Top tax writers in Congress are taking a “blank slate” approach to reworking the U.S. tax code that starts by wiping out hundreds of perks that ordinary taxpayers claim, including sacrosanct policies such as the child credit and the deduction for mortgage interest.
Those and other popular breaks could be restored as policymakers attempt to build support for the first far-reaching changes in the federal tax system in nearly 30 years. But each credit and deduction will be scrutinized, Senate tax writers said Thursday in a letter to their colleagues, and those that cannot be justified will be eliminated.
“We plan to operate from an assumption that all special provisions are out unless there is clear evidence that they: (1) help grow the economy, (2) make the tax code fairer, or (3) effectively promote other important policy objectives,” said the letter written by Senate Finance Committee Chairman Max Baucus (D-Mont.) and his Republican counterpart, Sen. Orrin G. Hatch (Utah).
Baucus and Hatch assured senators that “we both believe that some existing tax [breaks] should be preserved in some form,” and they gave their colleagues a month to make the case for preserving favored breaks. But independent analysts said the blank-slate approach, which has been adopted by House Ways and Means Committee Chairman Dave Camp (R-Mich.), increases the odds that some expensive policies could be pared back if the push for reform gains traction.
Baucus and Camp say they are aiming to complete the overhaul by the end of 2014, but neither President Obama nor congressional leaders have shown much enthusiasm for the task.
Thursday’s announcement nonetheless touched off a frenzy among tax lobbyists already anxious about the fate of specific perks. The American Society of Pension Professionals and Actuaries issued a press release defending tax deferrals for retirement savings. And nonprofit organizations vowed to step up an already intensive campaign to protect the deduction for charitable contributions.
“We are extremely concerned that it’s in danger,” said Gloria Johnson Cusack, executive director of Leadership 18, an alliance of chief executives of the United Way, the American Red Cross and other major nonprofits. “Until we hear people saying it’s off the table, we’re going to continue to be very aggressive.”
On Capitol Hill, the announcement sparked quiet grumbling among some Democrats, who would be forced to defend favored breaks, including new subsidies for the purchase of health insurance enacted as part of Obama’s landmark health-care initiative. But it drew praise from many Republicans. And advocates of debt reduction commended Baucus and Hatch for embracing a debate over trade-offs, even if their ability to jettison popular perks remains far from clear.
“Starting with the Zero Plan doesn’t absolve policymakers of the hard choices, but it surely does change the presumption by turning the tables on defenders of the status quo and forcing them to make the case for their particular tax preference,” said a statement released by Erskine Bowles and Alan K. Simpson, the co-chairmen of Obama’s fiscal commission.
Bowles and Simpson used a similar approach to build bipartisan support for their debt-reduction blueprint in 2010. Bowles, who served as chief of staff to President Bill Clinton, and Simpson, a former GOP senator from Wyoming, concluded that they could reduce the top tax rate — currently 39.6 percent — to 23 percent for individuals, and generate billions of dollars to reduce the deficit, by wiping out every tax break in the code.
Baucus and Hatch made no such claims, and their top aides said it’s not clear how much savings the approach would bring in its purest form. All told, the U.S. Treasury loses about $1.3 trillion a year to the credits, deductions and exemptions collectively known as “tax expenditures,” although tax analysts say not all that money could be recovered. This year, the code is forecast to give away nearly as much as it collects in individual and corporate income taxes.
Both parties want to eliminate some of those breaks to simplify the code and generate savings for other purposes, such as lowering tax rates (the top GOP goal) and deficit reduction (the chief aim of Democrats). But there is no agreement on how to apportion any savings, and senior Senate tax aides in both parties acknowledged that a tax reform bill is unlikely to pass until that long-standing conflict is resolved.
Another opportunity will come this fall, when congressional leaders will face a government shutdown and a potential default unless they can reach a compromise on tax and spending policies. In the meantime, Baucus and Hatch have agreed to set aside divisive questions about rates and revenue and focus instead on deciding which breaks should be preserved and how much money could be saved.
As a result, Thursday’s letter offers no estimates for savings, nor does it suggest how far the committee might be able to push down income tax rates, which top out at 39.6 percent for individuals and 35 percent for corporations. The letter says only that “the blank slate approach would allow significant deficit reduction or rate reduction” while maintaining the current distribution of the tax burden across taxpayers at all income levels.
But Baucus and Hatch warned their colleagues that keeping any of the tax breaks could significantly diminish the savings available for either goal.
According to estimates prepared by the nonpartisan Joint Committee on Taxation, the senators said, adding back breaks worth $2 trillion over the next decade — the equivalent of preserving just the tax breaks for pensions and retirement savings — “would, on average, raise each of the seven individual income tax brackets by between 1.3 and 2.2 percentage points from what they would be under the blank slate.”
Similarly, every $200 billion in corporate tax breaks would raise the top corporate income tax rate by 1.5 percentage points, the letter says.