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While one congressman’s special-interest tax loophole may be another’s cherished constituent project, both Houses of Congress are moving forward with efforts to reform the tax code, though there is much skepticism over whether these first movements will produce any meaningful legislation.
Following several weeks of presidential outreach to both parties of Congress designed to lay the groundwork for some “grand bargain” to deal with the budget deficit, Democratic and Republican members of the Senate Finance Committee, led by Max Baucus, D-Mont., met Thursday to begin the process of IRC reform.
On the other side of the Capitol, the House Ways and Means Committee is planning on holding similar bipartisan meetings, and chairman Dave Camp (left), R-Mich., released on March 12 a “discussion draft” which he said was “aimed at creating a simpler and fairer tax code for small businesses.”
The avowed intent in both houses is to close tax loopholes to raise revenue without actually imposing any new taxes.
In his State of the Union message last month, President Barack Obama made his pitch for closing those lacunae: “To hit the rest of our deficit reduction target, we should do what leaders in both parties have already suggested, and save hundreds of billions of dollars by getting rid of tax loopholes and deductions for the well-off and well-connected. After all, why would we choose to make deeper cuts to education and Medicare just to protect special interest tax breaks?”
Camp’s draft, which he says is based on ideas supported by both Republicans and Democrats, is designed to “spur job growth” and create “higher wages for American workers by reducing the burden the tax code imposes on small businesses.”
Using language that most independent advisors would applaud, Camp uses National Federation of Independent Business data that shows "tax compliance costs are 65% higher for small businesses than for big businesses, costing small business owners $18 billion to $19 billion per year. In addition, nearly nine out of 10 small businesses rely on outside tax preparers. With about half of the private sector workforce employed by a small business...these costs, along with tax rates as high as 44.6%, are especially burdensome for a sector that has long been responsible for leading the nation out of economic downturns.”
So Camp’s approach to tax code reform would include what he calls “widely supported reforms such as permanent section 179 expensing and expansion of the “cash accounting” method.”
On the Senate side, Chairman Baucus and ranking member Orrin Hatch, R-Utah, both sat on the Finance Committee when the last significant tax reform took place, Ronald Reagan’s 1986 Tax Reform Act. That law, which was specifically designed to be revenue neutral, simplified income tax rates and lowered individual tax rates for the highest earners. While it increased the deduction for home mortgage interest, it also ended the favorable tax treatment of real estate limited partnerships (which caused a major change in many advisors’ business models, by the way).
In the traditionally august U.S. Senate manner, the Senate committee adopted a bipartisan air. First, it announced that weekly meetings will be held to allow members input into forming “the foundation for comprehensive tax reform.” Tax reform itself, the official report of the meeting declared, “can provide families certainty, spark economic growth, create jobs, and make U.S. businesses more competitive.” The initial meeting on March 21 will be on simplifying the tax code, but further topics of discussion will include tax treatment of small businesses and corporate investment; education expenses; international taxation; and charitable giving and tax-exempt organizations.
Baucus’ long-stated goals for tax reform were summed up in an address he delivered last year at the Bipartisan Policy Center. “Since 1986,” he said, “Congress has made 15,000 changes to the tax code.” So, he argued, a "21st-century tax code must promote four goals:
- Jobs from broad-based growth,
Baucus goes on to address the issue of income inequality and the changing nature of the American family: “After benefits and taxes, the income of the top 1% of taxpayers has grown almost eight times faster than the middle over the past 30 years. And it has grown 15 times faster than the poorest 20%.... Family structures today are also different than they were in ‘86. There are fewer traditional married couples with one breadwinner, and more single parents and working couples. This means more families need to pay for child care, but the tax code hasn’t taken these changes into account.”
As for competitiveness, Baucus argues for lowering corporate tax rates and against one tax loophole, the trend of “weakened protections against shifting income to tax havens,” which results in “billions” of lost tax revenue yearly.
So will any significant tax reform happen in a year when gridlock between the parties reigns on anything with a pricetag? Political guru Greg Valliere, speaking on a Pioneer Investments call for advisors in late February, said it bluntly: “I don’t see major tax reform this year or next.” Valliere went on to suggest that “maybe something will happen” with the Buffett rule to increase taxes on millionaires and on the carried interest issue, As for overall tax reform, he argued that within Washington, there is “recognition that a grand compromise along the lines of Simpson-Bowles won’t happen; I don’t see the leadership in place, either with Boehner or the White House, to do it."
For more tax stories and advice, check out AdvisorOne’s 20 Days of Tax Planning Advice for 2013 home page.