Will Tax Reform See a Vote Anytime Soon?

Billy House

House Ways and Means Committee Chairman Dave Camp, R-Mich., was unequivocal when he announced at the Tax Foundation’s annual dinner in November that his panel will write, mark up, and pass tax-reform legislation in 2013.

“We intend to move a comprehensive tax-reform bill in 2013—no matter what,” Camp said, and the sentiment was underlined when Speaker John Boehner set it as the House’s top priority, reserving H.R. 1 as the bill number for tax reform.

Yet, as both the House and Senate move forward, widespread doubt has taken hold as to whether these efforts have any real chance of evolving into votes this year—or in 2014, or even a year after that. By that time Camp may no longer even be chairman of Ways and Means, because he faces a term-limit at the end of next year.

In the Senate, Finance Committee Chairman Max Baucus, D-Mont., has continued to describe tax reform as “a challenge, but one we are ready to take on,” although he has not set any due date for whatever plan the Senate will produce.

“We’ve learned it’s best to not set artificial deadlines,” said committee spokeswoman Meaghan Smith, although she reiterated that Baucus is committed to comprehensive tax reform “to make the system simpler for families and close corporate loopholes.”

William Hoagland, senior vice president of the Washington-based Bipartisan Policy Center, says he’s among those pessimistic about a two-party deal occurring this year or next on major tax reform—a sentiment reflected in interviews this week with others, including some senior congressional aides from both parties.

It’s not so much that consensus doesn't exist on the need to simplify, close some tax breaks and loopholes, and lower corporate tax rates to help U.S. companies become more competitive globally. Rather, Hoagland said that Republicans and Democrats are having trouble resolving whether an overhaul of the tax code should raise revenue to reduce the deficit.

Republicans generally want this effort to be revenue neutral, using the savings from limiting exemptions to lower individual and corporate rates. Many Democrats want to raise revenue through tax reform to help pay for deficit reduction.

Adding complexity is that corporate tax reform likely won’t fly alone—particularly heading into a congressional election year—and that meaningful changes to the individual tax code will also be needed.

One obstacle is that a majority of small businesses do not pay a corporate tax rate but are organized as so-called pass-through entities that pay tax on business income at an individual tax rate. Senate Minority Leader Mitch McConnell, R-Ky., is among those who say that just doing a corporate tax rewrite will leave out too many businesses. But redoing the individual tax code also means deals will have to be struck on tough reform issues, such as what to do with popular deductions for mortgage interest or charitable contributions.

All of this will require more compromise than might be possible between two parties in the midst of a budget war. There's speculation that President Obama could propose something in his own budget plan expected to be unveiled April 10—such as cutting Social Security and Medicare to reduce the long-term deficit—that at least “could give a group of Republicans in the Senate the ability to play ball on some tax increases,” Hoagland says.

Despite all the early declarations of how necessary a tax-code overhaul is and the ballyhooed setting aside of H.R. 1 for such a bill, optimism for action this year has faded—unless reform can emerge as part of a “grand bargain” on the budget.

Scott Hodge, president of the Tax Foundation, is among those who suggest a longer-term perspective, pointing out that the Tax Reform Act of 1986 was actually developed over several years. But he said he takes Camp at his word in promising action in his committee.

“I think that what the chairman is able to produce can be the catalyst for the eventual passage of a real tax-reform plan,” Hodge said. “It may not happen this year, or next year, or three years from now—but I believe that it will be a fundamental catalyst for an eventual reform plan.”

Hodge said legislative “spade work” needs to be done to build support, to overcome constituent opposition, and to create broader public awareness of the problems and solutions. “These things take time,” he said.

Senior congressional aides say it is unlikely that any bill will actually reach the House floor for a vote this year, unless a deal is reached with the Senate. Concerns by rank-and-file Republicans over taking a vote on a package that could include eliminating some popular tax breaks, only to see the bill go nowhere in the Senate, would outweigh any argument that this would put the Senate on the defensive.

Baucus, who meets with Camp each week on the subject—or at least talks to him by phone—has promised he would not use what Camp comes up with in the House as a political weapon.

But while Hodge and others say that Baucus is viewed as genuinely wanting to work toward political compromises, reform has little support in his caucus. His bigger challenge is crafting a bipartisan plan that will appeal to his caucus. On top of that, he faces reelection in 2014.

So, in what may be an example of just how gingerly Baucus must tread, Finance Committee “option papers” being developed as part of reform talks carry a disclaimer at the bottom of each page: “These option papers include ideas from across the spectrum and, as such, do not necessarily have the endorsement of either the Chairman or Ranking Member."