Will the Baucus-Hatch plan trigger tax reform? Probably not.
Senators Max Baucus (D-MT) and Orrin Hatch (R-UT), the chairman and senior Republican on the Senate Finance Committee, tried to jump-start the drive towards tax reform today with what they call a blank slate rewrite plan. Trouble is, it is not exactly a plan. And it isn’t quite a blank slate.
Their idea is to get senators to tell them by July 26 which tax preferences are worth keeping and which should be scrapped. So Baucus and Hatch adopted a zero-base budgeting approach.
In a letter to fellow senators, they said they plan to start their reform exercise by assuming that nearly all tax preferences are repealed. They’d then restore those that meet at least one of three tests: “(1) They help grow the economy, (2) make the tax code fairer, or (3) effectively promote other policy objectives.”
Unfortunately, the first two are in the eye of the beholder and the third, well, I have no idea what the third means.
I do know their plan will be a massive summer windfall for lobbyists and trade groups that are already gearing up to find senators to defend their tax subsidies (cell service on the Vineyard is dicey but it will have to do). Within an hour of the release of the Baucus-Hatch letter, I was getting calls and emails defending various tax breaks.
Mortgage interest deduction? Well, of course it helps grow the economy. Charitable deduction? What could be more fair? Special deductions to promote U.S. manufacturing? That’s got to be an “other” policy objective.
And it won’t be hard for those lobbyists to find senators willing to defend these preferences. What price would they pay for doing so?
Baucus and Hatch make their job even tougher by acknowledging in their letter that “some existing tax expenditures should be preserved in some form.” They don’t say which ones (and may not even agree on the list) but they are signaling that cleaning out the code may not be quite so easy.
Their zero-based budget strategy isn’t new. Erskine Bowles and Alan Simpson, the co-chairs of President Obama’s ill-fated fiscal commission, engaged in the same exercise back in 2010.
But Bowles and Simpson started with an overarching goal: They wanted to generate about $1 trillion in new revenues over 10 years to go along with about $2 trillion in non-interest spending reductions, and they wanted to reduce tax preferences enough to also buy some politically attractive rate cuts. In the end, even they could only come up with a set of alternative tax reform scenarios rather than a single concrete proposal.
Baucus and Hatch (and House Ways & Means Chairman Dave Camp (R-MI)) have no such bottom-line plan. They can’t agree on whether tax reform should generate any new revenue at all. As a result, they are asking senators to pitch various tax expenditures in a vacuum.
Take one example of why this is so hard: A lawmaker might be willing to tax capital gains at ordinary income rates if the top rate is cut to, say, 25 percent. She might not be so willing if the top rate is going to be 35 percent.
Baucus is scrambling to build some momentum behind reform before he retires from Congress in 18 months. And he knows he’s got less time than that with the congressional campaign season likely to start in a year.
Baucus is in a tough spot, and any reform effort faces severe constraints in today’s political environment. But he needs to start with a plan, not a blank slate. A chairman’s mark with a specific set of rates and limited preferences would focus the Senate’s collective mind. But this isn’t that.
