Sisyphus on the Potomac: The Senate Pushes Tax Reform Up a Long, Steep Hill
Policy + Politics

Sisyphus on the Potomac: The Senate Pushes Tax Reform Up a Long, Steep Hill

Though candidates and pundits are quick to toss out piecemeal elements of tax reform as potential solutions to the country’s various budgetary problems – a tax repatriation holiday to fund infrastructure spending, an increase in the gas tax to capitalize the Highway Trust Fund – a cadre of lawmakers in Washington continue to press forward on the long, slow slog toward a comprehensive overhaul of the U.S. Tax Code for the first time since 1986.

The effort is monumental and requires bipartisan cooperation, willingness to compromise, and the investment of time – probably years of it. And even then, there’s no guarantee of success. Rep. Dave Camp (R-MI), who chaired the House Ways and Means Committee until his retirement in January, last year released a proposed framework to rewrite the tax code that represented untold thousands of hours of work by committee staff. Even Republican leadership greeted it with little more than a shrug, and it was promptly put on the shelf.

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But on Wednesday, Senate Finance Committee Chairman Orrin Hatch (R-UT) and the committee’s ranking Democratic member Sen. Ron Wyden (D-OR) recommitted themselves to the task when they released a set of five different working papers from the panel’s subcommittees, each focused on a different element of broader tax reform. The five areas covered are the individual income tax, the business income tax, taxes on savings and investment, international taxation, and community development and infrastructure.

“The Finance Committee’s bipartisan tax working groups have spent the last several months examining various aspects of the code. As a result, members were able to submit thoughtful feedback and provide innovative solutions to addressing the challenges of our nation’s outdated tax system,” said Hatch. 

Promising that any overhaul of the system would lower rates and broaden the base while keeping American businesses competitive, Hatch added, “Now, armed with new ideas, I plan to work with Senator Wyden to review each working groups’ report and examine how they can be used to further advance the Committee’s efforts to achieve this bipartisan goal.”

The committee reporting on the taxation of business income was co-chaired by Sen. Ben Cardin (D-MD) and Sen. John Thune (R-SD).

“Our system for taxing business income is also woefully out of date and out of sync with our global competitors,” their report finds. “America today retains the dubious distinction of having the highest statutory corporate tax rate among advanced economies at roughly 39 percent (including state taxes). The Organization of Economic Development (“OECD”) average corporate tax rate (excluding the U.S.) is 24.6 percent, a more than 14 percentage point differential with the U.S. average combined federal and state rate. Some of America’s major competitors, such as Canada and the United Kingdom, have been particularly aggressive in lowering their corporate tax rates."

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Sens. Dean Heller (R-NV) and Michael Bennet (D-CO) led the working group focused on Community Development and Infrastructure. Surprising nobody who has been paying attention to the state of the nation’s infrastructure, they found it in dire need of investment, and of a reliable source of funding from tax revenues.

“Approximately 65% of major roads are rated in less than good condition, one in nine bridges are structurally deficient, and 45% of Americans lack access to transit,” they write. “As a percentage of gross domestic product (GDP), the United States spends less on infrastructure today than at any point in the last 50 years. We now spend just 2.4% of our GDP on public infrastructure. Meanwhile, China spends 8.5%.”

A detailed report on the current state of U.S. taxation of money earned by businesses operating overseas was compiled by a working group chaired by Sen. Rob Portman (R-OH) and Sen. Chuck Schumer (D-NY). Among other things, the report recognizes that the U.S. treatment of overseas earnings is badly out of step with international norms, creating incentives for companies to move operations overseas, or to relocate outside the U.S. entirely.

The report likely to draw the most attention from individual taxpayers, dealing with their treatment by the Internal Revenue Service, was produced by a group led by Sens. Chuck Grassley (R-IA), Mike Enzi (R-WY) and Debbie Stabenow (D-MI).

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Demonstrating the difficulty of achieving bipartisan consensus on this issue in particular, the working group reported agreement on fairly non-controversial issues: “[R]eform to address the individual side of the tax code should seek to make the code fairer, and should aim to reduce complexity for individual taxpayers. It should also help ensure that our tax code provides an adequate source of revenue to fund national priorities but does not provide more revenue than is needed for federal responsibilities."

However, it added, “At the same time, there are many differing views on what constitutes a ‘fair’ tax system, what level of revenue our tax system should raise, how tax rates affect growth, the degree of progressivity tax reform should aim for, and many other broad structural changes that could be made to the code. This leads to a lack of agreement on many key issues in reforming the individual side of the tax code – including what changes to make, and whether and how to address revenue gained or lost through those changes.”

Finally, a panel to address the tax treatment of savings and investment income was chaired by Sens. Mike Crapo (R-ID) and Sherrod Brown (D-OH). Again, the report from the working group points out the tricky nature of finding bipartisan agreement on as sensitive an issue as taxation.

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The group, according to the report, “had jurisdiction over the tax treatment of capital gains and dividends, financial products, defined benefit pension plans, and private retirement savings accounts.” However, it adds, “While options were considered in each of the four areas, given the Committee’s directive that the working groups should develop consensus, bipartisan policy solutions strictly within the confines of the tax code elements assigned to each group, our initial review led us to focus on the area of private retirement savings.”

This translates into, “We couldn’t agree on much. Here’s what’s left.”

The 18-page memo, dwarfed by the much larger reports of the other working groups, provides a number of ideas for increasing participation in retirement savings plans as well as means of increasing the rate of retirement savings. It leaves the more touchy issues, like the treatment of capital gains, untouched.

In all, the reports appear to be an early step toward a very distant goal, and the tension evident in the reports over key issues surrounding the way the U.S. taxes its citizens promises that it will be a bumpy journey.

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