Tax reform on hold in Senate amid fight over deficit reduction

Prospects for tax reform in Congress are in limbo because of a fight over whether the effort should raise revenue to reduce the deficit. 

The dispute has held action by the Senate Finance Committee, which has not begun preliminary work on overhauling the tax code. 

Senate Majority Leader Harry Reid (D-Nev.) is undecided as to whether it should proceed if Republicans do not agree up front on how much revenue should go to deficit reduction. 

{mosads}Many Democrats are eager to get moving on legislation to raise hundreds of billions of dollars in new revenues through tax reform, but Senate Finance Committee Chairman Max Baucus (D-Mont.) is reluctant to move legislation out of his committee that does not have bipartisan support.

Reid said the Democratic Caucus would have several more discussions before deciding to move tax reform without an agreement with Republicans to set aside a portion of the revenues to cut the deficit.

“The only conclusion I reached was that before any decisions are made in this regard, we’re going to have a caucus or two, or maybe three. It’s an important issue, and we’re going to make sure that not only members of the Finance Committee, but all my senators, understand the issues,” Reid said.

A Senate Democratic aide noted that while members of the Finance panel are well-versed on policy options, other members of the caucus need in-depth briefings.

The Senate Finance Committee held its first issue meeting on tax reform Thursday, in which members discussed papers laying out policy options. The panel plans to hold these meetings regularly on Thursdays.

Baucus says his panel can begin to explore ways to broaden the tax base, but the heavy lifting for tax reform will hinge on reaching agreement with Republicans on how much of the tax revenues raised to devote to shrinking the deficit.

“That question has to be resolved,” Baucus said before qualifying his answer. “The more that’s resolved, the more we’re going to get successful tax reform.”

The biggest obstacle to tax reform is that both parties are at a stalemate on the question of what to do with new revenues.

The Senate Democratic budget would devote $975 billion in revenues raised through tax reform to pay down the deficit. House Republicans want to keep tax reform revenue-neutral. They say any savings from limiting deductions and exemptions should be used to lower individual and corporate tax rates.

“That’s an issue that’s got to be put off for a while. In the meantime the tax-writing committees are going ahead and figuring out how to best broaden the base, figuring out what revenue can be generated by base-broadening bills [and] later on press the question of what that revenue is generated to,” Baucus said.

Republicans say the pressure will build on Baucus to move legislation through the Finance Committee if the House passes a package first.

The House Ways and Means Committee has already unveiled three drafts on international tax reform, financial products and pass-through and small-business entities that could be quickly merged into a broad legislative package.

“If the House passes something, there will be a lot more pressure to act,” said a Senate GOP leadership aide.

Some Democratic leaders want to get started on tax reform, even without an up-front agreement on a revenue goal. But it’s unclear whether they envision only the preliminary groundwork Baucus has in mind or more meaty action.

Senate Democratic Whip Dick Durbin (D-Ill.) thinks Republicans will be more likely to support raising new tax revenues for deficit reduction once the Finance committee identifies loopholes.

“I think it’s possible that there’ll be some sentiment among Republicans to support it,” Durbin said. “I think when you start identifying the loopholes in the tax code, it’s going to be politically difficult for a lot of these people to oppose changing.”

Senate Democratic Policy Committee Chairman Charles Schumer (N.Y.) said: “It can’t hurt to try. Right now tax reform means different things to different people, but I think we should try.”

The GOP leadership aide said Baucus has a very different view of tax reform than Durbin and Schumer.

“There’s a zero point zero percent chance that Baucus moves ahead with tax reform,” said the aide. “He’s not where the rest of the members of his caucus are, where they want a big tax increase. He wants revenue-neutral tax reform.”

Not a single Republican is expected to vote for the Democratic budget, which instructs the tax-writing committees to generate nearly $1 trillion in new revenues to turn off automatic spending cuts known as the sequester.

Baucus, however, wants to pass a tax-reform bill out of the Finance Committee that has Republican support.

“It’s a big help. That’s my goal,” he said.

Baucus made clear to Democratic leaders earlier this year that he was not happy about the reconciliation instructions included in the budget ordering his panel to raise hundreds of billions of dollars in new tax revenues. Under reconciliation, such an overhaul of the tax code could pass the Senate with a simple majority vote — but the Senate and House would have to reach a joint budget resolution to empower it.

Sen. Orrin Hatch (Utah), the senior Republican on Finance, blasted the Democratic budget.

“You can’t simply say we want the Finance Committee to figure out how to raise taxes by another trillion dollars to finance our spending spree,” he said. “That is irresponsible and, like I said, it poisons the well for fundamental tax reform.”

Many lawmakers are skeptical Senate Democrats and House Republicans can bridge their vastly different budgets.

Sen. Ben Cardin (D-Md.) said he does not envision the Finance panel advancing tax reform without an agreement on deficit reduction.

“I don’t see how you can move ahead if it’s not bipartisan,” he said. “The only way you can move ahead with broad tax reform is if it’s bipartisan.”

A Senate Democratic aide said Baucus “knows that in order for it to be successful, real comprehensive tax reform must be on a bipartisan basis.”

Baucus has held 30 hearings on tax reform, and members of the committee are now reviewing the information collected.

Cardin said the Finance panel could craft corporate tax reform if Democratic and Republican leaders remain divided on the question of revenues. Both sides agree corporate tax reform should be revenue-neutral.

But there appears to be little support among party leaders for advancing a corporate tax package separately from individual tax reform.

President Obama noted there is common ground between the parties on corporate tax reform but said it should be linked to individual tax reform that raises revenues.

Senate Republican Leader Mitch McConnell (Ky.) said addressing corporate tax reform exclusively would leave out too many businesses.

“I don’t see how you can do corporate tax reform only. We have too many S corps and [limited liability corporations] all across America. In fact, it is numerically the greatest number of American businesses [that] don’t pay taxes as corporations and you don’t want to have an adverse effect on American small business,” McConnell said.