DC Tax Update: GOP moves away from entitlements and toward tax reform in budget deal

DC Tax Update: GOP moves away from entitlements and toward tax reform in budget deal

With another fight over the national debt brewing this summer, congressional Republicans are de-emphasizing their demand for politically painful cuts to retirement programs and focusing on a more popular prize: a thorough rewrite of the U.S. tax code.

Reining in spending on Social Security and Medicare remains an important policy goal for the GOP. But House leaders launched a series of meetings last week aimed at convincing rank-and-file lawmakers that tax reform is both wise policy and good politics and should be their top priority heading into talks with Democrats over the need to raise the federal debt limit.

The move comes weeks after President Obama responded to Republican demands to cut expensive federal retirement benefits by offering to shrink Social Security cost-of-living adjustments and raise Medicare premiums. The proposals, included in the president’s budget request, outraged seniors, and some Republicans fear that embracing them would be political suicide.

There is no such ambivalence, however, about simplifying the tax code and lowering the top rate, which jumped from 35 percent to 39.6 percent as part of a year-end budget deal that still rankles Republicans.

“The conference will unite around tax reform,” said House Majority Whip Kevin McCarthy (R-Calif.), who hosted the first “listening session” on the issue Thursday in his first-floor Capitol office. “The window is now.”

House Ways and Means Committee Chairman Dave Camp (R-Mich.) led the session, offering polling and focus-group data showing that voters are hungry for simpler, fairer tax laws. Camp has started drafting legislation that would wipe out the current welter of exemptions and deductions and replace them with sharply lower rates, an approach championed by Erskine Bowles and Alan Simpson, co-chairmen of Obama’s fiscal commission.

“We’re not going to take the current code and see what comes out. We’re going to take a blank piece of paper and see what goes back in,” said Camp, who advocates a streamlined code with just two brackets and a top rate of 25 percent.

The House strategy also holds some appeal in the Senate, where key Republicans say it may offer a more palatable alternative to negotiating a budget deal directly with Obama. After two dinners with the president and a meeting Thursday with senior administration officials, Senate Republicans are under pressure from the White House to produce their own debt-reduction plan to counter Obama’s proposal to reduce borrowing by $1.8 trillion over the next decade through higher taxes as well as cuts to retirement programs.

Senate Minority Leader Mitch McConnell (R-Ky.) is staying out of the talks, and it’s not clear who would make such an offer on the GOP’s behalf. Republicans involved in the process say they are reluctant to form another ad hoc “gang” and hope to channel negotiations through the Senate Finance Committee, which has broad jurisdiction over taxes, Social Security and Medicare. Plus, retiring Finance Committee Chairman Max Baucus (D-Mont.) has a track record of working with Republicans and is eager to strike a deal.

However, the senior Republican on the panel, Sen. Orrin G. Hatch (Utah), said after Thursday’s meeting with White House Chief of Staff Denis McDonough that he is not inclined to take the lead in drafting a GOP counteroffer. Sen. Tom Coburn (R-Okla.) said the senators are also worried about agreeing to anything that would undercut House leaders.

“We really can’t go first,” Hatch said. “If I were the White House, I’d be working very hard with a guy like Camp, who’s a reasonable guy and smart to boot. And highly thought-of by both sides.”

Camp said he has spoken to Treasury Secretary Jack Lew and that aides to both men have “begun discussions” about tax reform. Still, most Democrats dismiss it as a fantasy in these polarized times, saying such complex legislation could never be finished before Washington enters campaign mode for the 2014 elections, much less by September, when lawmakers will likely need to pass legislation to raise the debt limit or risk a national default.

“They want tax reform as the price for raising the debt ceiling, but where’s the plan?” said Rep. Sander M. Levin (Mich.), the senior Democrat on the House Ways and Means Committee. “So far, what we mostly have is a 25 percent rate without any kind of hint as to how to get there.”

Moreover, Democrats argue, tax reform doesn’t meet the requirements that Republicans have set for supporting an increase in the debt limit. House Speaker John A. Boehner (R-Ohio) has repeatedly said he would demand “cuts and reforms” sufficient to put the nation on a path to a balanced budget. But the GOP vision for tax reform is “revenue neutral,” meaning all the cash raised from wiping out tax breaks would be returned to taxpayers in the form of lower rates, with no money left over to reduce annual budget deficits.

Obama, by contrast, is pressing to raise taxes on the wealthy by at least $600 billion over the next decade.

Camp argues that a simpler tax code would spur economic activity, create jobs, increase wages and, thus, raise revenue, offering “one way out of our debt.”

“Obviously, we’ve already done a lot to cut [agency] spending. The committee is also looking at entitlement reform, but those hearings are just beginning,” Camp said. Tax reform, on the other hand, has been in the planning stages for two years. Camp has already unveiled proposals related to Wall Street, small businesses and international taxation and is vowing to draft complete legislation by the end of the year.

“It’s not small ball. It’s a big idea,” Camp said. “This is something that is important and something that we could connect with the debt limit.”

Nearly 30 GOP lawmakers attended the first meeting on the subject Thursday afternoon. Additional sessions are planned when the House returns after a week-long break. Boehner spokesman Michael Steel said tax reform is among an array of options under consideration, adding that a final decision has yet to be made “about the best combination of spending cuts and reforms that will be necessary to increase the debt limit in accordance with the Boehner rule.”

GOP aides, however, said tax reform has emerged as the best option for House leaders determined to act early, avoid blame for another debt-limit crisis and associate the party with policies that help ordinary families.

The White House, meanwhile, insists that it will not negotiate over the debt limit. “Congressional Republicans have been presented a very common-sense compromise budget offer and have gotten the regular order process they have been asking for for years. Now the ball is in their court,” said an administration official, speaking on the condition of anonymity to discuss private talks. “The one thing that is nonnegotiable is the debt limit ? no trading, no negotiating over paying the bills Congress has racked up. Earlier this year they passed on putting our nation at risk of default, and it’s incumbent upon them to do it again.”

The House strategy is developing, and Camp said it is not clear how it might come together. Negotiations are underway between the House and Senate budget committee chairmen, Rep. Paul Ryan (R-Wis.) and Sen. Patty Murray (D-Wash.). If those talks become the forum for striking a budget deal and raising the debt limit, GOP aides said, Republicans could insist that a tax overhaul be put on the legislative fast track, with special protections from filibusters in the Senate. The debt limit might be raised for only a few months, with the promise of another increase when tax reform legislation passes the Senate.

Such an agreement, however, would require Republicans and Democrats to resolve the long-standing dispute over whether tax reform should generate fresh tax revenue to reduce deficits or whether it should lower tax rates. In a recent hearing on the Obama budget, Baucus suggested a compromise: Maybe, he said, tax reform should do both.

“We will close billions of dollars of loopholes. Some of this revenue should be used to cut taxes for America’s families and help our businesses create jobs, and some of the revenue raised in tax reform should also be used to reduce the deficit,” Baucus said. “It’s all about finding common ground.”

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