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Paulsen finds himself on the front lines of tax reform

WASHINGTON — Negotiations over raising the debt limit include potential changes to the tax code, and perhaps no Minnesotan has looked closer at the tax code than Erik Paulsen.

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Rep. Erik Paulsen
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.

“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.

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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.’”

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