Tax Analysts Blog

How to Pay for Camp’s Tax Reform Plan

Posted on Feb 24, 2014
This is the week tax reform observers have been waiting for. House Ways and Means Chair Dave Camp, after years of preparing small drafts and laying the groundwork, will release a comprehensive discussion draft on reform. Camp’s plan might be out as soon as February 26. In an e-mail to his committee, Camp promised to put it out this week, and speculation has been running rampant about what will be in it.

The Camp plan is expected to lower the top individual and corporate rates to 25 percent. That will be quite a cut. Right now, the top individual rate is as high as 39.6 percent, while the top corporate rate is 35 percent. According to the Joint Committee on Taxation, creating two individual brackets of 10 and 25 percent would cost $3.4 trillion over 10 years. Cutting the corporate rate would cost $1.2 trillion. If Camp reforms the alternative minimum tax at the same time, the total cost in lost revenues would be $5 trillion over 10 years.

Camp has promised to keep his plan revenue neutral. So theoretically, he has to offset those $5 trillion in revenues. The reason so many people have been waiting for a detailed plan from Camp (or anyone) is to find out what kind of pay-fors he has in mind. The revenue raisers that Camp puts in his plan are probably more important than the total package -- new revenue provisions have a way of outliving their original homes and slipping into new bills. (Look at how many times codified economic substance popped up before it was finally enacted.)

Raising $5 trillion will involve a lot of pay-fors. So almost everything has been considered as a possibility (except a VAT, of course). Fortunately for Camp (and people following the reform process), in late 2013 the Congressional Budget Office prepared a handy list of practically everything that could be added to the code to generate revenue. Some of the numbers in the CBO report are shockingly small, given how much discussion many of these proposals have attracted over the years.

1. Spending cuts in the Budget Control Act. The first 10 percent of the $5 trillion is probably the easiest to come up with. The Budget Control Act of 2011 (which created the sequester, some of which was undone by the most recent budget deal) mandates cuts to military spending of $495 billion over the next 10 years. That is the largest proposed discretionary spending cut in the CBO report. Other discretionary spending cuts, such as limiting highway spending to highway revenues ($65 billion over 10 years), cutting Pell Grants ($68 billion), ending human space exploration ($73 billion), and eliminating international aid ($114 billion), seem unlikely to become law.

2. Mortgage interest deduction. Republicans aren’t likely to eliminate the mortgage interest deduction, no matter how many economists support that notion. And Democrats might be even less likely, because the deduction overly favors blue states. But the GOP and others have proposed changing it to a 15 percent tax credit, which would make it slightly more progressive. That would raise only $52 billion over 10 years, so for all the talk and fear about changes to the deduction, the most likely option really doesn’t have much of a revenue effect.

3. Limiting itemized deductions. Obama has been pushing a limitation on itemized deductions for years, and Mitt Romney even supported a version of it during his failed 2012 presidential campaign. But it would raise only $146 billion over 10 years, so even if Camp does put it in his plan, it won’t be a major centerpiece.

4. Eliminating the state and local tax deduction. This would raise $954 billion over 10 years, or almost 20 percent of what Camp needs to accomplish his rate reductions. That means a lot of people are almost certain it will be in the discussion draft. Elimination of the state and local deduction is one of the most frequently proposed revenue raisers in any broad tax reform package, but it faces an uphill battle to make it into law. Blue states like California, New York, and Massachusetts will undoubtedly fight tooth and nail to keep the deduction, and that means Camp won’t get much Democratic support.

5. Eliminate the Social Security cap. Subjecting all income to Social Security withholding would raise $470 billion over 10 years. This is a change that will probably come in the future (just like an increase in eligibility ages), but it seems unlikely to be part of a tax reform, and not Social Security reform, plan.

6. A bank or financial transactions tax. Reuters reported over the weekend that a bank tax would be part of Camp’s plan. This would undoubtedly mobilize the financial sector and be one of the bigger surprises. But a tax on financial transactions would raise only $180 billion over 10 years, and a fee on large banks would raise $64 billion.

7. Extending depreciation, repealing last-in, first-out, and limiting section 199. Extending depreciation is almost a given for any corporate tax reform plan. The CBO says it would raise $272 billion over 10 years, but almost all of that is just a change in timing. These types of revenue raisers are among the most dangerous because they tend to increase the deficit in the long run. Repealing LIFO, another popular timing change, would raise about $112 billion over 10 years. The oft-proposed limitation on the section 199 manufacturing deduction would raise $192 billion. Taken together, these changes would bring in $576 billion. Expect them to be in the Camp plan.

8. Interesting no-goes. The CBO reported that a carbon tax would raise more than $1 trillion over 10 years. That almost certainly will not be proposed by Camp. Raising gas taxes 35 cents a gallon and indexing the tax to inflation would raise $452 billion, but it would be surprising if a Republican pushed that revenue raiser. Changing the exclusion for employer-sponsored healthcare could bring in over $600 billion, while capping Medicaid could raise a similar amount. Camp might include a healthcare component in his plan, but it isn’t likely. Expect those two numbers to return, however, if Republicans can ever restart the healthcare debate and have to start putting details in their own plans.

To repeat -- getting to $5 trillion is hard. There isn’t much low-hanging fruit. It will be fascinating to see how Camp does it, because just perusing the CBO report leads to no obvious conclusions.

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