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Congress Faces Numerous Hurdles to Tax Overhaul

Lawmakers have been making promises that a sweeping overhaul of the tax system is around the corner, but many tax experts are skeptical such an ambitious undertaking is plausible in the current political environment.

In fact, with both parties proposing to continue at least some expiring tax cuts for another year, ostensibly to give Congress more time to figure out a long-term fix, there are increasing concerns that individual income tax rates could go the way of numerous other tax provisions and be decided on an annual or semi-annual basis.

That lawmakers could allow a basic feature of the tax code to become temporary may seem dangerous and unlikely, but “they can and they’ve done it for big items,” said John Buckley, a longtime chief tax counsel for Democrats on the House Ways and Means Committee who now teaches at Georgetown University.

The House will take up a measure that provides broad parameters for a tax overhaul and a kind of “fast track” to enactment this week as the chamber turns to the politically volatile issue of the extension of the 2001 and 2003 tax cuts (PL 107-16, PL 108-27).

In House votes Wednesday or Thursday, Republicans favor a one-year extension of all current tax rates. The one-year extension offered by Democrats would allow tax rates to increase on ordinary income above $200,000 for individuals and $250,000 for couples. It would also effectively raise taxes on capital gains and dividends.

A companion measure would set into motion the process for an overhaul of the tax code next year.

For all of their disagreements, the decision of Republicans and Democrats to offer one-year tax cut extensions reflects a shared skepticism that a long-term agreement will be possible in a lame-duck session after the November elections.

To varying degrees, both sides have talked about a broad restructuring of the tax system that scales back tax breaks and reduces rates in the mold of the landmark tax overhaul of 1986 (PL 99-515).

Next year, “we’ll be in a good position to decide how to reform our entire tax code in a simple way that lowers rates and helps our economy grow and brings down our deficit, because that’s something that we’re going to have to do for the long term,” President Obama said July 9.

Budget Window History

The origins of temporary tax rates on ordinary and capital income date to the early 2000s, when President George W. Bush used reconciliation to push his fiscal agenda through Congress.

While use of the tactic allowed Republicans to circumvent a filibuster in the Senate, it also meant their tax cuts needed to lapse at the end of 2010 to avoid adding to the deficit outside of the 10-year budget window.

That put those tax cuts into the basket of tax provisions that have needed periodic renewal, creating a kind of patchwork across the tax code.

For years, Congress has approved short-term fixes to the alternative minimum tax to prevent the levy, for instance, which was never indexed to inflation, from hitting large numbers of middle-income earners.

And lawmakers have consistently extended many relatively small tax breaks for a year or two at a time, never quite willing to confront the budgetary cost of making them permanent.

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