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Ready Opposition to Tax Overhaul Means No Chance for Quick Fix

By Andrew Taylor, CQ Staff Writer

It was 1986, and Senate Finance Committee Chairman Bob Packwood, R-Ore., was desperate to rescue a major rewrite of the nation's tax laws.

He had watched special interest groups hijack his bill in committee and add $29 billion in tax breaks. He knew he had to pull the plug.

Instead, over two pitchers of beer with his top aide at a Capitol Hill watering hole, Packwood devised a simple plan: Start from scratch, clear away the special interest amendments, and offer a bill with income tax rates of 15 percent and 25 percent and virtually no deductions.

It was a bold stroke, with a critical second maneuver: cramming the pared bill quickly past the same interest groups that had larded it up. It worked. Committee members unanimously approved the basic plan 12 days after they got it. "There was no time for opponents to organize," Packwood said in a recent interview.

But now, as debate begins on an even more sweeping restructuring of the tax code, no lobbyist will be caught flat-footed. Anybody with a stake in the tax code will have years to prepare to protect cherished tax provisions.

Even the most rosy-eyed advocates of radically overhauling the code are not suggesting that a serious legislative effort can be mounted this year. The volcanic struggle over whether to rip up the tax code is not ripe for legislation, for several reasons: President Clinton and Republicans fundamentally disagree on what to do; the competing GOP proposals for a flat tax and sales tax on goods and services at the point of purchase need more study; and there is no consensus, even among House Republicans.

And the Senate has yet to engage. "Major tax reform is probably several years away," said Senate Finance Committee Chairman William V. Roth Jr., R-Del.

In the short term, GOP leaders are pressing a more immediate agenda: a yet-to-be-determined tax cut to follow up on last year's tax law (PL 105-34). And Clinton has unveiled several costly budget initiatives, some of which are tax related.

But the opening tax and budget gambits by Clinton and his Republican rivals suggest that the politics of the 1998 congressional elections may overwhelm any chance for compromise.

Clinton wants to expand the child care tax credit and provide targeted tax credits to promote energy efficiency. If a budget surplus should appear, Clinton has hinted that he might want to ease the so-called marriage penalty for couples who file joint income tax returns. But he is generally preaching caution on taxes and will not sign a major tax cut. He has also outlined several big spending initiatives.

Republican leaders counter with vows to block any return of "big government." They are planning an immediate tax cut to bring to the voters, whether voters want one or not (and polls suggest it is a low priority). The fight over whether and how much to cut taxes will keep those offering revolutionary overhaul plans such as the flat tax or sales tax off the legislative battleground.

Republicans believe that is good politics, too: Embrace for the future the general concept of "tax reform," which does resonate with the voters, but avoid endorsing any particular plan, thereby avoiding flak for unpopular features. Vow to vote to "scrap the code" to replace it with something simple and fair, but leave the details for later.

Republicans say tax cuts in the short term and a tax overhaul in the long term make a winning agenda that could provide the basis for electing a Republican president in 2000. And they agree that passing an overhaul will require a GOP president and Congress.

Risks Involved

But the strategy is not without risk, both this year and in the long term. Democrats may find plenty of opportunities to thwart it.

First, under budget enforcement rules extended last August in the landmark budget law (PL 105-33), any tax cut must be financed by cuts in other programs or new revenues. Since lawmakers grabbed the easy savings during last year's budget debate, a new round of offsets would be difficult.

Several recent polls have shown a tepid response to additional tax cuts. Most respondents say they would prefer to use any surplus to strengthen Social Security and Medicare, or to buy down the $5.5 trillion national debt.

In a poll taken Dec. 7-9 by campaign consultants The Terrance Group Inc. and Lake Sosin Snell Perry & Associates, 37 percent of respondents said they preferred that a surplus be dedicated to protecting Social Security and Medicare; 28 percent preferred to pay down the debt; and 19 percent wanted to restore spending cuts. Only 8 percent rated tax cuts as their highest priority.

Still, with the deficit sliding to negligible levels and the tantalizing prospect of a surplus looming, GOP leaders are sorting their options for 1998.

In a Jan. 20 speech, House Ways and Means Committee Chairman Bill Archer, R-Texas, called for dedicating about $200 billion of the estimated $660 billion budget surplus over the next 10 years for tax cuts. Among the possibilities, Archer said, are raising the income levels at which marginal tax rates shift from 15 to 28 percent; easing the marriage penalty; simplifying the new capital gains law; and granting a $400 exemption on interest and dividend income.

"There are two pillars that will support a smaller government that protects families, and we must build on both," Archer said. "We must reduce the tax burden, and we must pay down the debt."

The next day Roth weighed in with a call for an unspecified across-the-board tax cut, as well as marriage penalty "relief" and raising the cap on annual contributions to Individual Retirement Accounts.

Archer's and other GOP tax cut plans go well beyond Clinton's. The question facing Republicans is whether to pass a bill that would be sufficiently modest to attract Clinton's signature or pass a more ambitious bill that would serve as a campaign wedge.

"The real question is whether the Congress wants to do some legislation and pass a bill that the president can sign or pursue a veto strategy," said Clint Stretch, director of tax legislative affairs at the accounting firm of Deloitte & Touche.

Overhaul Plans

It is too early for Republicans to think about a legislative strategy on the flat tax or sales tax proposals. But they are taking the issue to the voters in what they like to portray as a national crusade pitting the people against special interests.

As in 1986, when the prospect of dramatically lower tax rates helped lawmakers face down special interests, supporters of the flat tax and sales tax think they can persuade voters to trade some of their most cherished deductions for a tax code so simple that (under the flat tax) they could file their returns on a postcard or (under the sales tax) they could do away with the income tax.

House Majority Leader Dick Armey, R-Texas, and Rep. W.J. "Billy" Tauzin, R-La., have been on the road on a tour in which they debate the merits of Armey's proposed 17 percent flat tax (HR1040) vs. Tauzin's support for a 15 percent sales tax (HR2001) on goods and services. The idea is not to build support for action this year but to cement it for the 2000 presidential election, says Tauzin, who maintains that a dramatic rewrite of the tax code cannot occur until Clinton leaves office.

The debate kicks off on the heels of the House GOP's smashing success in passing a bill (HR2676) to overhaul the Internal Revenue Service (IRS) and give taxpayers additional rights. But it will be more difficult to repeat that success on the scale required to advance major tax law changes.

Channeling voter anger over horror stories into an IRS overhaul bill is one thing. The Senate plans to consider an IRS measure this spring. But ripping out the tax code and replacing it with something "fairer, flatter and simpler" is going to take years.

In 1986, it took Herculean efforts by the powerful chairmen of the House and Senate tax writing committees, combined with an all-out push from President Ronald Reagan, to enact the tax law (PL 99-514). That law traded many special tax breaks for both individuals and corporations for big tax rate reductions. "The president decided to embrace it and make it his own and that's why it became law," said a longtime Senate Democratic aide.

That kind of consensus does not exist now. Even the strongest advocates of replacing the code see the issue as one that can motivate voters but that is not ripe for legislation.

So far, Republicans are confident that the public will embrace dramatic tax simplification and that a good strategy is to raise the issue's profile without getting drawn into a debate on competing plans. According to the Terrance Group poll, the public prefers "tax reform" to "tax cuts" by a 63 percent to 28 percent margin.

But Republicans should not underestimate the ability of Democratic opponents and other critics to use issues such as tax fairness to strike political blows against the ideas. Point man for Democrats on the flat tax is House Minority Leader Richard A. Gephardt of Missouri, who advocates a plan that seeks to preserve the progressivity in the tax code by creating five tax brackets from 10 percent to 34 percent.

Powerful Foes

In embracing a tax overhaul, Republicans will be taking on some of the most powerful interests in Washington: home builders and Realtors facing the possible loss of the mortgage interest deduction; doctors and other service providers who might have to charge sales tax; and hospitals and universities facing the loss of tax deductions for charitable contributions.

Indeed, core Republican constituents such as the home builders' lobby and the National Federation of Independent Business are already gearing up to ensure that no pure form of a national sales tax or flat tax gets enacted. The National Association of Realtors is dusting off a 1995 study by DRI/McGraw Hill that concluded that housing prices would fall 15 percent without the deduction.

A pure flat tax may be politically unrealistic because some common tax advantages are too popular to kill. With each exemption, the flat tax grows. With too many, it would fall of its own weight. Consider a 20 percent flat tax: If Congress decides to retain the earned income tax credit to counter charges that the tax hurts the working poor, the rate must bump up to 20.4 percent, according to a study by economists William G. Gale, Scott Houser and John Karl Scholz. If the powerful home building lobby saves the mortgage interest deduction and philanthropists retain the tax break for charitable contributions, the rate climbs another 1.5 percent, to 21.9 percent.

Businesses are expected to insist on maintaining the deduction for payroll taxes. If they succeed, the rate will soar to 25.1 percent. Once Congress got through all the exemptions that lobbyists would insist the country could not live without, the flat tax rate would exceed 30 percent, said Gale, a senior fellow at the Brookings Institution.

Critics say both plans would raise taxes on middle-income taxpayers, a natural byproduct of lowering taxes for the wealthiest. The flat tax, for example, would exempt investment and savings income from taxes -- lowering taxes for those who own most of those investments. A sales tax would bite hardest on those who have to spend most of their income on household expenses.

For these reasons, many lawmakers are unwilling to embrace a specific plan. Instead, the idea gaining the greatest currency is a bold -- its critics say facile -- plan to repeal the tax code and require Congress to write a new law.

Sunsetting the Code

Reps. Steve Largent, R-Okla., and Bill Paxon, R-N.Y., have lined up about 140 supporters for a draft bill to scrap most of the tax code on Dec. 31, 2001, said a Largent aide. Supporters include House Speaker Newt Gingrich, R-Ga., and Majority Whip Tom DeLay, R-Texas.

The idea of sunsetting the code is gaining currency as a campaign issue, but it probably cannot pass. Republicans are split on it, with many feeling that scrapping the code requires having a viable replacement ready.

Tauzin advocates sunsetting the code and making Democrats sweat.

"They end up having to defend the current code," Tauzin said. "If you like the current system and the code, then go ahead and defend it. . . . Let's let the American people decide."

GOP political consultant Terry Cooper said he advised his candidates "not to take a position on either the flat tax or the sales tax. Just come out generally for tax simplification and tax fairness." On the idea of scrapping the code, Cooper said: "Oh, that's a wonderful one." Many of his candidates will hold campaign events April 15 to throw the code into the local equivalent of the Boston Harbor. (Tauzin will toss a copy into the real Boston Harbor.)

"The reality is simply that we are all committed to reform," said a senior Senate GOP aide. "When you talk about specifics, you get static. This is a national conversation in the context of a presidential election."

Like many controversial ideas that spring from hard-charging House conservatives, it probably cannot pass in the House, let alone the Senate.

Senate leaders are focusing on other things, such as the IRS bill (S1096), tax cuts and the budget. In the crusade for a new tax code, they are prominently missing. Senate Majority Leader Trent Lott, R-Miss., has said taxes would be an issue for 1998, but he did not frame the issue in the same lofty terms as his House counterparts.

"I think there are still some tremendously unfair provisions in the tax code," Lott said, mentioning the marriage penalty. "So I think we could never quit trying to make the tax code fairer and reduce it where we can."

Ways and Means Chairman Archer talks about "pulling the tax code out by its roots," but Roth, his Senate counterpart, has been virtually silent on the issue. "I've seen no action or indication of action around the Senate Finance Committee," said Larry Neal, deputy chief of staff to Sen. Phil Gramm, R-Texas. "Nobody here seems to know what they want to cook just yet."

Gingrich insists the Senate is on board, but his list of tax revolutionaries is notably devoid of top Senate leaders. He counts Larry E. Craig, R-Idaho, Paul Coverdell, R-Ga., and Connie Mack, R-Fla., in his camp. But when asked his priorities for 1998, Mack, the GOP conference chairman, ticked off social issues, led by education. When taxes were suggested, he shrugged, "Oh, that too."

Conceded Tauzin: "Has it caught fire over there? No. But it will."

© 1998 Congressional Quarterly Inc. All rights reserved.

In CQ News This Week

Saturday Jan. 24, 1998

Support for Iran Sanctions Bill Still Runs Strong in Senate
Rebels of '94 and 'Watergate Babies' Similar In Class Size, Sense of Zeal
For Democratic Freshmen, a Tough Start
Firebrand GOP Class Of '94 Warms To Life On The Inside
Heavy Workload Exacted A Toll
Politically Charged Task Faces Gambling Panel
Rostenkowski Hopes To Set Forth On the Road to Redemption
Ready Opposition to Tax Overhaul Means No Chance for Quick Fix
Winners, Losers And Big Problems With Either Tax Overhaul Plan





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