Business Wary of Tax Reform

Posted February 16, 2005 at 6:38pm

Bruce Josten, the top lobbyist for the U.S. Chamber of Commerce, can identify one key difference between the Tax Relief Coalition of 2001 and the Tax Reform Coalition of 2005: the meaning of the word “coalition.”

“I’m unaware of anyone in the business community who’s pounding on his desk, saying, ‘We need tax reform,’” Josten said.

In fact, if anything, it could be the opposite. Unlike President Bush’s first round of tax cuts in 2001, which back then spawned a united, energized lobbying force of 790 business organizations and conservative groups, the possibility of tax reform has elicited shrugs at best, and jitters at worst, on K Street.

The worries are rooted in reality. For starters, the very act of pushing for tax reform is stealing oxygen from more pressing tax-related issues for business. Corporate lobbyists have little desire to debate the merits of simplifying the code while their clients and constituents wait for more targeted changes to the tax code.

“You can have all the reform you want, but our No. 1 issue is the death tax,” said David Rehr, the president of the National Beer Wholesalers Association, referring to the effort to make the estate tax permanent.

The bigger reason for anxiety, however, is the math. The president has demanded that any reform proposal be “revenue neutral” — that is, the system that replaces the current one should not provide less revenue to the Treasury.

No one knows for certain what rate of taxation would be necessary for a flat tax — one of the leading options now under consideration — to be revenue neutral. But the business community does know this: If any group has to give up advantages in order to make tax reform work, it won’t be individual taxpayers.

“If you get to the bottom line, you don’t do tax reform if you don’t do something for individuals,” one tax lobbyist said. “That means someone is going to pay. That someone is the business community.”

Added Josten, “‘Revenue neutral’ means there are winners and losers. That’s all there is to it.”

Josten said the business community still remembers, vividly and painfully, the last big tax reform fight in 1986. It began with lawmakers pledging to simplify the code, and ended with industries battling one another to preserve their favorable treatment.

“That was cannibalism,” Josten said.

One White House ally on K Street also cited the 1986 debate as a cautionary lesson in reform: “There’s a fear [among corporate interests] that it could lead to small business versus big business again.”

That lobbyist said he suspects that the White House has seen the writing on the wall and that sweeping changes to the code — as opposed to more modest measures, such as reforming the Alternative Minimum Tax — have been set aside indefinitely, despite Bush’s rhetoric.

“I think they’re tip-toeing out the back door on tax reform,” the source said of the administration. “Actually, they’re out the back door and over the fence.”

Gregory Mankiw, the chairman of the White House Council of Economic Advisers, told an audience this week that Bush plans to include tax reform alternatives in his administration’s forthcoming annual economic report. He declined to provide details about the plans that would be considered.

For now, however, the concept of overhauling the tax code has been handed off to a panel headed by former Sens. Connie Mack (R-Fla.) and John Breaux (D-La.). They have been asked to deliver their analysis and recommendations to Treasury Secretary John Snow by July 31.

In establishing the panel, the president — who during the 2004 campaign called tax reform one of his top domestic priorities — told its members that any plan that would replace the current system must be “simpler, fairer and more growth-oriented.”

Nearly every overhaul idea that has been discussed to date has involved some kind of flat tax, applied either to income or to retail purchases. Both ideas have well-established constituencies on Capitol Hill.

At the GOP’s bicameral leadership conference earlier this month, Ways and Means Chairman Bill Thomas (R-Calif.) laid out the challenge that lawmakers would face. The basic theme was that the more built-in preferences Congress can eliminate, the lower the new tax rates can be while remaining revenue neutral, participants in the session said.

But in this regard, Congress would likely start the reform process with a handicap. The president has said — and it is generally agreed among lawmakers — that a new tax code must continue to maintain incentives for home-buying and charitable giving.

Keeping these breaks, however, would put upward pressure on rates — to say nothing of the precedent this would set for other well-intentioned deductions in the current code. Before long, lawmakers would be forced to find new sources of revenue that would enable them to avoid raising taxes on individuals and small businesses (which are taxed at the same rate).

“Any call for general tax reform that is not tax reduction will inevitably shift the burden away from visible sources of revenue to less-visible ones paid by companies,” said Grover Norquist, a White House ally who heads Americans for Tax Reform.

Not even Norquist — one of the most vigorous anti-tax advocates in Washington — favors doing a major tax overhaul immediately. Instead, he recommends a more piecemeal approach to re-writing the code that would first “clear out the underbrush” — parts of the code that are cluttered or outdated and make it more difficult to make larger changes. Once this “underbrush” is removed, there should be less anxiety about possible impacts from moving to a new system.

“Anything [like the current code] with that many moving parts at once, it’s only natural to worry that you’ll get the fuzzy end of the lollipop,” Norquist said. “The answer is, don’t do it. Do the easy things first.”

Norquist and other GOP strategists suggested there is little for Republicans to gain by moving too dramatically on reform. They cite the close call that then-Rep. Jim DeMint (R-S.C.) experienced after Democrats seized on his previously stated support for a national sales tax. DeMint eventually won, but not before his poll numbers dipped amid a barrage of criticism from his opponent.

“Find out how [a tax proposal] can be misrepresented before you staple it to a candidate and send him out there,” Norquist advised.

Taylor Griffin, a spokesman for the Treasury Department, said it’s too soon to know what the recommendations from the Mack-Breaux panel will look like, and that many different strategies — not just a flat tax — are likely to be considered.

“The president has put very few limits on this,” Griffin said.

Many reform skeptics on K Street believe they have already beaten it, at least for the time being.

They cite, among other things, the administration’s decision to move first on Social Security reform — a move that virtually ensures that nothing will be considered before next year. And next year isn’t a great option either: Observers on K Street and on Capitol Hill agree that nothing as ambitious as an overhaul of the tax code could be done in an election year.

Then there is the Mack-Breaux group appointed by the president to study alternatives to the current code.

Although no one seems sure of when it first happened, sometime within the past six months the group went from being a “commission” to being a “panel.”

The important difference, lobbyists point out, is that Congress never feels obligated to consider the views of a panel. (Griffin said there were “legal reasons” for the change in designation.)

In any case, Congress tried a commission on tax reform in 1996, headed by former Rep. Jack Kemp (R-N.Y.). Its recommendations fell into a black hole.

Still, some lobbyists are not unwilling to count the White House out so soon, citing President Bush’s proven ability to bend Congress to his will.

“There are a lot of people in the business community who want it dead, and who might say that it is. But that doesn’t mean it’s true,” said one White House ally on K Street. “I think it’s going to happen.”