Tax fight sneaks up on K Street

Interest groups are gearing up for a fight over their cherished tax breaks and provisions that has arrived faster than they imagined.

Organizations and lobbies trying to protect the deductions for mortgage interest, charitable contributions and other policies had long expected to be on defense during discussions over tax reform. But many in the capital did not expect those negotiations to heat up until 2013, and certainly not in the lame-duck session of Congress.

Congressional Republicans, reeling from their party’s election losses, have signaled they are open to raising tax revenues now in order to stop the tax increases and spending cuts of the “fiscal cliff.”

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Given that President Obama has made tax increases on the wealthy a precondition for a fiscal cliff deal, interest groups are worried that any compromise reached by the end of the year is likely to limit the tax breaks that high earners can claim.

“It’s an illogical landing point, which is perfectly reflective of the way Washington does business,” Jerry Howard, the chief executive of the National Association of Home Builders, told The Hill. “They’re looking for a way out. That’s what worries me.”

As lawmakers returned to work Tuesday after a seven-week hiatus, leaders in both parties laid down markers for the negotiations to come.

Senate Minority Leader Mitch McConnell (R-Ky.) said that Republicans remain willing to exchange revenue for restraint in entitlement spending, echoing the message that House Speaker John Boehner (R-Ohio) delivered last week.

The White House, meanwhile, said the president’s opening bid in the fiscal-cliff talks would be to extract $1.6 trillion in new revenue from the wealthiest, partially through an increase in tax rates. 

Democrats and Republicans have both talked openly about a cap on the amount of deductions that taxpayers can take, an idea that Mitt Romney floated in the stretch run of his failed presidential bid.

All the chatter about raising revenue through the tax code has upended the conventional wisdom on K Street, which held that the real horse-trading on the breaks wouldn’t begin until well into 2013.

Now interest groups are back on their heels as lawmakers get to work on a debt deal that could bring a sudden end to their favored policies.

Even the U.S. Chamber of Commerce, the most powerful business lobby in town, moved Tuesday to accept new federal revenues under some conditions. Top officials said they would push for a deal that would bring concessions from Democrats on energy production. 

The charitable sector has long been concerned about a deduction cap, arguing that it would depress donations to nonprofits from wealthy individuals.

Diana Aviv, the chief executive of Independent Sector, said that taxpayers facing a cap would take advantage of deductions dealing with items they have to pay, like their mortgage, and perhaps hold off on further charitable contributions. 

“If someone’s getting their benefits capped, they’re going to take the benefits for themselves first,” said Aviv, whose group is a coalition for hundreds of charities and nonprofits. 

Aviv said nonprofits across the country are beginning to realize that the tax break for charitable contributions could be under threat, and are pressing Washington groups to take action. “The sleeping giant is being awakened,” she said.

At the homebuilders association, Howard is making the case that the mortgage interest deduction broadly helps the middle class.

Howard said he’s worried that policymakers might look to score political points by trimming the deduction for second homes, or by limiting the other ways that the wealthy use the mortgage break.

“They’re looking for the shiniest political scalp they can find,” Howard said, noting that non-rental second homes account for roughly 5 percent of U.S. homes. “It also represents almost no money.”

Other groups have a different focus. Some are making the extension of current tax rates their top priority, while others are trying to distance themselves from efforts to shield tax breaks from changes.

Brian Reardon, executive director of the S-Corporation Association, said he was thrilled to see congressional Republicans remain united against raising tax rates, and said his group would push lawmakers to keep the preferential rates for capital gains as well.

“S-corps,” like other so-called pass-through entities, are businesses that generally pay taxes through the individual code. With that in mind, Reardon steered clear of offering any advice on which tax breaks should be on the block.

“I’m going to stay out of that discussion,” Reardon told The Hill. “That’s something for people at a higher pay grade than us to decide.”

Democrats have tried for months to nudge the so-called “carried interest” provision, which allows many hedge fund managers or private equity executives to pay a lower rate, into the fiscal cliff discussion.

But financial groups say changes to that provision should wait for tax reform, because the treatment of carried interest is different from garden-variety credits and deductions.

“Carried interest is appropriately taxed as a capital gain for private equity, venture capital, real estate and related industries, and for this reason, it should be addressed within the context of the capital gains rate discussion that we expect to occur during comprehensive tax reform in 2013,” said Ken Spain, vice president of public affairs for the Private Equity Growth Capital Council.

Still, Jade West, the senior vice president of government relations for the National Association of Wholesaler-Distributors, said she wasn’t sure that Washington would have enough time to translate the talk about new revenues into action.

 “The rhetoric is starting,” said West, whose group wants to extend current tax rates and also protect the “last in, first out” accounting method.

“They’re talking about a lot, yes. But I’m not sure they can get past that rhetoric in the next four weeks and actually act on some of these things.”

— Erik Wasson contributed to this report.