This blog is on hiatus indefinitely.
With the ink not yet dry on the compromise debt-ceiling legislation, some of the principlas are arguing about a key provision that would determine how likely it is that the new Joint Select Committee on Deficit Reduction would address the scheduled expiration of the current individual rate structure, estate tax, and the preferential rates on capital gains and dividends, i.e. the Bush tax cuts.
At issue is a provision bargained for by House and Senate Republicans and widely marketed to skeptical conservatives wary of the deal, prior to the vote. The provision aims to require the Joint Committee to use the benchmark of current law (rather than current policy) to score the legislation the Committee is required to vote on prior to November 23.
Under Section 301 of the debt-ceiling bill, deep, across-the-board, spending cuts go into effect, beginning in FY 2013, if Congress does not pass into law a proposal that would reduce the deficit by at least $1.2 trillion. The question is how that $1.2 trillion is measured – – against what benchmark.
Recognizing that it would far too tempting for the Joint Committee to reach the $1.2 trillion figure by measuring from a current policy baseline that assumes low taxes into the future, Republican negotiators insisted that the Congressional Budget Office should be required to use current law in providing estimates for Joint Committee deliberations. They specifically included a reference to Section 301(a) of the 1974 Budget Act in the debt-ceiling bill.
Now, White House economist Gene Sperling argues on the White House blog that the bargained-for language is not specific enough. Despite the intent of Republican negotiators, Sperling claims that the Joint Committee can adopt any baseline it chooses by a majority vote. The legislation may require CBO to provide an estimate based on current law, but the sequestration would not necessarily be triggered under his interpretation, if the Committee reaches the $1.2 trillion figure by some other measure. Paul Ryan strongly disagrees.
Sperling’s interpretation is nonsensical and it would gut the deficit reducing purpose of the legislation, because there is no bipartisan consensus on any baseline other than current law. For example, the current policy baseline used by the Administration assumes that taxes will go up on everyone earning over the $200/$250k threshold while the bulk of the Bush tax cuts will be extended. If the Joint Committee were to use the Adminsitration’s baseline, ironically, the Joint Committee would not be allowed to count the President’s preferred rate increases towards the $1.2 trillion.
Would the Adminstration argue against the Joint Committee using its own policy baseline? and what basis does it have for supporting any other benchmark? If there is no rationale for the baseline, then the whole Joint Committee exercise becomes nothing but smoke and mirrors.
One common feature of both the Reid (S. 1323) and Boehner (S. 627) debt ceiling bills is a “Joint Select Committee on Deficit Reduction” with the power to report legislation (almost) directly to the House and Senate that is entitled to consideration under modified fast-track procedures. The Boehner version prevailed and was included in the debt-ceiling legislation, with no changes, on August 2.
The language of the provisions creating these “super” committees is so similar that it’s clear that the two bills have a common origin, but they differ on their revenue targets and on authority to write tax legislation. The Reid bill empowers the committee to “include recommendations and legislative language on tax reform” in its report. The Boehner version that ultimately prevailed on August 2 omits the language on tax reform but it contains no specific prohibition on writing tax legislation.
In public comments, the Speaker has emphasized that it would be nearly impossible for the Committee to propose significant tax reform, but other commentators are not so sure. The Wall Street Journal editorialized that the committee could “end up proposing tax increases.”
Here are the commonalities:
- Membership – – 12 members, with 3 each chosen by the Speaker, the House minority leader, and the majority and minority leaders of the Senate.
- Approval Threshold – – 7 of 12 members. At least one member must cross party lines in order for the committee to report.
- Deadlines – – Committee vote on recommendations due Nov. 23, 2011. Committee report due by December 2nd. Committees of jurisdiction must report by December 9th. Floor vote on final passage due December 23rd.
- Fast Track Procedures – – in nearly identical language, the bills would be entitled to consideration with 4 hours of debate in the House and 30 hours in the Senate. Cloture would be invoked by the terms of the legislation, so that 50 Senators and the V.P. could determine the outcome. The chamber that acts first gets precedence, unless the bill contains revenue measures, in which case the House bill takes precedence.
- Role of Committees – – In both bills the Super Committee report is referred to committees for 7 days for an up or down recommendation. In the Senate, the committees with jurisdiction are “automatically discharged” if they fail to report, and in the House, a motion to discharge the committees becomes in order after 7 days. Committees are also allowed to submit recommendations to the Super Committee by October 14, 2011.
- Revenue Targets – – The goal of the committee in the Reid bill is to reduce the deficit to “3 percent of GDP.” The Boehner bill sets a goal of $1.8 trillion in deficit reduction from 2012 to 2021.
- Tax Reform – – The Reid bill allows the Super Committee to include “recommendations and legislative language on tax reform” in its report. The Boehner bill omits this language, and it also revises the language referring to the Joint Committee on Taxation. The JCT is not mentioned in the bill text, but there is a cross-reference to a section of the Budget Act that clarifies JCT’s role in providing tax estimates.
Note: Updated Aug. 4.
According to Democratic leaders interviewed today, President Obama and Speaker Boehner are close to approving a budget deal that would require in 2012 a re-vamping of the tax code to lower individual and corporate rates by modifying or repealing scores of “tax breaks” and other “loopholes.”
Thus, the Speaker and the President appear to be on the verge of accepting the logic of the Bowles-Simpson commission that issued its unofficial report in December, initiating a process that could wring out an overall rate reduction by focusing on tax expenditures.
Which tax expenditures are at risk? Sen. Tom Coburn’s “Back in Black” report provides useful context, although it has not been endorsed by any other Senator. In it, Sen. Coburn uses the familiar style of appropriations battles past to highlight what he views as inappropriate use of tax deductions, like the historic preservation credit, the exclusion for foreign-earned income, and (humorously) the tax deduction for Eskimo whaling captains.
His point is that they should all be repealed immediately and other tax benefits should be sharply limited. In the face of determined opposition, Coburn takes on the home mortgage interest deduction (cap at $500k of mortgage principal; no second homes) and the exclusion for employer-provided health insurance (cap at $15k for families). In total, his reforms are said to save $962 billion in tax revenue over 10 years, which is close to the $1 trillion figure touted by the Gang of Six as their goal. In reality, his proposals would bring in much less than $1 trillion, because taxpayers would change their behavior to minimize tax.
The leaders will not likely come close to endorsing Dr. Coburn’s prescriptions, but they now seem to be willing to enact procedural changes, such as a the new fast-track process endorsed by the Gang of Six, that would require the tax writing Committees to repeal enough deductions to reach the inflated $1 trillion target.
This could be a disaster for taxpayers.
For many years, an uneasy detente between corn-belt Senators and their urban, southern, and mountain state colleagues has protected the booming ethanol industry, but there are signs in the vote on Thursday that it is now “open season” on all tax expenditures.
As Nebraska Senator Mike Johanns remarked, after the vote, “I think we’re looking at everything now.” A sentiment echoed by California Senator Diane Feinstein who declared the era of large subsidies “really over.”
What else is on the chopping block? Earlier in June, senior Ways & Means Committee Republican Rep. Devin Nunes said, “it’s universally accepted that most of these credits are going to be gone.” He’s promoting a reverse auction process that could replace the existing set of production tax credits for wind, solar and other advanced energy technologies.
If ethanol subsidies and other renewable energy subsidies are threatened, what about tax benefits for mostly urban constituencies, such as historic preservation tax credits? Will the unravelling of the ethanol detente affect those policies as well?
As budget concerns become increasingly salient and a new group of House and Senate leaders with no allegiance to the old bargains gain in authority, Treasury’s annual list of tax expenditures is looking increasingly like a menu of offsets.
The Wall Street Journal’s William McGurn discusses the recent dialogue between former Clinton official and tax expert William Galston and Reihan Salam, an advisor for the “pro market” think tank Economics 21 on the viability of President Obama’s famous pledge not to raise income taxes on families earning less than $250k in gross income.
Here are the articles McGurn cites:
Five former Assistant Secretaries for Tax Policy today kicked of an ambitious series of hearings by testifying on the broad topic of tax reform. Chairman Max Baucus is planning to hold as many as 24 hearings, digging in to a wide variety of tax policy topics.
In a harsh critique of the 1986 tax reform, former IRS Commissioner and Treasury Assistant Secretary Fred Goldberg blamed the ’86 Act for diminishing the United States’ economic competitiveness in banking and pharmaceuticals in particular. Goldberg urged the Committee to respect economic forces beyond the Committee’s control to avoid further damage to the U.S. economy.
The fact is that our tax system is increasingly hostile to capital in most of its forms – money, human capital, and intangible assets. These kinds of capital are mobile, don’t respect national borders, and are extremely unforgiving. The ’86 Act, and legislation that has followed in its wake, have ignored or challenged these powerful forces. In doing so, we have acted at our peril – and we are paying a very high price.
Other former Treasury Asisstant Secretaries testifying included:
- Jonathan Talisman, 2000-2001
- Mark Weinberger, 2001-2002
- Pamela Olson, 2002-2004, and
- Eric Solomon, 2006-2006