GOP Offer Tax Deal to Break Debt Impasse, Dems Dismiss It
Policy + Politics

GOP Offer Tax Deal to Break Debt Impasse, Dems Dismiss It

Congressional Republicans have offered to increase tax revenue by nearly $300 billion over the next decade through an overhaul of the tax code, a significant concession aimed at breaking a long-standing impasse in negotiations over the federal debt.

The offer envisions a tax code rewrite that would lower rates for everyone while raising overall tax collections by $250 billion, mainly by limiting the value of itemized deductions such as write-offs for home mortgage interest, state and local taxes and other expenses.

In addition, Republicans are offering to use a less generous measure of inflation to adjust formulas government-wide, a proposal that would push people more rapidly into higher tax brackets. That would generate an extra $40 billion over the next decade, according to several people with knowledge the discussions.

The offer, made during talks late Monday between members of a special debt-reduction supercommittee, marked the first time Republicans on the panel have endorsed higher tax revenue, a key demand of congressional Democrats.

However, the tax increases would be offset by permanently extending the George W. Bush-era tax cuts past their 2012 expiration date, a move that would increase deficits by about $4 trillion over the next decade. Democrats have previously demanded at least $1 trillion in fresh revenue in exchange for extending the Bush tax cuts, and senior Democrats Tuesday dismissed the GOP offer as a non-starter.

Sen. John Kerry (D-Mass.), a supercommittee member, said the GOP offer “doesn’t get the job done, and we’ve got some distance to travel, and we’re working very hard to do that.”

Kerry said the offer represents “a change” in position for Republicans, though he said, “I would not characterize it as a substantial change yet.”

Other Democrats challenged the notion that Republicans have offered significant tax increases, however. They argued that Republicans are demanding that the top income tax rate fall from 35 percent to 28 percent, a substantial decrease that would eat up any extra revenue generated by limiting deductions and leave nothing for deficit reduction.

“They would plow all of the money back into lowering the rates,” said a Democrat with knowledge of the offer. “It’s impossible to net out $250 billion, unless they’re willing to raise rates on capital gains and dividends, and I don’t think that’s what they’re talking about. They either think we’re morons or desperate.”

Supercommittee members from both parties had planned to meet again Tuesday afternoon, but Democratic aides said the meeting had been canceled and neither side appeared optimistic about a breakthrough. With a Thanksgiving deadline just two weeks away, the supercommittee must reach agreement on a plan to reduce future borrowing by at least $1.2 trillion or risk triggering across-the-board spending cuts of the same amount in January 2013.

Aides in both parties, speaking on condition of anonymity to discuss the closed-door meetings, said discussions have focused almost exclusively on a “big deal” that would reduce future borrowing by as much as $3 trillion over the next decade. On top of about $1 trillion in cuts to agency budgets adopted earlier this year, such a deal would come close to stabilizing the national debt as a percentage of the overall economy.

But the going has been slow, with lawmakers deeply divided over how much of the savings should come from tax increases and how much from spending cuts, such as cuts to Social Security and Medicare.

Democrats want a roughly equal mix of spending cuts and tax increases. They have offered to cut federal health spending by as much as $500 billion over the next decade and trim Social Security benefits by about $100 billion over the same period by using a less-generous inflation index to calculate annual cost-of-living increases. In return, however, they have demanded far more significant tax increases than Republicans say they are able to support.

Republicans, meanwhile, have been trying to compromise on a balanced mix of cuts and revenue increases, but they have been pressing Democrats to substitute other forms of revenue for outright tax increases. For example, by counting such things as fees for an array of federal services, asset sales and higher Medicare premiums for well-off seniors, Republicans say they could raise as much as $300 billion over the next decade.

Add that to the $300 billion in higher taxes, throw in increased tax collections from economic growth and savings from lower interest payments on the national debt, and Republicans say they are offering as much as $800 billion in new revenue for the purposes of deficit reduction.

But Democratic sources scoffed at the “other revenue” offer, noting that Republicans at one point this week suggested permitting oil drilling in Alaska’s Arctic National Wildlife Refuge, a move that could indeed generate about $5 billion in federal revenue, by some estimates. But it is extremely controversial politically and opposed by many Democrats.

GOP aides played down the ANWR proposal, saying it was no longer part of the discussions.