The prospects for a grand bargain on the "fiscal cliff" have diminished rapidly, with both Congress and the White House going home for Christmas with nary an agreement in sight. Instead, as President Obama mentioned in passing before leaving town on Friday, talk has shifted to an emergency "small deal" that would avert tax hikes for the middle class in the short-term and suspend at least some of the sequester. Entitlements and the debt ceiling would be dealt with later on in January. But any other big reform could end up falling by the wayside — including corporate tax reform, a top priority for many of the CEOs who have poured millions into lobbying on the fiscal cliff.
Corporate taxes aren't actually part of the fiscal cliff at all, as the Bush tax cuts just deal with individual tax rates. But a corporate tax overhaul had certainly been in the cards in the earlier stages of the fiscal cliff debate: It was part of Republicans' ideal compromise on the Bush tax cuts — extend them for a year but overhaul the entire tax code in 2013 — and one that Obama was sympathetic to as well. The White House had put out its own outline for a tax overhaul in February and put a corporate overhaul on the table as little as two weeks ago. And that helps explain why CEOs had been so enthusiastic about a fiscal cliff deal, pouring huge sums into lobbying groups like Fix the Debt, even if it meant higher taxes on their individual income.
But as negotiations have deteriorated, legislators are now poised to shift to triage mode on the fiscal cliff — bracing themselves for a short-term fix to blunt the effects of going over the cliff, and the more extraneous parts of a deal are looking far less likely to make it in. "It will be just an emergency, patch-the-tax-hikes, ex-post-facto-type approach," a senior Democratic Senate aide tells Mike Allen. "The priority is going to just be on repairing or restoring the tax cuts to the middle class."
That helps explains why some CEOs were publicly urging Republicans to accept tax rates as part of a fiscal cliff deal, in addition to pushing Democrats on entitlements: If they were willing to play nice, legislators would be more likely to come up with a far-reaching deal that included a corporate tax overhaul that had nothing to do with the short-term fiscal cliff (corporate tax rates would stay the same either way), and nothing to do with long-term deficit reduction (both Obama and Republicans have supported a corporate tax overhaul that would be revenue-neutral).
Now that the hopes for a deal have shrunk down to a de minimus agreement, so has the likelihood of these more extraneous reforms. While entitlements aren't part of the fiscal cliff either, Republicans view them as the primary target of spending cuts and deficit reduction they're demanding in any fiscal cliff deal.
That doesn't mean that all hope is lost for corporate tax reform in a cliff deal: Even if legislators agree to a "small deal" by early January, no one wants a second fiscal cliff a year for now, so the White House and Obama will have to come up with a longer-term agreement on taxes. A "small deal" would also mean that there will have to be a deal over the next debt ceiling, which we're likely to hit in late January, which would likely be worked out with an agreement over entitlements.
So a corporate tax overhaul could end up being on the table as part of these negotiations. But that would mean that legislators would be willing and able to consider reforms that go beyond what both parties insist are their top priorities: To prevent the fiscal cliff from harming the immediate economy and to reduce the long-term deficit.