StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

No Tax Reform Before The End Of This Decade

10 Jun 2013
Posted by Stan Collender

Here’s something you haven’t heard from anyone else: Tax reform is at least three years away...and even that may be optimistic. In fact, I'm not expecting a serious tax reform effort until 2017.

Note that I said "effort" rather than a bill. Comprehensive tax reform is far more likely to be enacted towards the end of the decade than it is to be in place before the 2016 presidential election.

Yes, I know that absolutely is not the common wisdom. House Ways and Means Committee Chairman Dave Camp (R-MI) has been saying all year that he wants to put tax reform on a fast track so it can be enacted this year. Just a few months ago House Republicans were threatening to make a process for tax reform the price of their supporting the next increase in the federal debt ceiling. And when Senate Finance Committee Chairman Max Baucus (R-MT)  (D-MT) announced that he wasn’t going to run for re-election, there was a flurry of speculation about how that decision would make tax reform more likely to happen this year.

All of this is nonsense. None of the statements, threats or retirements had any real impact of the politics of tax reform, which are as intractable today as they were at the start of the year.

But first, a quick step back in tax reform history.

The last comprehensive tax reform act, enacted in 1986, took three years to work its way through the legislative maze. CG&G alum Pete Davis, who worked for the Congressional Joint Tax Committee at the time, told me that it took two years for the House and Senate to agree on a basic new tax code and a full year after that to draft the transition rules that were needed to switch from the old to the new system.

Those of use who lived through it or who have read Jeff Birnbaum's and Alan Murray's Showdown at Gucci Gulch know how painful the process was in the mid-1980s when the effort came close to crashing or being abandoned a number of times.

The tax reform situation is much more difficult now than it was almost three decades ago.

1. The 1986 tax act was always designed to be "revenue neutral," that is, from the start there was a presumption by both Democrats and Republicans that, in the aggregate, the new code wouldn't raise revenues compared what would be collected if the old code remained in place.

That's not the case now. At least in nominal terms, the federal deficit and national debt are much higher than they were in 1986 and both are much bigger issues than they were then. That by itself increases the prospect for a revenue-positive bill.

There also will be pressure for a revenue-positive bill because that will be the price Democrats are likely to demand for changes in Medicare, Medicaid and Social Security.

The need or demand for a revenue-positive tax reform act will present serious problems for congressional Republicans whose political base considers any type of tax increase as an unforgivable political sin. Before House and Senate Republicans will be able to negotiate Democrats, they'll first have to negotiate with themselves. That will add a very time-consuming complication to the new tax reform process that didn't exist in the 1980s.

2. The tea party, Fox News and Rush Limbaugh didn't have the influence they have today. In fact, they weren't even on the national political radar screen. Grover Norquist began Americans for Tax Reform in 1986 and his no tax increase pledge effort began in 1986.

3. Social media didn't exist.

4. There were far fewer one-party congressional districts in the 1980s than there are today and this situation will continue to exist until at least the next decennial census in 2020. That means that most members of the House will keep paying more attention to their primaries than the general and that typically limits their ability to compromise on big issues like tax reform.

5. The U.S. is far more politicized and polarized today than it was in the 1980s.

6. The willingness to filibuster legislation, including routine procedural motions, is much, much greater today.

7. One of the things we seem to have forgotten about the tax reform debate of the 1980s is that all members absolutely needed to be repeatedly heard on the subject. Even if they weren’t on the tax-writing committees, representatives and senators had to find ways to ask questions at hearings, make floor statements, hold town hall meetings, meet with constituents, meet with lobbyists, etc. Time-limited debates were virtually impossible.

And given that they couldn't possibly get everything for everyone they represented in a bill that had to be revenue-neutral -- i.e., everyone's taxes couldn't be reduced -- every representative and senator had to have a chance to say at least once that they were against the bill. In many cases, they had to have the chance to actually vote against it.

All this will be even truer with a tax reform bill that raises revenues; everyone will need a chance to vote against it at least once.

Put this all together and the only thing that's hard to see is how anyone thinks comprehensive tax reform will, or even can, happen quickly.

Regular legislative order likely will take more than three years to complete and fast-track process will only do two things: fool voters into thinking that something will happen quickly and then fail as miserably and ignominiously as the anything-but-supercommittee.

My expectations:

House and Senate Republicans cannot possibly agree to a tax increase before the 2016 presidential election without seriously, and probably fatally, hurting their political prospects. There may be lots of hearings, white papers, and discussions between now and then, but even a hint of an accommodation on revenues will create serious problems with the GOP base.

The deficit is expected to continue to fall both in nominal terms and as a percent of GDP between now and 2017. That will make it even harder for Republicans to justify a tax increase deal to their base.

As the projected deficit starts to rise again after 2017, the pressure to do something about it will increase. This very conveniently will begin to happen after the 2016 presidential and congressional elections are over.

That's when the real tax reform clock will start to run. If we give Congress some credit for the hearings, etc. that will have taken place, and if you assume that some serious internal discussions will have started within both political parties by then, the process is likely to take at least two-plus years from that point.

That makes 2019 the earliest tax reform is likely to be enacted with implementation for some, but not all of the changes, starting in 2020.

Tax reform

The incentives are all wrong for tax reform. The tax lawyers and lobbyists depend on finding loopholes to justify their salary. Politicians use loopholes to extract campaign donations. Each side has incentive to make the system more complex. Taxpayers are not organized.

Max Baucus only *ACTS* like a (R-MT) on key votes

It's either a Freudian slip or a typo.

While Baucus regularly fails to act like a Democrat supporting Democratic Party principles, (e.g. Bush Tax Cuts, Background Checks for Gun Purchases), his actual political affiliation is (D-MT).

"And when Senate Finance Committee Chairman Max Baucus (R-MT) announced that he wasn’t going to run for re-election, there was a flurry of speculation about how that decision would make tax reform more likely to happen this year."

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