GOP clash looms on tax loopholes

Two prominent Republican lawmakers are heading for a showdown over whether Congress should use money from closing tax loopholes to avert major cuts to Pentagon spending. 

House Ways and Means Committee Chairman Dave Camp (R-Mich.) has sent a strong signal he does not support closing tax loopholes this year, which might imperil plans by Sen. John McCain (R-Ariz.).

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McCain, the ranking member of the Senate Armed Services Committee, said late last week that he is eyeing the elimination of tax loopholes in the hopes of striking a bipartisan deal on defense sequestration.

Camp invited anti-tax activist Grover Norquist to his panel’s hearing room last week to tell fellow Republicans that closing tax loopholes in 2012 does not make sense. 

Doing so would only diminish Camp’s larger objective, shared by other conservative leaders: to lower tax rates as much as possible by reforming the tax code in the next Congress.

“We had about 100 staffers, 20 members, the head of Ways of Means, Dave Camp, who talked about the importance of the pledge in getting tax reform done,” Norquist said in an interview. 

Norquist is president of Americans for Tax Reform and author of the Taxpayer Protection Pledge, which requires signatories to oppose any legislation that raises marginal tax rates on individuals and businesses or eliminates tax deductions without offsetting tax cuts. 

“The key thing, I think what Camp was focused on as well, was the pledge does two things that makes tax reform possible next year: It protects against poaching of deductions and credits,” Norquist said. “[It] protects them from being used for something other than rate reduction.”

He said the pledge will reassure voters they can trust Republicans to pursue tax reform without fear they might ultimately produce a package that increases the net tax burden. 

Camp and other advocates of lowering tax rates believe it would be foolish to close tax loopholes this year to pay for defense programs or deficit reduction because it would limit the scope of future tax reform.  

Bringing in Norquist to hammer home discipline on the anti-tax pledge could be a sign that Camp is nervous McCain’s efforts to seize on tax loopholes to stop defense cuts will gain traction. 

Camp, in an op-ed published in Tuesday’s edition of The Hill, said he would lay out his principles for comprehensive tax reform before August. He intends to pay for lower individual income and corporate tax rates by eliminating niche deductions. 

“It is clear taxpayers are sick and tired of a code filled with special-interest loopholes that picks winners and losers and creates massive complexity,” he wrote. “The tax code should be simpler, flatter and fairer. By eliminating lobbyist loopholes, we can lower rates and create a healthier, stronger economy with more jobs.”

This puts Camp at odds with McCain, who suggested Friday that tax loopholes could be closed to avert $55 billion in automatic defense cuts scheduled to happen in 2013. 

McCain said some of the proposed tax-loophole closures advanced by Sen. Pat Toomey (R-Pa.) during the fall negotiations of the deficit-reduction supercommittee could be used to reduce cuts to the Pentagon. 

“Pat Toomey, in the final hours, as you know, before the failure of this select committee, had some proposals, some of which have already been adopted, for raising revenues, closing loopholes, whatever you want to call it, and I think that that could serve as a blueprint for further action on our part,” McCain said Friday at the Bloomberg Government Defense Conference. 

McCain is in talks with Senate Armed Services Committee Chairman Carl Levin (D-Mich.) to craft a deal to limit or eliminate the defense cuts. They hope the package will draw enough bipartisan support to pass the Senate and pressure the House to act. 

Senate Democratic leaders, however, say such a bill must include an increase in tax revenues or it will die in the upper chamber.

When asked recently about the prospect of sparing the Defense Department deep cuts, Senate Majority Leader Harry Reid (D-Nev.) said, “We cannot do anything until the Republicans agree to do something about revenue, period.”

If McCain succeeds in striking a deal with Senate Democrats, he will likely run into stiff opposition from Camp and other House Republicans. 

Some House Republicans think their party missed a big opportunity in the 1980s when then-President Reagan agreed to a major deficit-reduction package before tax reform.

The 1982 deficit-reduction compromise called for $3 in spending cuts for every $1 in tax increases. In retrospect, some conservatives maintain it constrained the size of the 1986 Tax Reform Act. Adding to their collective irritation, many of the cuts promised in 1982 failed to materialize.

McCain questions whether closing tax loopholes should be defined as a tax increase.

“This raising revenues or taxes is in the eye of the beholder,” he said Friday. “I’ve been fighting against ethanol subsidies.

“We don’t need ethanol subsidies and we’re finally doing away with it. So is that a tax increase — I don’t think so — or a tax cut?” McCain said, making reference to tax incentives for ethanol production that he and Sen. Tom Coburn (R-Okla.) have opposed. 

A vast majority of congressional Republicans have signed the ATR pledge, including McCain. 

The House in May passed legislation to replace the defense sequester with cuts to spending on Medicaid, food stamps and the Affordable Care Act. Not a single Democrat voted for the bill, which is viewed as a non-starter in the Democratic-controlled Senate.