Democratic leaders are embracing a new strategy for tax reform that leans on President Obama's State of the Union call for tax fairness and economic equality.
The new strategy diverges from the 1986 formula, the last time Washington successfully tackled tax reform, and focuses on raising tax revenue from the wealthiest taxpayers and businesses that funnel jobs offshore.
“Tax reform after the president's speech now has a different definition,” Sen. Charles Schumer (D-N.Y.) said Wednesday.
Such a strategy would seem to have little chance of winning Republican support, making it seem more like election-year politics than a way to actually pass a bill.
The 1986 reform lowered marginal rates, tossed out tax breaks for businesses and individuals, and neither added to nor subtracted from deficits.
Many observers had thought the same basic formula would guide the next round of reform, and top lawmakers from both parties had discussed a tax overhaul based on that template throughout 2011.
But some Democrats suggest their party will not move away from the new strategy in 2013, when real policymaking is expected to pick up steam, since eliminating tax breaks could be politically painful.
A Senate Democratic aide said the shift in tax reform strategy sprouted after many party lawmakers started drilling deeper into the details of exchanging tax breaks for lower rates.
Some Democrats, the aide said, found that some of the credits and deductions that could be targeted in a tax overhaul, like those for healthcare and retirement savings, benefit the middle class.
“Tax reform can include getting rid of some deductions to try to lower rates for most Americans,” the aide said. “But it probably won’t mean cutting taxes for the very wealthiest Americans, because to do that and still reduce the deficit would likely cut into middle-class deductions.”
That’s where some of the president’s ideas could fit in, including the Tuesday proposals to ensure that those making over $1 million a year and multinational corporations pay at least a minimum amount in taxes.
Democratic leaders on Capitol Hill insist they are going to push to make law out of those sorts of proposals, especially with Mitt Romney, the GOP presidential candidate, having announced this week that he paid a 14 percent effective tax rate on more than $20 million of 2010 income.
With that in mind, Democrats have said they want to target a tax break that allows “carried interest” to be taxed at 15 percent, one of the provisions that drove down Romney’s effective rate.
And citing a slew of polls that have found that Americans believe the wealthiest should be paying more, party lawmakers also say they plan to push for the fleshed-out “Buffett Rule,” which would ensure that anyone making seven figures a year pays at least 30 percent in taxes.
“Don't underestimate the chances of Congress to enact parts of the president's blueprint,” Schumer also said Wednesday. “Republicans will not go along out of a desire to cooperate, but they may find they have to out of political necessity.”
As of now, Republicans are showing no desire to cooperate on the president’s framework, saying Democrats were clearly playing politics by offering tax proposals that had no chance to be enacted.
GOP lawmakers added that, if Democrats did keep pushing their tax fairness proposals, it would all but officially kill the chances of broad reform this year.
And some Republicans on Capitol Hill, and even some nonpartisan analysts, ripped the president for proposing to add more tax breaks and complexity to the code — tax “deform,” as the Urban-Brookings Tax Policy Center called it.
“It really does require presidential leadership. Tax reform is about as hard a thing as you can do around here,” said Sen. Mike Johanns (R-Neb.). “Hopefully after November, we can do real tax reform.”
Still, there are signs that serious tax reform discussions will continue in 2012, even if very few observers believe policymakers have much chance to broadly revamp the code this year.
As Democrats pursue their new strategy on Capitol Hill, the Obama administration is preparing to release its long-awaited road map for corporate tax reform next month, a plan that is expected to include the proposal that U.S. corporations with offshore operations pay a minimum amount of tax.
On Tuesday, Obama talked up targeted tax breaks to help the manufacturing sector and encourage companies to invest in the United States. The president and Treasury Secretary Timothy Geithner have also suggested that the top tax rate should come down and loopholes should be closed in any corporate tax overhaul.
Meanwhile, the top two congressional tax-writers, Rep. Dave Camp (R-Mich.) and Sen. Max Baucus (D-Mont.), have vowed to continue to work together on at least laying the groundwork for tax reform.
And Sen. Ron Wyden (D-Ore.) said that he agreed with many of the president’s ambitions for the tax code, but thinks they could be more easily achieved if the two parties continue to work together.