Analysis: Coming soon to Congress: Tax Deadlock 2?

WASHINGTON Thu Aug 4, 2011 4:14pm EDT

The Capitol dome and Senate (R) in Washington, August 2, 2011. REUTERS/Jonathan Ernst

The Capitol dome and Senate (R) in Washington, August 2, 2011.

Credit: Reuters/Jonathan Ernst

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WASHINGTON (Reuters) - U.S. tax code changes on matters ranging from corporate jet depreciation to yacht and beach-home deductions will be in play once a congressional super committee to reduce the deficit gets down to work.

A comprehensive tax reform package is unlikely to emerge from the panel in the next four months, aides and analysts said on Thursday, citing the divisive power of 2012 election politics and the lack of adequate time for such a project.

"The possibility of real tax reform is about zero. There is just too much Tea Party and Republican opposition," said one Democratic Senate aide as party leaders considered a short list of contenders for inclusion on the 12-member panel.

Still, the committee is sure to examine tax breaks for ethanol, the oil and gas business, employer-provided health insurance, domestic manufacturers, research and development, and high-rolling managers of private equity and hedge funds.

Offshore corporate profits issues -- such as overseas income deferral -- will come under scrutiny as well, but perhaps end up being too complex to confront by November 23, when the panel must finish its work, analysts said.

"We don't want to see it become a tax-hiking exercise," said a Republican Senate aide.

Lurking in the background will be an intensive lobbying effort by high-tech and pharmaceutical firms for a tax holiday that would let them bring home, or repatriate, at a discounted tax rate, an estimated $1 trillion in offshore profits.

Another business lobbying push -- for lowering the 35-percent corporate income tax rate, possibly in exchange for acquiescing to loophole closures -- will come up, but also probably be too big a bite for the panel, analysts said.

"There is an interest in tax reform, but the idea that it will happen between now and November is to live in a fantasy land," said Dean Zerbe, a former senior Senate tax staffer and now managing director at tax consultancy alliantgroup.

Zerbe said the super committee would not take on taxes at all. "You'll see the Republicans close ranks. They didn't go through all this in the first round just to give it away in the second round. I don't see this as a window for tax reform."

At the same time, Republicans may be willing to give ground on a few, largely symbolic loophole closures, said Ed Mills, also a former Senate tax staffer and now a policy analyst at investment firm FBR Capital Markets.

"It is 'Deadlock Part 2' on a grand bargain," Mills said, but he added that with elections nearing, Republicans will be reluctant to defend accelerated depreciation for corporate jets or the mortgage deduction for yachts and vacation homes.

The super committee is tasked with finding $1.5 trillion in budget savings over 10 years. That is above and beyond the savings of $917 billion in 10 years that was included in the debt ceiling bill made law this week after months of debate.

When the committee finishes its work on November 23, Congress will have until December 23 to vote on the panel's recommendations. If either deadline goes unmet, automatic spending cuts of $1.2 trillion over 10 years will be triggered on January 1, 2013 -- after the November 2012 elections.

TRIGGERS 'ONEROUS'

"The triggers are onerous enough for members" to try hard to hit their $1.5-trillion savings target, Mills said.

That can happen without sweeping reforms if committee members cobble together some loophole closures, some budget cuts and small revenue raisers such as a broadcasting spectrum auction or higher mortgage guarantee fees, he said.

Beyond December 23, the immediate focus will shift to the end-2011 expiration of a temporary, 2-percent Social Security tax cut; "bonus" depreciation that allows businesses to write off 100-percent of certain new capital investments; and the so-called "patch" that raises the exemption level on the alternative minimum tax (AMT) so that more than 20 million middle-income households do not have to pay it.

Election-year politics will take over as 2012 unfolds, with Republicans standing firm on a "no new taxes" pledge and Democrats defending the Medicare and Medicaid health programs, as well as the Social Security retirement pension program.

Both positions are shaping up to be foundations of the parties' election campaigns and would be undermined if the super committee were to defy the odds -- and the calendar -- by crafting comprehensive tax or entitlement reform.

Further ahead, shortly after the 2012 elections, the 2001 and 2003 Bush tax cuts will be due to expire again, with implications for many tax provisions, among them:

* income tax rates, personal exemption, deduction limits;

* estate tax, marriage penalty, child tax credit, student loan interest deduction, earned income credit; and

* capital gains and dividend taxes.

Expectations about how these will be handled will influence the discussion in coming weeks as well.

(Additional reporting by Nanette Byrnes in Chapel Hill, N.C.; Editing by Howard Goller)

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Comments (3)
bobw111 wrote:
Throw out all 80,000 pages of the tax code and replace it with 5 simple brackets.

No deductions, no exemptions, no “targeted” exclusions.

The problem isn’t that the “Tea Party” doesn’t want tax reform. From what I’ve read that’s one of the biggest things they are do want.

The real problem is that to truly “reform” the tax code you have to do away with all the special deals congress writes in for their “constituents” (read pocket stuffing lobbyists.)

Aug 07, 2011 4:19pm EDT  --  Report as abuse
seattlesh wrote:
If those goes the way of Obama’s other compromises, the Republicans and TPers will get everything they want, Obama will hail it as a bi-partisan compromise and go celebrate by taking a vacation to Hawaii.

Aug 07, 2011 10:26pm EDT  --  Report as abuse
Eric.Klein wrote:
If Tea Party wants to show that it is relevant they need to propose a completely new tax code that is fair and without loopholes.

No more band-aids that only create more loopholes for those who can afford it to take advantage of the system.

When a billionaire can brag that his tax rate is (more than 10%) lower than that of his secretary there is a problem.

For example, current personal tax are calculated on worldwide income less taxes paid. It is time that corporations are required to do the same, with no more offset or games that result in lower tax rates than most individuals. Make deductions only for taxes paid, and for new jobs created and held for more than 10 months prior to reporting.

Aug 08, 2011 1:43am EDT  --  Report as abuse
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