Congress members agree to fix tricky tax code

Amid all the unbridled partisanship and naysaying about Washington gridlock, a glimmer of consensus has begun to develop in Congress around the herculean task of fixing the nation’s tax code.

House Speaker John A. Boehner, Ohio Republican, has said rewriting the tax code is a top priority; both President Obama and likely GOP nominee Mitt Romney say it needs to be done, and Sen. Max Baucus, the top Democratic tax-law writer in Congress, said this week that it’s time to clear out some of the thousands of tax breaks that have infiltrated the code since it was last overhauled in 1986.

The upside is that a streamlined tax code should be more competitive and fair. Depending on how much lawmakers are willing to cut, it could bring a windfall of hundreds of billions of dollars in higher revenue.

But even before the two sides zero in on which sacred cow tax breaks to eliminate, there’s still a deep divide over what to do with new revenue: use it to lower tax rates across the board, which Republicans say will free up investment, or plow the money into the federal Treasury to cover spending.

Mr. Baucus, chairman of the Finance Committee, used a speech on tax reform at the Bipartisan Policy Center on Monday to urge senators to keep working behind the scenes to build trust running up to the November elections and avoid any divisive votes beforehand to prevent members in the House and Senate from getting too locked into their positions before the lame-duck session.

“Everyone agrees we need to get rid of the dead wood and simplify the code, and we should,” he said. “But tax reform can’t be an abstract, academic exercise. We should start with a clear understanding of the results we want to achieve.”

Many Republicans have felt bound by their commitment to Grover Norquist’s Americans for Tax Reform pledge not to increase taxes, which means any tax revenue raised by eliminating breaks must be returned to taxpayers some other way.

But the pledge has seen slippage. Some House Republicans openly talk of no longer being bound by it, and in the upper chamber, Sen. Lindsey Graham, South Carolina Republican, spoke of having “crossed the Rubicon” on the matter.

When asked directly whether he is open to “revenue raisers,” Mr. Graham said he supports closing tax loopholes, as well as allowing more drilling off the South Carolina coast and on federal lands and using the revenues generated from the leases to help reduce the national debt.

The conversations are being driven in part by what is known as the “fiscal cliff”: Deep, self-imposed, across-the-board budget cuts are set to kick in at the end of the year if Republicans and Democrats don’t reach a deal to cut the deficit by $1.2 trillion over the next decade.

The tax cuts enacted during President George W. Bush’s tenure also will expire at the end of the year if Congress doesn’t act, and both sides now say that deadline could be a catalyst for rewriting the overall tax code.

Congressional Republicans last week urged a one-year extension of the Bush tax cuts, which they said would create space for broad tax reform in 2013.

Mr. Baucus said negotiations later this year on the Bush tax cuts could lay the groundwork for the kind of cooperation it will take to tackle the tax code.

Mr. Baucus and other leaders in Congress hope later this year to engage and educate members about tax reform, including a proposal advocated by former White House Budget Director Alice Rivlin and former Sen. Pete Domenici, a Republican from New Mexico, and a plan from the bipartisan Bowles-Simpson debt commission.

Both call for spending cuts and the elimination of tax breaks to produce extra revenue to reduce projected deficits.

During Monday’s speech, Mr. Baucus said he was working on a tax reform proposal that both sides could support but offered no details. The goals, he said, would be to help create jobs and promote “broad-based growth.”

Dozens of senators, including Tom Coburn, a Republican from Oklahoma and outspoken fiscal conservative, and Charles E. Schumer, New York Democrat, met privately over the past week to continue trying to forge a bipartisan compromise on long-term deficit reduction.

They heard from Robert B. Zoellick, outgoing president of the World Bank, and William C. Dudley, president of the Federal Reserve Bank of New York, who said that if the European crisis spirals out of control it could throw the U.S. economy back into a deep recession.

Mr. Zoellick told them Congress needs to be ready and willing to step in and act to avoid a repeat of the 2008 financial crisis that caught Congress flat-footed.

Senators seemed to emerge from the meeting with a new sense of urgency, but they offered few details on how to bridge the divide between the two parties both on extending the Bush tax cuts and long-term deficit reduction.

Sen. Bob Corker, Tennessee Republican, called the message from Mr. Zoellick a “defining moment” for debt negotiations in Washington after a year and a half of partisan impasse and said he is drafting legislation to tackle both entitlements and tax policy legislation he hopes will serve as a template for ongoing discussions.

But Sen. Joe Lieberman, a Connecticut independent who is retiring this year, best captured the bottom line.

“There’s a real sense that Europe’s economy is in a deep crisis and if it slides further it will drag down the United States even more,” he said after the meeting. “Everyone seems to know that. The question is whether we’ll have the guts to do anything about it.”

Still, any deal either on the Bush tax cuts or a longer-term tax overhaul must get through the Republican-controlled House, where many conservatives are dead set against changes that would give the government more room to spend.

“While I generally support tax reform and getting rid of loopholes, I would have to see what loopholes we’re talking about,” said Rep. Joe Wilson, South Carolina Republican. “One person’s loophole is someone else’s livelihood.

“I’m not here to increase federal revenue.”