Tax Code Rewrite Prospects: Wait 'Til Next Year

Washington always seems to be asking whether this will finally be the year Republicans and Democrats somehow set aside their differences on one of their most fundamental issues and undertake a full rewrite of the sprawling, unwieldy monster known as the tax code.

But each year passes like the last: a march of hearings, white papers and discussion drafts gives way to a last-minute stampede to renew 50-odd temporary tax breaks for another year or two.

The familiar tax-extender routine is often cast as the last one — a necessary step to give lawmakers breathing space to take on the tough questions that would come with the first full restructuring of the tax code since 1986, including firmly held political views and tax provisions dear to the hearts and wallets of many Americans. Ryan is pushing a comprehensive tax overhaul. Tom Williams/CQ Roll Call

In reality, Congress stands a vanishingly small chance of solving in the next few months tax policy issues that have been decades in the making. But the work this Congress does in diving into the intricate structure of taxation will lay the foundation for a more ambitious future overhaul, when Republicans hope to have a better partner in the White House.

The ingredients are being prepared, the utensils put in order, the table settings arranged and the cooks lined up for a once-in-a- generation meal.

“We want to lower rates across the board for individuals, families, everybody — like ’86,” House Ways and Means Chairman Paul D. Ryan of Wisconsin said. “We have a president who doesn’t like that, so we’re trying to figure out: Is there a way to get part of that now, and in a way that helps make sure we get the second part later?”

Back to the Future

Just before retiring from the House and the chairmanship of Ways and Means last year, Michigan Republican Dave Camp introduced a 979-page tax overhaul bill that would have pared back cherished deductions and introduced a bank tax and a complicated surtax on the wealthy to offset rate reductions.

Instead of setting the foundation for rewriting the tax code, however, Camp’s plan looked more like a road map to the political dead ends that come with any talk about taxes.

This year, some lawmakers are trying to avoid the complexity of a Camp-style draft that used tough trade-offs to make the math work but brought few political allies. They’re looking instead for alternatives outside the current tax system. A consumption tax? Corporate-shareholder integration? Sure, worth exploring.

Senate Finance Chairman Orrin G. Hatch has mentioned both ideas in recent months, but the Utah Republican’s openness is a reminder of the contradictions in the progress toward a tax overhaul. To some, he’s showing a refreshing willingness to consider big changes; to others, such brainstorming is more evidence that overhaul discussions aren’t yet serious.

Such ambitious changes would require years of work, which would be appropriate given the many decades it took to build the current code, with its disparate treatment of businesses based on their legal structure and industry, the distortions caused by various preferences and the erosion of the corporate tax base.

The biggest change in tax policy since the 1986 overhaul may not be in the tax code, but in the battle within the political arena.

As economic trends have reshaped the tax landscape, years of squabbling over marginal rates have left Democrats and Republicans entrenched. Debates over a percentage-point change up or down have turned into ideological crucibles for both sides.

Because of that impasse, some analysts say reframing the entire issue might be the only way forward.

Maryland Democrat Benjamin L. Cardin, a Senate Finance Committee member, recently said a consumption tax — such as a sales tax or value-added tax — may be the way out.

“The reality is that you cannot reduce rates the way that Ronald Reagan did in the ’80s” because of the proliferation of special preferences in the code since then, said Columbia Law School professor Michael J. Graetz, a former Treasury official who backs the consumption-tax idea.

“We have to rethink the tax system in a much more radical way than we have before,” Graetz said, “or we’re just going to tinker until we do it the next time.”

Not in an Election Year

But the biggest obstacle may be the timing, with the 2016 presidential race already underway.

Early Republican candidates are suggesting tax ideas that could complicate a serious bipartisan overhaul. Texas Sen. Ted Cruz wants to abolish the IRS and replace all current taxes with a flat tax. There is more serious potential for change from Florida GOP Sen. Marco Rubio, who wants to eliminate most taxes on capital gains, dividends and estates. And Kentucky Republican Sen. Rand Paul favors a temporary cut in the repatriation tax on overseas earnings in order to raise money for transportation.

Ryan, who wants to link a long-term highway fix to a comprehensive tax overhaul, dismissed Paul’s idea as a money-loser and said repatriation cannot be used “outside of  . . .  a full tax reform.”

“We don’t want to do reforms that will make it more difficult to get the kind of comprehensive tax reform we ultimately need,” Ryan said. “We don’t want to do the first part if it hurts getting the second part later.”

In the meantime, the menu for tax overhaul is being compiled.

A comprehensive revision would revamp the three major planks of the tax system: taxation of businesses, individuals and international transactions. As part of its working-group effort, the Finance Committee defined two additional tax policy areas to consider — savings and investment and community development and infrastructure.

The five bipartisan groups must prepare options for a full committee draft to be released in May.

Democrats and Republicans are at odds over the degree to which individual income taxes should redistribute wealth. Recognizing the persistence of that divide, some Democrats, including those in the Obama administration, want to change business taxes separately.

Republicans say they are open to the idea, but insist that any corporate overhaul protect pass-through businesses — those where income flows through to owners or investors, who pay the taxes individually — and no one has offered a viable plan detailing how to do so.

Given the constraint of getting something on paper by summer’s end, piecemeal overhauls might be the only way forward, assuming each side can keep a few favored provisions. That probably leaves international taxation as the obvious choice, but the popularity of lowering the corporate tax rate and changing the way foreign earnings are taxed might be its undoing.

Ryan says Republicans won’t support piecemeal changes that would make it harder to “finish the job” down the road, effectively ruling out taking up more popular items now.