Will Obama call for tax reform in the State of the Union?

Tax reformers are pushing the president, but aren't sure it's at the top of his agenda.

Tax reformers are pushing President Obama to use his upcoming Jan. 25 State of the Union address to press for a rewrite of the revenue code. They admit, though, they are uncertain whether he’ll do so, or whether he’ll follow up the rhetoric with a major White House initiative.

Unless the president takes the lead, reformers fear their efforts will go nowhere. “What this has always been about is the president,” Senator Ron Wyden (D-OR) told me the other day. “We need to get the presidential bully pulpit.” Wyden, who has sponsored his own reform plan, says he’ll reintroduce his bill this year with a new Republican cosponsor. New Hampshire Republican Judd Gregg, who had coauthored the plan, has retired.

Last week, Rich Miller and Ryan Donmoyer at Bloomberg News described the Administration’s internal struggles over whether to embrace reform. Insiders say the debate within the Obama White House over the issue remains unresolved. It is likely that Bill Daley, Obama’s new chief of staff who has close ties to the business community, will play a key role in settling the dispute.

Rhetorical support from Obama in his speech to Congress is a necessary first step in a serious reform effort, but it is just a modest beginning. Tax reform is one of those issues that sounds fabulous at 30,000 feet. After all, what could be more popular than a clarion call for tax fairness and simplicity?

Besides, as Wyden notes, no one is likely to leap to the defense of the current revenue system. As an abstraction at least, tax reform may be the only issue in America that does not have us screaming at one another over the back fence.

The trouble comes when you start to dig in the muck of the tax code. That’s when you wrestle with issues such as what to do about the immensely popular mortgage interest deduction, or whether workers should have to pay tax on the cost of their employer-sponsored health insurance. And that’s when the issue becomes highly polarizing.

Then there is the bedrock question of how much money a new tax code should raise. Democrats see reform as a mechanism to increase taxes. Many Republicans see it as a way to cut taxes and the rest are likely to demand that any new law raise no more than the current tax code.

Just look at the state of play on Capitol Hill. Senate Finance Committee chair Max Baucus (D-MT) and House Ways & Means Committee chair Dave Camp (R-MI) both say they favor reform. Neither man has said exactly what that means, but I suspect their views are quite different.

It is highly unlikely that gap can be bridged before the next elections, but if it can, it will take Obama and his bully pulpit to pull it off. No member of Congress, not even a chairman of a tax-writing committee, is going to unilaterally call for scaling back the mortgage deduction. Only the president can provide the political cover necessary to do that.

Obama has three key decisions to make in the coming weeks. Does he embrace reform as a keystone issue at all? If so, does he limit his initiative to corporate tax restructuring–as some in the White House are hinting—or include individual taxes as well. Finally, does Obama call for “revenue neutral” reform that keeps federal taxes at their current low levels or does he push a rewrite as part of a larger deficit reduction package?

Watch what Obama says in two weeks. If he ignores reform, the issue is almost surely finished for the next two years. If, by contrast, he puts the issue at the top of his 2011-2012 agenda, something may actually happen.

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