You can only stall so long on the details of tax reform. On February 26 the clock ran out. House Ways and Means Committee Chair Dave Camp, R-Mich., provided 194 pages of details, and now tax reform gold has turned to dust. The political damage will mainly be to Republicans who made tax reform part of their brand.
Where do we go from here? "I think we will not be able to finish the job, regretfully. I don't see how we can," said Senate Minority Leader Mitch McConnell, R-Ky. And when asked if he would allow a vote on the Camp draft, House Speaker John A. Boehner, R-Ohio, could only respond with what may be the quote of the year: "Blah, blah, blah."
The lack of follow-through is no surprise. Republicans are flying high on the failings of Obamacare, and they do not want any distractions, especially in an election year. But the current political landscape is not the main factor for inaction. Reforming the tax code is not something Congress actually wants to do. The tax community has known this for a long time. Now the general public is finding out. Republicans who had so loudly touted tax reform and oversold its benefits will be asked to explain why they aren't pushing it forward. They will blame uncooperative Democrats who insist that tax reform raise revenue. And conservatives, led by the editorial page writers of The Wall Street Journal, will blame economists who do not incorporate tax-induced economic growth into their official estimates.
Some people say that if Mitt Romney were president, tax reform would be much further along. For similar reasons they believe that even though reform is impossible now, that could all change if we get a Republican president in 2017. But really, what would be different? What magic beans could be planted by a President Romney or a President Cruz/Paul/Jindal that would change the prospects for reform? After three years of good-faith effort by a well-liked, hardworking chair, with all the technical expertise of the Ways and Means Committee and Joint Committee on Taxation staffs at his disposal, the best he could come up with was a plan that has antagonized almost every major business group inside the Beltway. And after being promised a top rate of 25 percent, we get a thinly veiled top rate of 35 percent packaged as a 25 percent rate with a 10 percentage point surtax.
While either damning or distancing themselves from his plan, everybody at the same time has high praise for Camp personally. Part of this is just the usual kowtowing to the chair. But part of it is respect for a good man who has made a courageous effort. On Capitol Hill, Camp is among the best we have. If he can't do tax reform, who can?
By chance, the newly appointed chair of the Finance Committee is the sponsor of the only other full-fledged income tax reform plan in public view. Like Camp, Sen. Ron Wyden, D-Ore., does not just throw sound bites around in front of cameras. Like Camp, he has worked for years on a tax reform plan. But also like Camp, the best he could do on the individual side was a top individual rate of 35 percent. Except for his Republican cosponsors -- first, retired Sen. Judd Gregg of New Hampshire, and now Sen. Dan Coats of Indiana -- support for his plan has been paper-thin. It would be completely forgotten except that Wyden's ascendancy to the chairmanship makes it required reading for lobbyists.
There is a chance that the Camp draft, like the plan released by Treasury in 1984, will serve as a first draft that determined lawmakers will revise and rework until they succeed in passing major legislation. But the political situation and the substance of law make tax reform far more difficult now than back then. It is much more likely that the next chair of the Ways and Means Committee -- most likely Paul Ryan of Wisconsin -- will see Camp's valiant attempt at reform as clear evidence that tax reform is a thankless and impossible task.
Cat's Out of the Bag
Besides demonstrating the extreme difficulty of reform, the lasting legacy of the Camp plan will be the revenue raisers he chose to pay for lower rates. In Washington a good revenue raiser is a rare and valuable commodity. Camp has put over 200 revenue raisers on the table. Although the overwhelming majority are political non-starters, revenue raisers mellow with age. And very few ever fade away.
The raisers in the new plan have the imprimatur of the chair of Ways and Means. That means the next time anybody needs revenue, the Camp draft will be the first place they will turn. The immediate task of every lobbyist on K Street is to play defense. They must shout louder than everybody else that repeal of their client's tax break is out of the question. Otherwise they risk being moved to the top of the list.
The Camp plan is summarized on the table below. One of the more eye-catching revenue raisers is the 0.35 percent excise tax on the assets of our nation's largest financial institutions. This is a scaled-back version of the "financial crisis responsibility fee" that President Obama has proposed in every budget since he took office. Until now, bank lobbyists have prevented any members of Congress from giving it serious consideration.
Camp explained in his press conference that the fee was included because other sectors of the economy -- for example, manufacturing -- were giving up a lot for lower corporate rates, while banks would enjoy huge benefits from rate reduction. The excise tax was a way of spreading the pain. That makes good political sense.
But there are excellent policy justifications as well for a special bank tax. Upon release of his draft, the industry immediately told Camp that "a specific tax imposed on a single industry sector is wholly inconsistent with the fundamental purpose of tax reform." That would be true if we were talking about taxing just any run-of-the-mill business sector. While still posing a large potential threat to the soundness of the U.S. financial system, large banks pay rock-bottom low rates of interest because the federal government implicitly guarantees their borrowing. The industry complains that the new tax would shift bank business abroad. What they fail to mention is that the United Kingdom, our number one competitor for financial services, already imposes a bank levy. (For prior analysis of the bank tax, see Tax Notes, Dec. 19, 2011, p. 1443, and Tax Notes, Feb. 8, 2010, p. 697.)
One of the more puzzling aspects of the Camp draft is its treatment of research and development. Under current law, there are two tax benefits for research: the section 174 expensing of what otherwise would be capitalized research spending and, assuming it is extended, the section 41 credit for increasing research. The expensing provision, originally enacted in 1954, is a model of tax simplification. It provides an incentive for research while at the same time eliminating the problem of separating expenditure on research from ordinary business expense.
Enactment of the research credit in 1981 was the antithesis of simplification. It has a highly complex incremental structure and, even more problematic, it assigns tax directors and IRS agents the impossible task of distinguishing research from ordinary business expense. The Camp draft retains the credit and eliminates expensing. The opposite approach would be more sensible.
Estimated 2014-2023 Revenue Effects of Tax Reform Act of 2014
Lower Individual Rates -$543.8
Dividends and Capital Gains $44.7
Increase Standard Deduction -$666.2
Increase Child Credit -$554.0
Modify Earned Income Tax Credit $217.2
Repeal Personal Exemptions $987.2
Education Provisions (10 items) $27.4
Repeal Dependent Care Credit $26.0
Cut Itemized Deductions $858.4
Roth IRAs $143.7
Eliminate IRA Limits $16.7
Fringe Benefits $39.0
Pension Limit Adjustments $64.0
Other Individual (44 items) $83.1
Total Individual Reform $743.4
Repeal Individual Alternative Minimum Tax -$1,331.8
Repeal Corporate Alternative Minimum Tax -$110.2
25 Percent Corporate Rate (phased in) -$680.3
Reform Depreciation $269.5
Limit Net Operating Losses $70.5
Amortize Research $192.6
Amortize Advertising $169.0
Small Business Expensing -$54.9
Section 199 (phased out) $115.8
Repeal Like-Kind Exchanges $40.9
Limit Cash Method $23.6
Terminate Private Activity Bonds $23.9
Insurance Company Reforms (15 items) $75.6
Extend and Modify Research Credit -$34.1
Repeal Last-In, First-Out $79.1
Other Business (145 items) $271.2
Total Business Reform $562.4
Deduction for Foreign Dividends -$212.0
Tax on Unrepatriated Earnings* $170.4
Subpart F Reform $115.6
Other Foreign Business -$5.7
Total Foreign Business Reform $68.3
Total Tax-Exempt Entities Reform $8.0
Total Administration and Compliance Reform $4.6
Repeal Medical Device Tax -$29.5
Excise Tax on Financial Institutions $86.4
Other Excise $1.4
Total Excise Reform $58.3
Grand Total $3.0
Source: Joint Committee on Taxation, "Estimated Revenue
Effects of 'The Tax Reform Act of 2014,'" JCX-20-14, Feb. 26, 2014.