By Keith Smith
Many are speculating about what action the new Joint Committee of Congress may take on tax issues prior to November 23rd when the Committee presents its work to Congress for a vote.
The Joint Committee must recommend at least a net $1.2 trillion in debt reduction to the Congress or risk triggering the sequester mechanism to cut the federal budget to achieve that same amount of savings. I say “net” because they may attempt to make programmatic fixes that actually cost money, resulting in the need to find additional offsetting cuts.
With regard to overall tax rates, the House Republicans wanted to put the Joint Committee in the tightest constraints possible with regard to raising individual tax rates - as in the President’s proposal to extend the 2001/2003 tax cuts for the middle class and consequently raise taxes on the “wealthy” making $200,000/$250,000 or more. Tax rate increases are limited by the requirement that the Committee adhere to the current year budget baseline – which assumes the 2001/2003 tax cuts are repealed beginning in 2013. This requires the Joint Committee to raise additional revenue to enact either the President’s proposal for extending rates for the middle class or the Republican’s desire to extend the tax cuts for all tax payers. This limitation on the Joint Committee was so strong that House Speaker Boehner felt it safe to claim that the plan contained “No tax hikes” in his presentation to rank-and-file House Republicans.
It’s also important to note that when Senate Republican Leader McConnell was questioned closely on the Sunday talk shows about the Joint Committee’s mandate to find additional cuts this year for the second step of the debt limit increase early next year, he said that the mandate of the committee will include tax reform. He added that the agreement ensures …. “no tax increases that we know will kill jobs.” This leaves the door open for the loss of some tax exemptions. Recently discussed targets include deductions for corporate jets, oil and gas tax breaks, the credit for ethanol, carried interest for hedge fund managers, among many others.
Forecast
It is clear that many Democrats, including the President, want a “balanced” approached to debt reduction that includes new sources of revenue. If tax rates are too difficult to alter in this process, the Democrats will likely first seek revenues from the list of revenue raising proposals included the President’s proposed budgets. These include deferral, LIFO, elimination of the charitable deduction and the limitation on itemized deductions. Democrats hope that Republicans will agree to revenue measures in the next round of negotiation in order to stave off automatic cuts to the defense budget that would result if the Joint Committee fails.
Obviously, the tax writing committees of the Congress would prefer to maintain control of any tax reform efforts particularly given that Representative Dave Camp (R-MI) and Senator Max Baucus (D-MT), the Chairmen of the House and Senate tax committees have been appointed to the Joint Committee. But major tax reform would be impossible to achieve in the next few months. Instructions by the Joint Committee, however, to the Ways and Means and Finance Committees could ask or require the committees to act to achieve certain targets.
What is not clear is how issues like payments to physicians under Medicare (the “Doc Fix), which would cost some $300 billion/10 years, a fix to the AMT, which would cost some $500 billion/10 years, the perennial tax extenders and others will be handled. They were not specifically addressed in the mandate for the Joint Committee. If the Joint Committee decides to fix any of these problems, it would only increase the amount of cuts or revenues that must be found to achieve their overall minimum goal of $1.2 billion in debt reduction.
Given this dynamic we believe there will be relevant and ongoing work in the tax committees (and possibly all authorizing committees) alongside the efforts of the Joint Committee this fall.