The GOP still insists that the path to prosperity runs straight through the tax code. For leading Republicans, the only way forward is to reform it all at once, with the ultimate goal of lowering marginal rates without increasing the deficit.
At the same time, the GOP is also trying to ensure that certain tax breaks are pushed through ahead of any comprehensive tax overhaul. Unlike the new tax breaks in President Obama’s budget, they aren’t paid for, and Democrats say that’s simply not acceptable.
Under the new leadership of Wisconsin Republican Rep. Paul Ryan, the House Ways and Means Committee has taken up a package of tax breaks intended to make it easier for small businesses to write off expenses, to encourage businesses and individuals to make charitable contributions, and make other tweaks to the tax code. All of them are temporary provisions that have been extended again and again, as Congress has failed to reform the code to make them permanent—a move that comes with a hefty price tag.
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But Republicans insist that these changes are important enough that Congress needs to deal with them first, without offsetting their estimated cost of $94 billion. Unless such legislation is passed, “people are going to stop giving, people are going to stop planning, people are going to stop buying,” Rep. Paul Ryan said Wednesday as his committee was taking up the bills.
The individual provisions are relatively non-controversial. In his latest budget, for instance, Obama includes a similar proposal to make it simpler for small businesses to expense new equipment. Other proposed changes would allow individuals to donate money from their retirement accounts to charity, reduce taxes on private foundations, and give businesses a write-off for donating excess food to charity.
“They will help poor people, and they will help job creators, and help people get jobs,” Rep. Pat Tiberi, an Ohio Republican, said at the hearing.
But Democrats on Ryan’s committee were unanimously opposed to moving forward with the bills, criticizing the legislation for increasing the deficit and undermining the goals of comprehensive tax reform.
“What we don’t support is cherry picking certain provisions and making them permanent while other deserving provisions languish waiting for tax reform,” said Rep. Linda Sanchez, a California Democrat.
“If we’re going to have any hope of having comprehensive tax reform, we’re not going to be able to, on a serial basis, deal with the items that we all agree with – the easy stuff – that narrows the range of what we’re going to have going forward,” added Rep. Earl Blumenauer of Oregon.
Their argument is based on the basic principles that both parties have already laid out for comprehensive tax reform: Most Republicans believe it should be revenue-neutral; many Democrats want it to actually raise revenue to be invested elsewhere; and both parties agree that either way, it shouldn’t increase the deficit.
All these scenarios would mandate certain trade-offs: In order for any individual tax break to be expanded or rates to be reduced, that revenue would have to be made up by either getting rid of a tax preference for somebody else. That’s why Obama’s budget has both major winners and losers: The new tax breaks for lower- and middle-income families—as well as new infrastructure spending—are fully paid for by new taxes on wealthy individuals and corporations, and then some.
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By contrast, House Republicans are proposing new, permanent tax breaks that would not be paid for. That not only benefits the recipients of these tax breaks, but also ultimately makes it easier for the GOP to push for lower tax rates in a comprehensive overhaul because of the way that permanent and temporary tax breaks are calculated into the overall cost. “If you’ve extended them first, you get credit for eliminating them, and then you get lower rates,” said Eric Toder, co-director of the Urban-Brookings Tax Policy Center.
Republicans counter that the country shouldn’t have to wait for Congress to pass a comprehensive overhaul—an increasingly dim prospect in a divided government—to provide tax relief for Americans. “We can provide tax certainty to families and small businesses at the same time we work toward broader reform,” said Ryan spokesman Brendan Buck.
But Republicans may have a tough time convincing the opposition of the urgency to act on these provisions: They are non-controversial partly because most of them are relatively minor tax breaks with limited benefits. The biggest provision would simplify expensing for small businesses at the cost of $77 billion. But even if it’s not extended permanently, Congress will almost certainty extend it temporarily, as it’s done nearly every time the deadline approaches.
Suzy Khimm