WASHINGTON — A deficit reduction plan to accompany an increase in the debt ceiling must include revenue increases.
That’s the message Democrats in Congress and at the White House have repeated since negotiations on a debt limit increase began. While Republicans have resisted such a measure, negotiators have identified $1.5 trillion in cuts for the package and they met Thursday to discuss potential changes to the tax code that could result in more revenue to top off the deal.
By virtue of committee assignment, perhaps no Minnesotan has looked closer at the tax code than Erik Paulsen. The Republican Congressman sits on the tax-writing Ways and Means committee, meaning he’s been at the front and center — sometimes literally — of the debate over how to reform the code.
Both parties have indicated support for a plan that “broadens the base and lowers the rates,” or, in other words, one that eliminates tax deductions to increase enough government revenue to offset a lowering of the tax rate. The idea is that such a move would spur economic growth as employers hire more employees with the savings they see from the lower tax rate.
“The most important lever left is economic growth,” Paulsen said of ways to create jobs. “We are not going to cut our way to prosperity or deal with all of our budget challenges by cutting spending. We have to do that, but that’s the only answer. It has to come through economic growth.”
What will tax reform look like?
Only the high-level debt negotiators — a group that includes President Barack Obama and a handful of party leaders from both chambers of Congress — truly know the extent to which tax code reform is on the table. There have been reports that a final deal could drop the Bush-era tax cuts for high earners, while maintaining those for the middle-class families. Obama has suggested he’s sought tax increases that kick in years down the road. Paulsen said he’s heard that lowering the top rate to 35 percent has been discussed.
paulsen.house.gov
Rep. Erik Paulsen
But so far, the negotiating group has remained mum on the issue, declining to “negotiate what we’re doing” from a press conference podium, in the words of Senate Majority Leader Harry Reid on Thursday. Absent a set plan, rank-and-file lawmakers have been freed to discuss what they’d like to see included in a major tax reform deal, which would be the first since 1986.
Paulsen said he wants a plan that solidifies a tax code that saw 579 changes to it last year.
“A lot of companies have testified in committee and organizations have testified that to be more competitive with our trading partners and in our allocation of capital,” Paulsen said, “we should have a lower rate and get more predictability for these companies so they know how to invest 10 years out.”
Congress has already identified some tax loopholes, also called “tax expenditures,” to close in order to reduce the deficit or lower rates to spur economic growth. Minnesota Sen. Amy Klobuchar helped negotiate an end to an ethanol tax subsidy — which Paulsen said he supports ending — and has since called for an end to those going to oil companies. Obama has used a tax deduction that goes toward the purchase of a corporate jet to illustrate the types of deductions that could be cut.
The loopholes, which end up costing the federal government $1.1 trillion in lost revenue each year, make for situations like that involving General Electric, a mega-corporation that qualified for enough exemptions that it paid no federal taxes in 2010.
“I think everyone needs to pay taxes rather than having loopholes that you can get out of,” Paulsen said.
Tax loophole politics
The idea of eliminating expenditures and lowering tax rates has gained support from both partiesm including Obama and House Republican leadership. Obama’s bipartisan deficit reduction commission even recommended a zero-based approach to tax reform, completely ending the expenditures and using the savings to lower marginal tax rates and reduce the deficit.
While there seems to be support for the plan, problems arise in deciding which exemptions should be cut and where the savings from those newly-closed loopholes would go.
The president said Monday that he supports a plan as long as it’s “sufficiently progressive so that we weren’t balancing the budget on the backs of middle-class families and working-class families, and we weren’t letting hedge fund managers or authors of best-selling books off the hook.”
Republicans, meanwhile, “are willing to talk to the president about that but we are going to require offsetting tax cuts because the commitment for us in our pledge is we are not raising taxes,” House Majority Leader Eric Cantor said. “So it has to be net revenue neutral.”
The debate over how to designate the savings from closed loopholes — tax rate decreases or straight deficit reduction — is “krux of the issue” that’s wedged itself between the parties, said Jay Kiedrowski, a senior fellow at the University of Minnesota’s Humphrey School of Public Affairs. Considering many of these exemptions, like the mortgage interest deduction, are popular with the American public means both parties will use up considerable political capital to change the system.
“Eliminating an exception may make more fiscal sense [than raising other forms of taxes],” said Ted Gayer, the co-director of the Economic Studies program at the Brookings Institution. But, politically, it could be hard to frame such a measure to voters. “One person’s tax exemption is another person’s expenditure.”
Both Gayer and Kiedrowski warned that Congress would have to rush to put together a solid tax reform package before the Aug. 2 deadline to raise the debt limit.
“I think the most likely way [reforms], happens is crisis management,” Gayer said, “and that’s a risky way to do policy.”
For Paulsen’s part, he says the hard deadline makes now the best time to finally force legislation that can change the code.
“If we’re going to do tax reform we should do it now and not accept a promise of, ‘Oh, we’ll do it later.’”
Devin Henry can be reached at dhenry@minnpost.com.
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