By Bernie Becker - 02/28/12 10:00 AM EST
Despite what appear to be long odds, a handful of Washington tax experts think Congress and the Obama administration could actually make real progress on corporate tax reform this year.
These optimists — who admittedly represent a minority opinion in town — point out that lawmakers have a relatively open calendar for the rest of 2012 following this month’s extension of the payroll tax cut.
And they maintain that what others say are factors working against a tax overhaul this year — the likely hard-fought presidential race and the at-times strident partisanship on Capitol Hill — could actually help the push for reform.
That optimism is fed at least in part by President Obama’s release last week of a long-awaited corporate tax reform framework, which some say is a sign of needed executive leadership on the issue.
Meanwhile, with the economy and financial system at least somewhat more stable, Treasury Secretary Timothy Geithner and other administration officials may have more time to deal with long-term issues like tax reform.
Washington observers have also speculated that the two parties might want to move forward on corporate reform before having to deal with the expiring Bush tax cuts and other knotty issues at the end of the year – and also maintain that the Obama framework and the corporate tax ideas being pushed by congressional Republicans aren’t actually that far apart.
The administration, for instance, has called for a top corporate rate of 28 percent, while top Republicans like Rep. Dave Camp of Michigan, the chairman of the House Ways and Means Committee, have proposed a 25 percent top rate.
“People are just miles apart, and here’s an area where we do have some agreement,” said Edward Kleinbard, a law professor at the University of Southern California and former chief of staff at the Joint Committee on Taxation. “It would make perfect sense, be perfectly logical, for there to be some progress.”
Even so, Kleinbard is among those pushing the more widely held view that tax reform in 2012 is a long shot, and that momentum for revamping the tax code might have to wait until after this year’s election.
“I don’t think tax reform is happening this year,” said Caroline Harris, chief tax counsel at the U.S. Chamber of Commerce. “Will it happen? No. Should it happen? Yes.”
Besides the pressures of this year’s election, some tax observers say that the administration and Republicans on Capitol Hill really haven’t found much common ground when it comes to corporate reform.
Business groups would also be expected to fight hard to save their own tax preferences when the reform negotiations become more detailed.
And veterans of the last successful overhaul of the tax code, in 1986, add that Democrats and Republicans appeared more willing to negotiate a quarter-century ago — and tax reform still took several years.
“Tax reform requires a lot of hard decisions,” said Ken Kies, a top tax lobbyist and a GOP Ways and Means staffer during the 1986 tax reform debate. “If there’s one thing this group has demonstrated, it’s that they’re not as good at hard decisions.”
As it stands, the Chamber, other business groups and congressional Republicans are also pushing for a more comprehensive revamp of the tax code, saying that companies that pay taxes through the individual code would be left behind in a corporate-only reform.
The administration’s framework also calls for a minimum tax on global corporate income, while Camp and other GOP lawmakers want to shield most foreign profit from taxation.
And while USC’s Kleinbard told The Hill that there was some overlap between those two positions, Kies was not so sure.
“The administration would move the law in one direction,” said Kies, managing director at the Federal Policy Group. “Republicans would move it in the other direction.”
On a broader level, Clint Stretch of Deloitte Tax said it would be difficult for policymakers to move forward this year on tax reform without any consensus on how to deal with Medicare and other entitlement programs. In contrast, policymakers had reformed Social Security in the run-up to the 1986 tax reform.
“I think the gap on corporate taxes could be bridged, especially since it is a relatively small part of overall taxes,” said Stretch. “But until they deal with Medicare, they have not defined how much tax is needed — so any reform could be undone by a later decision on spending.”
As for the election, analysts say that it would be natural for the campaign to blunt any momentum for tax reform, with GOP lawmakers unlikely to get ahead of their presidential nominee when it comes to reform.
And if Obama should win come November, observers cautioned that a new economic team would probably take center stage in a second term.
“It’s hard to cut a deal when you don’t know if the person across the table is going to be there in January,” Douglas Holtz-Eakin, an economic adviser to Sen. John McCain’s (R-Ariz.) 2008 GOP presidential campaign, told The Hill.
For those and other reasons, Larry Summers, a former Obama adviser, suggested recently that 2013 would be the year for tax reform.
“Right after the election, the negotiations should begin,” Summers, also a former Treasury secretary under President Clinton, wrote in a Financial Times op-ed. “Nothing that is likely to be done during the next presidential term will be more important.”
But Kies and other observers say tax reform will be a heavy lift even in 2013, given that policymakers really only started bearing down on the issue around a year or so ago.
“We’ve had an income tax for around 100 years, and you can count the number of comprehensive reforms on less than one hand,” said Holtz-Eakin, also a former director of the Congressional Budget Office. “I think it’s going to take more than what we’ve seen so far.”