By Lori Montgomery
Washington Post Staff Writer
Friday, December 10, 2010; 6:54 PM
As President Obama, his deficit commission and a bevy of lawmakers urge a concerted push to streamline the federal tax system, Senate leaders have rolled out a sprawling $858 billion tax bill stuffed with dozens of narrow credits and special-interest perks - the very breaks that much of Washington agrees should be banished from the code.
The final package, released late Thursday, would extend tax credits for producing ethanol and for hiring American Indians. It would maintain deductions for teachers who buy their own supplies and businesses that donate books to charity.
It has tax breaks for restaurants, movie producers and NASCAR track owners. It has a special "economic development credit" for investors in American Samoa.
The provisions - long-standing tax breaks that are renewed by Congress year after year - are layered on top of a two-year extension of the larger, Bush administration income tax cuts that Republicans and Democrats have been fighting about for months. Overall, analysts said, the package would sharply increase budget deficits while perpetuating the worst aspects of a tax system that is widely viewed as inefficient and unfair.
"This tax bill is not in line with fundamental tax reform," said Sen. Ron Wyden (D-Ore.), a reform advocate who has yet to decide whether to support the package in a critical vote set for Monday. "It's essentially propping up this broken system that we've got today."
The final package - which contains $801 billion in tax cuts paired with a $57 billion extension of emergency jobless benefits - was drafted by the White House and lawmakers in both parties and is intended to boost the economy. But its final shape emphasizes the lingering disconnect between high-flown concerns about the mounting national debt and the ground-level reluctance to raise taxes or demand other public sacrifices necessary to reduce government borrowing.
In recent days, Obama has begun talking about bridging that divide, and he is considering pressing an overhaul of the tax code as his first major attempt to rein in the soaring national debt. Aides said no decisions have been made about whether to include tax reform in the State of the Union address or in Obama's next budget request, due out in February. They said Obama also recognizes that a comprehensive effort to simplify the code, lower rates and raise revenue is likely to take several years to enact.
But Obama said in an interview broadcast Friday with NPR, "We've got to start that conversation next year."
"The idea is simplifying the system, hopefully lowering rates, broadening the base. That's something that I think most economists think would help us propel economic growth," Obama said. "It's a very complicated conversation. . . . I think we can get some broad bipartisan agreement that it needs to be done. But it's going to require a lot of hard work to actually make it happen."
Obama has asked his economic advisers to review recommendations from his deficit commission, released last week, and from an earlier tax panel chaired by former Federal Reserve Board chairman Paul Volcker. Administration officials found the commission report particularly interesting because it calls for raising tax collections by nearly $1 trillion over the next decade, in large part by eliminating or reducing many popular tax loopholes.
Despite those recommendations, the report won the support of all three Republican senators on the panel, including the very conservative Tom Coburn (Okla.), who is influential on budget matters inside his party. The commission vote was one of several recent developments that "create much more space for a tax-reform debate going forward than would have looked likely several months ago," said one senior administration official.
Meanwhile, even the package pending in Congress offers glimmers of hope that lawmakers may be ready to start paring back the profusion of loopholes that have crept into the tax code since the last major overhaul in 1986, during the Reagan administration.
The current bill contains two major new tax breaks aimed at creating jobs and boosting the economy. An expanded incentive for businesses would permit them to write off 100 percent of the cost of capital investments next year, while another provision would cut payroll taxes for workers from 6.2 percent to 4.2 percent on income up to $106,800 in 2011, for a potential savings of up to $4,272 per couple.
But the bill does not contain a single new perk requested by a lawmaker, congressional aides said - perhaps a first for major tax legislation. And although lawmakers and the White House agreed to extend dozens of tax breaks that have been around for years, they agreed to drop more than 40 others, aides said, including a deduction for property taxes enacted in 2008 that benefits millions of homeowners who do not itemize on their tax returns.
Democratic aides involved in drafting the legislation said House Republicans objected to the provision, which was authored by Senate Finance Committee Chairman Max Baucus (D-Mont.) and costs the Treasury about $2.5 billion a year.
"We thought no one would object to it. Republicans said they didn't want to raise anyone's taxes during a recession," said a Senate Democratic aide, who spoke on the condition of anonymity to describe private negotiations. "This basically raises taxes on about 40 million people."
An aide to Rep. Dave Camp (R-Mich.), the incoming Ways and Means Committee chairman who represented House Republicans in the bill drafting sessions, did not respond to a request for comment.