A special congressional committee created by last week's debt ceiling legislation is unlikely to have the time or the political will to tackle any meaningful tax reforms.
The 12-member panel, which will comprise an equal number of Democrats and Republicans from the House and Senate, will have four months to come up with $1.5 trillion in deficit reduction over 10 years either through budget cuts or tax increases. Given the glacial pace of most legislation in Congress, that isn't a lot of time.
“It's difficult to do a full-fledged tax reform effort coming out of such a tightly telescoped time frame,” said John Stanton, senior tax legislative partner at Hogan Lovells U.S. LLP.
Another and perhaps more important factor undermining broad reform is that the deliberation on tax issues is likely to mirror the contentious discussions on the topic during the debt ceiling debate.
The GOP refused to consider tax increases, while Democrats drew a line at protecting Social Security, Medicare and other programs. Each side protected its turf in the final debt ceiling bill.
That makes it unlikely that this new so-called supercommittee will have the wherewithal to tackle fundamental changes in the tax code, such as eliminating or reducing tax deductions provided for employer-sponsored health care insurance, and tax deferrals for the buildup of cash in insurance policies and retirement savings.
“I don't see any way in God's green earth you're going to get tax increases coming out of this special committee,” said Dean Zerbe, managing director of alliantgroup LP, a company that specializes in tax services for small and midsize businesses.
“The possibility of an agreement on tax reform among this group is pretty remote,” said Brian Graff, executive director and chief executive of the American Society for Pension Professionals and Actuaries.
The scope of the committee's mandate also works against achieving broad tax reform, according to Sam Olchyk, a partner at Venable LLP.
The panel was established primarily to reduce spending rather than engage in the more complicated process of making the trade-offs required to change the tax code.
“Tax reform and the supercommittee have differing objectives,” said Mr. Olchyk, a former aide to the Senate Finance Committee and the Joint Committee on Taxation. “It's difficult to accomplish both within the framework of the committee.”
One clue about the committee's flexibility will come in the appointments that House and Senate leaders make over the next week.
If the panel roster is filled with hard-line partisans, it is likely to hunker down in the parties' well-defined positions. If a moderate member or two is tapped, the dynamic could become much more fluid.
Another sign will come in the budget baseline that the panel chooses to use. If it adopts the Congressional Budget Office baseline, which assumes that the Bush administration tax cuts will expire at the end of next year, it will be much more difficult to consider tax increases.
STILL SOME HOPE
Some observers, however, hold out hope that the special committee can make substantial progress.
“Chances are as good here as I've seen in some time to get comprehensive tax reform done, but it's not a slam-dunk,” said Brian Gardner, senior vice president for Washington research at Keefe Bruyette & Woods Inc. “Sometimes when you're under the gun, it forces you to focus more intently, and that works in their favor.”
Even if major tax reform is beyond the committee's grasp, individual tax items are likely to be put on the table.
For instance, taxing carried interest at individual rates instead of capital gains rates for private fund managers, oil and gas industry tax breaks and depreciation rules for corporate jets are likely to be addressed. Reforming the alternative minimum tax also may be discussed.
And even if no tax changes come out of the supercommittee, observers will be watching for signs that could lead to reforms down the road. If it follows the trend set by last year's presidential deficit commission and this year's Senate Gang of Six, the committee could advise their colleagues to begin a process of lowering individual rates by making changes in so-called tax expenditures.
“We're going to be looking at what suggestions the committee will be making to the tax-writing committees that would impact retirement incentives,” Mr. Graff said.
Perhaps the biggest indictment of the yet-to-be formed supercommittee comes from Congress itself. If the committee can't reach an agreement on deficit reduction, the debt ceiling law provides for a trigger that will automatically cut $1.2 trillion in spending over the next 10 years from the budget.
Email Mark Schoeff at [email protected]
