CHN: Taxes in the 114th Congress

Since the election in November, much has been written about potential areas where congressional Republicans and Democrats and the Administration might be able to work together. Often tax reform is mentioned as an area where compromise could happen. It seems everyone at least pays lip service to their desire to do tax reform, but agreeing on specifics will undoubtedly be a much harder task. Would reform include both corporate/business and individual taxes? Would it be budget-neutral or would it result in additional revenue?
Surely taxes will be on the agenda in 2015. In December, Congress renewed a package of approximately 50 tax cuts, mostly for businesses, known as “extenders,” that had expired at the end of 2013. The $41 billion one-year compromise bill was a retroactive extension for 2014. The package expired again on December 31 and will likely be renewed at least for 2015 or perhaps longer. Last year, the House passed much more expensive legislation that would have made permanent some of the biggest business tax breaks, costing $450 billion over 10 years. Advocates opposed making these cuts permanent without paying for them by increasing other taxes.  Further, they insisted that if any of these provisions were made permanent, improvements in the Child Tax Credit and Earned Income Tax Credit set to expire in 2017 should also be made permanent. For more background on the tax extenders package, see CHN’s December 22 Human Needs Report.

The Republican-controlled House and Senate will likely pass a joint budget resolution for FY 2016. It could include a process called “reconciliation” to enable the Senate to enact tax cuts with only a simple majority, instead of the 60 needed to end a filibuster. If the House and Senate can agree on a tax cut bill to send to the President, he can decide to veto it. To override the President’s veto, both House and Senate would need a two-thirds vote – unlikely in the current Congress. (For more on reconciliation, see the budget article elsewhere in this Human Needs Report.)

Comprehensive tax reform is a heavy lift. Some are suggesting addressing only corporate tax reform. There are many obstacles to that approach. For one thing, a large percentage of business taxes are paid through the individual tax code. Representative Dave Camp (R-MI), newly retired Chairman of the House tax-writing Ways and Means Committee, received virtually no support from his Republican Party colleagues last year for his corporate tax reform plan. It called for paying, in part, for a reduction in the highest corporate tax rate of 35 percent (the average effective rate corporations actually pay is about half the maximum) to 25 percent by eliminating many of the corporate tax breaks now in place. Each of those breaks has a powerful, well-funded lobby that will fight to keep them in place.

The majority party in each new Congress passes a set of rules to guide its work in the upcoming two-year session. On January 6, the House passed its rules for 2015-2016. Included was a provision known as “dynamic scoring.” It requires the non-partisan Congressional Budget Office (CBO), and the Joint Committee on Taxation (JCT), charged with estimating the cost of legislation and tax policy, to factor in to the cost-estimate of tax cuts their impact on economic growth.  If the tax cuts are assumed to spur growth, they would generate more tax payments, thus reducing their cost to the Treasury Department in lost revenue. While CBO has estimated some economic impacts in the past, considerable uncertainty has caused them to provide a range, which sometimes has varied wildly. Requiring the CBO and JCT to use dynamic scoring could force the appearance of more certainty than is warranted and politicize their work. In his blog, Shaun Donovan, Director of the Administration’s Office of Management and Budget, warned against using dynamic scoring saying, “Non-partisan economists and analysts at CBO and JCT analyze all spending and tax bills based on a stated set of assumptions that are chosen and widely recognized to be accurate, consistent, fair, and impartial…. any change to scoring rules should enhance their accuracy, consistency and fairness. Adopting dynamic scoring risks doing just the opposite.” In a January 5 paper, the Center on Budget and Policy Priorities warns that Congress could use dynamic scoring to produce tax reform that appears much less costly than it actually is. The Senate has not yet finalized its rules for 2015-2016.

Republicans have almost unanimously opposed any increase in taxes for a number of years. One area where some have indicated that they might be open to more revenue is an increase in the gas tax to fund the Highway Trust Fund that is expected to run out of money by the end of May. (Some would get around their pledge not to raise taxes by calling it a “user fee.”) The 18.4 cents tax per gallon of gasoline and 24.4 cents tax per gallon of diesel fuel has not risen since 1993. Increased vehicle fuel efficiency lowering gas-tax revenues, coupled with growing transportation infrastructure needs, has left the Fund without adequate revenue. Since 2008, periodic installments totaling $53.6 billion have been transferred from general revenues to the Highway Trust Fund. Senate Finance Committee Chairman Orrin Hatch (R-UT) and Senate Environment and Public Works Chairman James Inhofe (R-OK) are among those who have indicated an openness to increasing the gas tax in order to pass a multi-year transportation bill that would give states greater certainty as they plan long-term transportation projects.

Senator Hatch (R-UT) has invited his friend from his Senate days, Vice President Joe Biden, to participate in tax overhaul discussions. Biden has accepted the invitation. Stay tuned.

tax policy