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Tax Reform

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GOP Way and Means Chairman Unveils Mammoth Tax Reform Bill

February 26th 2014


The House’s top tax writer rolled out a broad tax reform plan on Wednesday that would pare back tax breaks once thought untouchable and affect practically every part of American life.

The nearly 1,000-page plan unveiled by Ways and Means Chairman Dave Camp (R-Mich.) would pull back on the cherished deduction for home mortgage interest and embraces some ideas touted by Democrats, like scrapping the “carried interest” tax break used by hedge fund managers.

Camp said a discussion on making the tax code fairer and a more positive force for the economy was long overdue in Washington, given that the last successful tax reform effort was in 1986. But the discussion draft, which included a summary that along ran almost 200 pages, quickly found detractors both on and off Capitol Hill, as trade groups and lobbyists found out who were the losers in the chairman’s outline.

Even before it was released, the top Republicans in both chambers had distanced themselves from the effort, with Speaker John Boehner (R-Ohio) scoffing at the possibility of a vote this year and Senate GOP Leader Mitch McConnell (Ky.) saying it would be better to do tax reform next year.

In fact, one of the few areas of bipartisan agreement is that tax reform has little chance for success this year, and some have suggested that the best-case scenario for Camp’s draft is to be a template for future efforts. But Camp was defiant, arguing Wednesday that the average person was ready for a tax code no longer littered with “special interest handouts.”

“You’re going to hear a lot about one provision or another,” Camp told reporters at a news conference introducing his long-awaited draft. “The truth is people want a simpler, fairer and flatter tax code.” The Michigan Republican said he meets that goal by getting rid of 228 sections of the tax code, or roughly a quarter of its current 70,000 pages.

With changes to tax breaks for mortgage interest, charitable contributions, and state and local taxes, Camp also says that around 95 percent of households would be able to use the standard deduction and avoid itemizing – down from around seven in 10 right now. The deduction for state and local taxes – which Camp outright eliminates – is especially prized in Democratic states like New York and California.

But the release from Camp also acknowledges that he fell short on the House GOP goal of reducing the top individual rate to 25 percent. Roughly 99 percent of taxpayers, Camp says, will pay 25 percent or less, while the rest will face a top bracket of 35 percent.

Camp did succeed in lowering the corporate rate to 25 percent, by chopping off 2 percent a year over five years. In the process, Camp makes the prized credit for research and development permanent, while also stretching out depreciation schedules and getting rid of an accelerated cost recovery system.

Still, Camp also acknowledged that he was at times hamstrung by the fiscal cliff deal hashed at the end of the last Congress, which raised the top individual tax rate to close to 40 percent.

He also noted that his vow to not shift any of the tax burden away from the rich – which he made with his longtime partner, former Senate Finance Chairman Max Baucus (D-Mont.) – also meant that some tax provisions that have entrenched constituencies and are popular among Republicans had to be changed.

Some Democrats, like Rep. Sandy Levin (Mich.), the ranking member at Ways and Means, said they would keep an open mind about the draft, with an eye toward how Camp’s plan tries to battle issues like income inequality.

But others, like Chuck Schumer (N.Y.), the No. 3 Democrat in the Senate, underscored the challenge in making progress on tax reform this year. “Any proposal that eliminates the deduction for state and local taxes, as the Republican plan would do, is dead on arrival,” Schumer said in a statement.

Camp’s draft also illustrated why tax reform is often popular in the abstract, but becomes a more difficult sell when lawmakers and lobbyists get to see what tax breaks have to be slashed to bring down tax rates across-the-board.

The draft would have relatively little impact on the national debt over a 10-year span when analyzed under traditional scorekeeping methods. But the plan could raise as much as $700 billion – or as little as $50 billion – over a decade under a secondary method that tries to more fully estimate taxpayers’ reactions to the new code.

In his draft, Camp generally ignores the raft of taxes found in President Obama’s healthcare law, saying he was leaving those to fight another day. The Ways and Means chairman does repeal two pieces of ObamaCare– a tax on medical devices that has bipartisan opposition, and a provision that limits the ability to use health savings accounts to buy over-the-counter medicines.

Camp’s changes to the rates for capital gains and dividends would lead to a roughly similar top rate, when taking into account taxes from the healthcare law. But Camp says his approach would be far simpler, by taxing capital gains as ordinary income but excluding 40 percent of the profits.

Corporate America would also get a long sought after prize, a system that limits most offshore income, but business reaction to the plan was mixed. Retailers, which generally face a higher effective tax rate than other sectors, were quick to give their blessing to Camp’s plan.

But the oil-and-gas industry, where powerful interests have long said that keeping tax breaks was more important than a lower rate, said it was disappointed by the proposals to pare back cost recovery treatment and the “last in, first out” accounting method.

The National Federation of Independent Business, a prominent small business advocate, also said it had issues with the plan, in large part because the top individual rate would exceed the corporate rate. Many small businesses pay taxes through the individual code.

Perhaps no sector was more upset than the banks, who saw Camp propose a tax on the largest financial institutions that the industry fears could eventually seep down to smaller banks. Plus, Camp decided against removing the tax exemption for credit unions, a longstanding goal for banks.

“America should have more competitive business tax rates and our tax code should be fairer, flatter and more simple,” said Tim Pawlenty, the former GOP presidential candidate and chief executive of the Financial Services Roundtable. “Creating a new tax that adds costs on one critical part of the economy detracts from that goal."

Bernie Becker writes for The Hill, from where this article is adapted.

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