Tax Reform Outlook Update
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Meryl Tiemann
Tax Reform Outlook Update
Inside Washington, Taxation

The promise of a broad rewrite of the U.S. tax code is fading amid the politics of mid-term elections and the sheer challenge of cutting corporate and individual tax rates while maintaining government revenue.

Add the departure of Sen. Max Baucus (D-Mont.) as chairman of the Senate Finance Committee to be the new U.S. ambassador to China—he was confirmed by the Senate on Feb. 6 by a vote of 96-0—and prospects for major tax legislation seem especially dim.

Some speculate that the most Congress may accomplish is setting the groundwork for an eventual overhaul while renewing dozens of tax provisions that expired in Dec. 2013.

Senator Max Baucus’s Confirmation

Last year, Baucus announced he would not run for reelection in 2014 after serving in the Senate for nearly 36 years. In late December, President Barack Obama announced Baucus as his pick for the Beijing assignment and the six-term senator had been on the fast track for confirmation in the weeks since. Although, he has been confirmed, the exact timing of his resignation from the Senate is currently unclear.

Baucus’s appointment as ambassador has given Montana Gov. Steve Bullock (D) an opportunity to put a fellow Democrat into Baucus’s seat until the election. On Feb. 7, the governor appointed his Lt. Gov. John Walsh (D), who is already running for the vacant seat, as the replacement. Walsh’s appointment could boost his chances at winning a full term in the fall, and give Democrats a better shot at holding onto control of the Senate.

New Senate Finance Committee Chairman

Now that Baucus has been confirmed, on the Finance Committee, the job of leading on tax legislation will fall to the next chairman, most likely Sen. Ron Wyden (D-Ore.), but he has been circumspect regarding his plans for moving tax reform legislation. Wyden is expected to be formally named as Finance Committee chairman after a meeting of the Senate Democratic Caucus on Feb. 11.

The extent to which the Finance Committee will build on Baucus’s discussion drafts—on international tax rules, tax administration, cost recovery and tax accounting, and energy policy—as it develops tax reform legislation remains to be seen. Wyden steps into his new role as Finance Committee chairman with a tax reform portfolio of his own.

It is likely; Wyden will draw heavily from his own tax overhaul legislation that he introduced with Sen. Dan Coats (R-Ind.) in 2011 and, before that, with former Sen. Judd Gregg (R-N.H.). The Bipartisan Tax Fairness and Simplification Act was one of the first attempts at taking a comprehensive approach to reforming the tangled web of more than 10,000 exemptions, deductions, credits and other preferences that currently clutter our tax code.

Specifically it would:

• Lower the corporate tax rate to 24 percent and compress individual tax rates to three brackets of 15, 25, and 35 percent;
• Provide a temporary tax holiday for repatriated foreign income but eliminate deferral on foreign income;
• Repeal the individual alternative minimum tax;
• Create new retirement savings incentives;
• Eliminate numerous current-law credits, deductions, and exclusions; and
• Impose new taxpayer compliance provisions.

While Wyden decides how to continue tax overhaul discussions he must also figure out how to deal with a package of tax cut extensions (S. 1859) and a proposal to replace the formula for Medicare payments to health care providers (S. 1871). Another top priority will be to replace a temporary Medicare payment patch that expires March 31.

House Ways and Means Committee

The tax efforts could receive a boost if House Ways and Means Committee Chairman Dave Camp (R-Mich.) can pass a bill in the committee—since the New Year he has ramped up efforts with a new push on a comprehensive overhaul. In January, he used the annual House Republican members’ retreat to take his message to fellow lawmakers.

While positive discussions emerged from the Republican retreat, Democrats on the committee have not endorsed Camp’s proposals, and ranking member Rep. Sander Levin (D-Mich.) has said that after initially reaching across the aisle, Camp turned toward a Republicans-only strategy of writing a bill that helped kill its chances in 2013.

Additionally, Camp faces a political climb within his own party in convincing House Speaker John Boehner (R-Ohio) that a tax rewrite that lowers rates by eliminating popular tax deductions makes political sense in a congressional election year. So far, Boehner and House Majority Leader Eric Cantor (R-Va.) have not committed to that approach, focusing instead on the troubled rollout of the Patient Protection Affordable Care Act (PPACA) and other issues that are viewed as more politically attractive.

The Ways and Means Committee’s internal politics come into play as well, as time goes by, the focus will increasingly turn to the shuffle for the chairmanship in 2015, as Camp must step aside as chairman after 2014 per House Republican term limits. Rep. Paul Ryan (R-Wis.) has said he plans to seek the chairmanship, although others could come forward.

Camp remains committed to producing revenue-neutral legislation that lowers the top corporate rate to 25 percent, down from 35 percent in current law, achieved in large part by eliminating tax deductions and credits. He has not detailed which tax preferences he would consider cutting. While, most lawmakers wholeheartedly support simplifying the tax code and lowering tax rates, the problems arise when the specifics of how to do that come into play.


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