Why tax code appears to offer deficit 'super committee' rare common ground

Congress’s bipartisan deficit “super committee” began public discussions of the federal tax code Thursday amid doubts that its mandate to cut at least $1.2 trillion from federal deficits over the next 10 years is still attainable.

Despite the extreme partisanship enveloping Congress around this new venture, reform of the tax code appears to offer the panel a chance to find some common ground.

The White House and GOP leaders drew further apart this week, after President Obama unveiled a deficit reduction plan that called for $1.5 trillion in tax hikes that Republicans declared to be “off the table.”

“The deficit proposals that the president put forward, I think, are a step backward,” said Speaker John Boehner of Ohio at a press briefing on Thursday. Mr. Obama’s plan, he said, would destroy jobs by raising taxes on small businesses and their capital – “the key ingredient for job creation in our country.”

Until now, the main target for deficit reduction has been cuts in domestic discretionary spending. While Republicans oppose raising taxes, Democrats oppose changes to health and retirement entitlements unless net tax hikes are also on the table.

But panel members on both sides of the partisan divide see possibilities for debt reduction in tax reform, essentially overhauling the 10,000-page US federal tax code.

For Democrats, it’s the prospect of raising revenues either by raising tax rates or cutting tax breaks. In her opening statement, Sen. Patty Murray (D) of Washington, co-chair of the panel, cited “a tax code that’s become riddled with corporate giveaways and special-interest carve-outs for the richest Americans.”

For Republicans, however, it’s the prospect of increasing revenues (not taxes) by lowering tax rates, especially the corporate tax rate. This, they say, will stimulate investment, job creation, and growth, which will in turn expand the tax base and boost revenues for the federal government.

Despite their differing approaches, both sides expect to find common ground in the $1 trillion in annual tax breaks for individuals and corporations buried in the tax code, which are referred to in Congress as “tax expenditures.” The $1 trillion in tax breaks are comparable in size to Congress’s annual discretionary spending, and reducing them could be used for cutting deficits, lowering tax rates, broadening the tax base, and, eventually, reviving the economy.

“Most Americans agree that there is something fundamentally wrong with our tax code when a small business in East Texas pays 35 percent and a large Fortune 500 company pays little or nothing,” said Rep. Jeb Hensarling (R) of Texas, the other co-chair of the panel.

“We should seize the opportunity and correct this for the sake of both bringing in more revenues through economic growth and addressing our jobs crisis at the same time,” he added at Thursday’s hearing.

Obama’s bipartisan deficit commission, known as Bowles-Simpson, last December proposed eliminating all tax expenditures and using the revenues from that “clean slate” to cut overall tax rates and lower deficits.

But the lone witness at Thursday’s hearing cautioned that Congress can’t assume that eliminating a tax break will necessarily produce that much more revenue to the Treasury – nor that how one eliminates tax expenditures will be obvious.

“One thing I’d like to emphasize for the committee: There’s a lot of decisions that the members have to make to get to that clean-slate proposal,” said Thomas Barthold, chief of staff for Congress’s Joint Committee on Taxation. “It’s not clear as a matter of legislation what it means to eliminate a tax expenditure.”

From 2005 to 2009, the four largest tax expenditures for individuals were (five-year total):

• Net exclusion of pension contributions and earnings for employer plans: $567.8 billion

• Exclusion of employer contributions for health care: $493.7 billion

• Deduction for mortgage interest on owner-occupied homes: $434.2 billion

• Reduced rates of tax on dividends and long-term capital gains: $356.8 billion.

However it is not clear what the impact of eliminating such tax breaks would be on the economy.

Rep. Fred Upton (R) of Michigan, who chairs the Energy and Commerce Committee, asked whether the Joint Committee on Taxation has done an analysis of the impact on the economy and jobs, especially in the construction sector, of eliminating the mortgage tax deduction. (They had not.) “I think that would be very important for the committee to understand in terms of the economic impact if that were removed,” he added.

Typically, an enterprise as complex and politically perilous as tax reform has been a labor of years, not weeks. The deficit panel must report a plan to Congress by Thanksgiving.

“It’s usually a multiyear policy, because it takes time to work through the policy and the politics,” says Stan Collender, a partner at Qorvis Communications in Washington. “The 1986 tax reform was two years in the making. The idea that they can put it together in two months is hard to imagine.”