GOP split over niche tax breaks

An internecine fight has broken out within the Senate Republican Conference over tax expenditures, putting Sen. Orrin Hatch (Utah), the senior Republican on the Finance panel, at odds with colleagues.

Hatch, who will likely face a conservative challenger in next year’s Republican Senate primary, has taken a strong stand against any possible tax increases — a position popular with the right. And he’s warned colleagues that niche tax breaks will not be eliminated in order to raise revenue if he has any say.

{mosads}Several colleagues, such as Sens. Tom Coburn (R-Okla.) and Lamar Alexander (R-Tenn.), are talking about a broad proposal to eliminate billions of dollars in tax subsidies and have not ruled out using the revenue to reduce the $1.6 trillion budget deficit.

But they’ll have to battle Hatch first.

“As an aside to some of my friends on my side of the aisle who seem to think all tax expenditures are wasteful spending, consider the following. The third largest tax expenditure is the current lower rates for capital gains and dividends,” Hatch said on the Senate floor recently.

He also warned his GOP colleagues they risked falling into the same camp with liberals such as Sen. Bernie Sanders (I-Vt.).

“Be careful, my friends. Otherwise, you might inadvertently find yourself sharing the stage with my friend, the junior senator from Vermont, in effect advocating for a sharp hike in the rates on capital gains and dividends,” he said.

This stance has put Hatch in step with conservative activist Grover Norquist, president of the anti-tax group Americans for Tax Reform, who argues that eliminating tax breaks without offsetting them with new tax cuts is a violation of the Taxpayer Protection Pledge.

And the fight between the Republicans could affect the deficit talks being led by Vice President Biden.

It’s an open question whether closing special tax breaks will be part of a deficit deal. 

Senate Republican leaders have said tax increases are off the table in the debt-limit negotiations, but last week 33 Republicans, including Senate Republican Leader Mitch McConnell (Ky.), voted to end a tax break for ethanol. McConnell, at a breakfast with reporters Wednesday, declined to say whether closing the ethanol tax break counted as a tax increase.

Coburn has said elimination of the ethanol subsidy should be part of a deficit-reduction deal if the House doesn’t approve the Senate’s action sooner. 

{mosads}Senate Democratic leaders touted last week’s vote on ethanol as a sign that Republicans could be willing to end special tax breaks to reduce the deficit.

Alexander, the chairman of the Senate Republican Conference, says that at a time when the federal government is borrowing 40 cents for every dollar it spends, “it is a good time to take a hard look at unwarranted tax breaks, and one appropriate use of those funds is to reduce the deficit.”

He says about a third of the $1.1 trillion in annual tax expenditures could be eliminated,  citing a recommendation by Martin Feldstein, chairman of the Council of Economic Advisers under former President Reagan.

Coburn says Congress could cut as much as 40 percent of those tax subsidies if it chopped the earned-income tax credit and child tax credit. He argues they shouldn’t be thought of as tax breaks,  and are more like spending.

“That’s just spending put into the tax code instead of an appropriation,” he said.

Coburn would like to use the revenues to lower tax rates, but he’s not ruling out putting them toward deficit reduction.

Sen. Lindsey Graham (R-S.C.) said over the weekend that eliminating special tax breaks could be part of a deficit-reduction deal. He disagrees with Norquist’s contention that ending subsidies such as the ethanol tax break is the same as raising taxes.

“No one in the Republican Party is going to vote to raise taxes,” Graham said on NBC’s “Meet the Press.” “Many of us would look at flattening the tax code.”

He said ending ethanol subsidies doesn’t raise taxes and is “one way to help pay off the debt.”

One Senate GOP aide complained that Alexander is giving ground to Democrats who have demanded that tax increases be part of a deficit-reduction deal.

“I have no idea why certain members of the Senate Republican Conference are willing to cede ground to Sen. [Charles] Schumer [D-N.Y.] and put revenue or tax breaks on the table. Frankly, it’s astonishing,” said the aide.

Hatch doesn’t oppose ending niche tax breaks, but he argues that it must be done as part of broader tax reform package and not connected with a deficit-reduction agreement.

He concedes the tax code as currently written is “burdensome,” but warns any attempt to reform it during negotiations over a deficit-reduction package could lead to higher taxes.

“That’s a wrong-headed approach since spending is causing our debt crisis — not too few taxes,” Hatch said. 

Neither Alexander nor Coburn has yet met with Hatch to discuss eliminating tax expenditures.

Some Republicans bristled at the notion that Alexander, a member of the Appropriations Committee, would stray into the Finance Committee’s jurisdiction.

“When a non-tax writer talks about getting rid of a third of the tax expenditures, what is he talking about?” said a Senate GOP source.

Vicki Needham contributed to this report.