could clear the way for some GOP lawmakers to agree to close tax loopholes – a move that would raise government revenues – on grounds that cutting these "tax expenditures" will actually reduce the sway of big government and spur economic growth. It's a delicate issue for elected Republicans, almost all of whom have pledged not to raise taxes – and not to end tax breaks, unless the resulting revenue increase is offset dollar for dollar by new tax cuts.

Much is at stake as the Joint Select Committee on Deficit Reduction, as the panel is officially known, knuckles down ahead of its pre-Thanksgiving deadline. The panel could opt to undo decades of work by K Street lobbyists who carved out tax and other advantages for their causes and corporations. It could raise the standing of Congress by presenting a viable plan that distributes the pain, or it could further sink the institution's public esteem by dissolving in acrimony and stalemate. It could put the federal government on the path to fiscal responsibility, or it could punt – and risk a rebuke from the markets and the rating agencies that determine America's creditworthiness.

"The super committee represents our best, and possibly only, chance to make the real reforms needed to return our country to fiscal health," said Rep. Mike Simpson (R) of Idaho in a statement, as the Nov. 2 bipartisan letter made its way to the panel.

No one, however, should be sanguine about the panel's prospects. Powerful forces drive lawmakers to hold to partisan lines. For Republicans, it's a commitment to no net increase in taxes. For Democrats, it's no significant cuts to entitlement spending, such as Medicare, Medicaid, or Social Security, unless Republicans agree to tax hikes.

That impasse puts taxes at the center of any bid to reach a deal. Nearly every Republican in Congress – and all six GOP members of the deficit panel – have signed the "taxpayer protection pledge" maintained by Americans for Tax Reform (ATR) and its president, Grover Norquist.

Given the gravity of America's economic crisis, some economists in good standing with conservatives are challenging whether the limits imposed by the ATR pledge still make sense. Three think tanks are also engaged in the discussion but will not go on the record. At issue is whether some tax breaks distort markets and harm growth. Big tax breaks can be just as much a symptom of big government as big spending, they say. If so, the argument runs, why should lawmakers who oppose excessive government spending be bound by a pledge to protect harmful or excessive tax expenditures, especially if axing them enables Congress to reduce the deficit, lower overall tax rates for individuals and corporations, and promote growth?

Mr. Norquist, however, is not taking the challenge lying down. "Democrats want to raise taxes. They don't want to cut spending," he says in an interview. "Republicans don't want to raise taxes. They want to cut spending. That's exactly what we want the narrative to be between now and the next election cycle."

People remember what happened after President Reagan struck a 1982 deficit-reduction deal with Democrats – one that included tax hikes – and after President George H.W. Bush did the same in 1990, Norquist told C-SPAN's "Washington Journal" on Oct. 31. Taxes went up and, contrary to congressional promises, future spending went up, too. "That's why we're going to hold the line," he said.

Even so, some Republicans are rethinking their commitment to the pledge, especially the ban on getting rid of tax breaks without offsets.

Asked on Nov. 1 whether he could vote to end tax breaks without offsets, Sen. Pat Toomey (R) of Pennsylvania, a super committee member, said: "If you lower marginal rates and simplify the [tax] code, you reduce the misallocation of resources that is produced by the code, and if you preserve the lower rates for capital formation and dividends, then yes, I think so."

Does that mean he could vote along these lines on the super committee? "With a lot of qualifiers and under certain circumstances, I could do it," he said.

Tax expenditures in 2010 accounted for almost $1.1 trillion in revenues that would otherwise have been collected by government. Spending on Medicare and Medicaid, by contrast, was $701 billion that year, and for defense it was $689 billion, according to government figures.

"I hope that a big part of what the super committee will do is to look at many of those tax expenditures, eliminate them, and lower tax rates for everyone," said Sen. Bob Corker (R) of Tennessee. "That would spur tremendous economic growth in our country."

Some conservatives say the debate has shifted since the tax pledge was born in 1986, noting that GOP presidential contenders are focused not on tax cuts but on a flatter, fairer tax code. "The debate is changing. It's a different era," says a spokesman for a prominent conservative think tank, speaking off the record to avoid a public rift with Norquist.

Rep. Frank Wolf (R) of Virginia, who signed the bipartisan letter, challenged Norquist's clout Oct. 4 on the House floor: "Everything must be on the table, and I believe how the 'pledge' is interpreted and enforced by Mr. Norquist is a roadblock to realistically reforming our tax code."

House GOP leaders do not publicly criticize the pledge. But they are encouraging lawmakers to focus on policies that will promote growth, such as lower tax rates, but not necessarily to find offsets for every tax break to be axed.

"The House Republican leadership is working very hard trying to talk to people and say to them: These are loopholes. These are picking and choosing winners in the marketplace. It's everything we've been against," says Steve Bell, senior director of the Economic Policy Project at the Bipartisan Policy Center in Washington. "Whether they have persuaded enough members, I don't know."

Economists such as Martin Feldstein, chairman of the Council of Economic Advisers under Reagan, and Donald Marron, director of the Urban Institute-Brookings Tax Policy Center, are urging lawmakers to seek deficit reduction in a tax code full of loopholes and subsidies that distort the economy and harm growth. That argument has not yet won over a critical mass of conservative lawmakers, for whom lower taxes and smaller government is a mantra. But examples in the tax code, such as $6 billion in ethanol subsidies, are winning converts.

"Smaller government and lower taxes don't completely mesh anymore, and conservatives are beginning to realize this," says Mr. Marron. For instance, "by getting rid of the tax advantage for ethanol, you can make government smaller by increasing tax revenues."