Lawmakers this week renewed the fight over revenue and taxes as the debate continued over whether to reform the tax code and how to replace the "sequestration" that is scheduled to automatically cut spending beginning March 1.
The American Taxpayer Relief Act of 2012 (ATRA) enacted in January will raise an estimated $620 billion over the next 10 years but did not completely settle the fight over deficits. In addition to the sequestration scheduled for March 1, the most recent funding resolution for the federal government will expire on March 27, and an extension of the federal debt limit will expire on May 19.
The president's State of the Union address on Feb. 12 offered few new details on the administration's tax platform but again called for new revenue to be part of any deficit solution. President Obama said "hundreds of billions" could be saved by "getting rid of tax loopholes and deductions for the well-off and well-connected." Senate Democrats followed the speech with a proposal to replace the sequestration with spending cuts and $55 billion in new revenue from tax provisions that would:
- create a new 30% minimum tax for high-income taxpayers phasing in from $1 million to $2 million in adjusted gross income (charitable contributions would not be included in the minimum tax calculation);
- add oil from tar sands to the definition of petroleum products for purposes of oil spill liability trust fund taxes; and
- bar deductions for the cost of certain "offshoring transactions" in which operations are moved abroad.
Republicans immediately rebuffed the Democratic proposals and have consistently argued that the revenue fight ended with the $620 billion raised by ATRA. They have instead called for entitlement reform or other spending cuts to replace the sequestration. Republicans could possibly agree to include some revenue as part of an eventual compromise, but the minimum tax proposal and offshoring proposals are unpopular and unlikely to be enacted.
Tax reform
Both sides moved to advance the tax reform debate this week. The House Ways and Means Committee announced the following 11 bipartisan tax reform working groups:
- Charitable/exempt Organizations
- Debt, equity and capital
- Education and family benefits
- Energy
- Financial services
- Income and tax distribution
- International
- Manufacturing
- Pensions/retirement
- Real estate
- Small business/pass-throughs
Each working group is led by a Republican and a Democrat, and is charged with reviewing current law and identifying, researching and soliciting feedback. The groups are not expected to make policy recommendations or produce legislation, but the Joint Committee on Taxation will prepare a report by April 15, 2013, that summarizes the information gathered by the groups.
House Ways and Means Committee Chair Dave Camp, R-Mich., is clearly committed to pursuing tax reform. In addition to creating the working groups, he has already published tax reform discussion drafts on financial products and international tax rules. The commitment of party leaders is less clear. House Speaker John Boehner, R-Ohio, said last week that Republicans would love to reform the tax code, but he expressed serious reservations about whether it was worth it: "Why go through all that effort if it isn't going anywhere, or why go through that effort if the outcome would be unacceptable?"
The president said in the State of the Union speech that "now is our best chance for bipartisan, comprehensive tax reform," but he has many other policy priorities, including immigration, the minimum wage, gun regulation and carbon emissions. In a policy document released with the speech, the administration also made clear that tax reform must raise revenue to reduce deficits, which could make it harder to reach agreement with Republicans. The policy document also emphasizes many of the other smaller tax changes the president has called for, such as a tax credit for bringing production back from overseas and the permanent extension of renewable energy incentives. If tax reform is going to be considered, it will most likely have to be part of a grand compromise on the deficit and not a standalone effort.
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