This article first appeared in the St. Louis Beacon: WASHINGTON – Now that everyone has finished filling out their Form 1040s and a myriad other tax forms, plenty of Americans want to know if there is any prospect for a new law to simplify the complex and time-consuming tax code.
The simple but frustrating answer from most experts is: probably not. But there’s plenty of talk about tax reform this year, and the tax panels of both the U.S. House and Senate are working on separate proposals.
Most members of Congress have pet plans to simplify the 5,600-page tax code, and some proposals make sense. It takes, on average, about 13 hours for a typical taxpayer to gather the receipts and W-2s and fill out income tax forms. Nationwide, the costs of complying adds up to 6 billion hours and about $168 billion.
But a fundamental disagreement about whether tax reform should be “revenue-neutral” – that is, not increasing overall tax revenues – has been blocking a possible deal this year between the White House and the Republican-led U.S House.
“While tax reform is possible,” said U.S. Sen. Roy Blunt, “as long as the president insists on tax reform including more tax revenue from individual taxpayers, it’s not likely to happen. And it won’t happen as long as the Republican party controls the House of Representatives,” which must originate tax legislation.
A a member of the Senate GOP leadership and a former member of the party’s House leadership, Blunt, R-Mo., has a good perspective on what is possible in a Congress in which one party can block major legislation. But the chairmen of both major tax panels in the House and Senate say they are at least trying:
- U.S. Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee, has pledged “to do a bill this year” to revamp the tax code. It’s a goal that has eluded Congress since the last major overhaul in 1986. In February, Camp divided the panel into 11 working groups for reform, each focusing on one area of the tax code.
- U.S. Sen. Max Baucus, D-Mont., chair of the Senate Finance Committee, held a closed-door meeting of senators last month to discuss the same goal. Baucus and the committee’s ranking Republican, U.S Sen. Orrin Hatch, R-Utah, have reportedly agreed on a schedule of meetings with the goal of developing legislation by August.
- During last fall’s election campaign, President Barack Obama said he wanted to reform and simplify the tax code. He has told congressional Republicans he’d like to revamp business taxes in a revenue-neutral way, but has linked similar reforms in the tax code for individuals to boosting taxes on millionaires, closing several loopholes – and using the revenue to help pay down the deficit.
In the budget he submitted to Congress last week, Obama suggested several changes in the tax code to raise revenue, including limiting the value of itemized deductions for the wealthy, requiring millionaires to pay a minimum tax rate of 30 percent, and doing away with some tax breaks, such as the tax credit to Big Oil firms.
Blunt, who has opposed doing away with those breaks, said he does not understand why Obama is insisting on squeezing extra tax revenue from the system.
“The president, at his lunch with Republicans senators a little over a month ago, said that he was for, on the corporate side, for instance, making the tax code much simpler, eliminating a lot of the so-called loopholes in the tax code, broadening the base of the tax code, and reducing the rate in a revenue-neutral way,” Blunt told reporters.
“Probably every single [senator] in that room was thinking, ‘Well, I could be for that.’ But then the president said: ‘I won’t do that unless I get some increased revenue on the personal income tax side.’” And that, Blunt said, is a nonstarter for GOP lawmakers.
Last week, Camp told journalists that – to spur business growth – Congress needs to lower individual tax rates as well as corporate rates because many small firms are taxed via the personal tax returns of their owners.
“You can't have the corporate rate at 25 [percent] and then have small businesses on Main Street paying 40 [percent] plus,” Camp said. “If you do just the corporate side, it's not enough.”
Should major tax reform be ‘revenue neutral’?
In the eastern Missouri and southern Illinois congressional delegations, nearly every lawmakers wants to streamline the tax system. But Republicans and Democrats tend to be divided on whether to make a tax revamp revenue neutral.
U.S. Sen. Dick Durbin, D-Ill., the second-ranking Senate Democratic leader, has said that he would support a serious simplification and reform of the tax code. But he is more or less in line with the White House on the need to apply some of the revenue from a revamp to buying down the debt.
Also backing the closing of some credits and loopholes is U.S. Sen. Claire McCaskill, D-Mo., who has called for ending tax “subsidies” to highly profitable Big Oil companies. She, too, has discussed the need for a simpler tax code.
“Claire is hoping to support bipartisan tax reform that will simplify the tax code, reduce the corporate rate -- including by ending tax earmarks -- and reduce the deficit,” said McCaskill spokesman John LaBombard, in a statement Monday to the Beacon.
U.S. Rep. Ann Wagner, R-Ballwin, said, “House Republicans are committed to reforming our tax code to create an environment that jumpstarts our economy with high-paying middle-class jobs. By making the tax code simpler and fairer, we can lower tax rates so families can save more, so employers can hire and invest more, and so there are more jobs and higher wages for all Americans.”
Like Blunt and Camp, Wagner said in a statement Monday that she wants to make a tax overhaul revenue neutral. “For the people of the 2nd District, comprehensive tax reform means more money in your pocket and it means Washington has to live within its means.”
In 1986, two St. Louis lawmakers – Sen. Jack Danforth, a Missouri Republican, and U.S. Rep. Richard A Gephardt, D-St. Louis – were both involved in crafting the major tax overhaul that Congress and the administration of President Ronald Reagan were able to achieve. Gephardt was a senior member of Ways and Means; Danforth was on Senate Finance.
At a 2011 hearing of the Joint Committee on Taxation, Gephardt and former Treasury Secretary James Baker – who helped shape the tax overhaul – said that a new tax reform can't be accomplished without Republicans and Democrats overcoming partisan divides.
"You've got to be bipartisan, you've got to have a core group that really believes in this and is willing to do the heavy lifting to get it done," said Gephardt, who now heads a consulting and lobbying firm. "And I think it is important to try, if you can, to disassociate [tax reform] from the budget issue."
Baker agreed that mixing the budget debate with tax reform would doom the latter. "If tax reform gets caught up in that, you won't have tax reform," he said.
"I think the American people desperately want to see a decent tax code," Baker added. "They hate this tax code."
In the last couple of decades, lawmakers have tried to revamp the tax code several times, but have – in the end – managed only to complicate it further. Since the 1986 tax overhaul, Congress has made more than 5,000 changes in the tax code -- an array of loopholes, tax credits, deductions and exemptions that have greatly complicated the system.
At the same time, many businesses complain that the nation's corporate income tax is so high that it is putting U.S. companies at a disadvantage against competitors who pay lower taxes abroad.
In 2001, the administration of President George W. Bush toyed with the idea of a major tax reform but instead moved simply to lower tax rates instead. Obama has often called for tax simplification but he opted to pursue other legislative priorities during his first term. And, after this year, his political strength is likely to start waning.
Ideally, Camp says he would like to reduce the corporate and personal tax rates to 25 percent. Obama budget also called for a similar corporate tax revision.
The budget deficit is the main problem. To reduce tax rates as sharply as Camp and other Republicans would like, they would need to find about $5.7 trillion in offsetting tax increases over the next decade to keep the revenue the same. That would likely mean limiting some popular middle-class tax breaks – a tough sell among GOP stalwarts.
“There would be a lot of significant opportunities for tax reform” this year, Blunt said, “but not with increased revenue, if you are just statically scoring the impact of those tax policies.”