By Bernie Becker - 02/26/14 08:38 PM EST
The House’s top tax writer on Wednesday challenged his colleagues to embrace a broad and radical tax reform plan that would pare back breaks once thought untouchable to achieve a monumental overhaul of the IRS code.
The release of the nearly 1,000-page plan culminated years of work by Ways and Means Committee Chairman Dave Camp (R-Mich.), who released the framework despite the reluctance of party leaders to tackle the topic in an election year.
The draft from Camp slays sacred cows, pulling back on the cherished deduction for home mortgage interest and embracing some ideas touted by Democrats, including the elimination of the carried-interest tax break used by hedge fund managers.
Though GOP leaders last year reserved the pole position of H.R. 1 for tax reform, Camp unveiled his proposal alone, with no promise his handiwork would ever see the light of day in the House.
Camp said a discussion on making the tax code fairer and a more positive force for the economy was long overdue in Washington, given that the last successful tax reform effort was in 1986.
But the discussion draft, which included a summary that ran almost 200 pages, quickly found detractors both on and off Capitol Hill, as trade groups and lobbyists figured out who were the losers in the chairman’s outline.
And before it was released, the top Republicans in both chambers distanced themselves from the effort, with Speaker John Boehner (Ohio) scoffing at the possibility of a vote this year and Senate Minority Leader Mitch McConnell (Ky.) suggesting it would be better to wait.
Camp was defiant, arguing that the average person was ready for a tax code no longer littered with “special interest handouts.”
“You’re going to hear a lot about one provision or another,” Camp told reporters at a news conference. “The truth is people want a simpler, fairer and flatter tax code.”
Camp also swatted away questions about top Republicans keeping his draft at arm’s length, and the expected blowback from K Street lobbyists.
But Camp’s insistence that now was the time to jump-start the discussion on tax reform only fed the suggestion that the best-case scenario for the draft is to be a template for future efforts.
Ways and Means Republicans applauded Camp for releasing the draft and said they looked forward to further developing it, even as some said they needed to dig deeper into the details.
Rep. Paul Ryan (Wis.), perhaps the GOP’s most respected voice on fiscal matters and the heir apparent to the Ways and Means chairmanship next year, said Camp’s plan could clearly be built upon. The Senate’s top two tax writers, Sens. Ron Wyden (D-Ore.) and Orrin Hatch (R-Utah), also praised it.
“No plan is perfect, but the critics must offer an alternative or tell Americans why they continue to defend a nightmarish tax code that works only for the well-connected,” Ryan said in a statement. “Chairman Camp’s plan is a terrific first step toward a much-needed debate over how to best reform the tax code.”
Republicans and Democrats on Ways and Means will get briefed on the plan on Thursday, and Camp said he expects to reach out more fully to rank-and-file Republicans as well in the hopes of sparking a movement for tax reform this year.
The Ways and Means chairman said he meets his goal of flattening the tax code by getting rid of 228 sections, reducing its size by a quarter.
With changes to tax breaks for mortgage interest, charitable contributions and state and local taxes, Camp also says that around 95 percent of households would be able to use an expanded standard deduction and avoid itemizing, up from around the two-thirds who use the standard deduction now.
The deduction for state and local taxes, which Camp generally eliminates, is especially prized in Democratic states like New York and California, where property values are high.
But in releasing his proposal, Camp acknowledged that he fell short on the House Republican goal of reducing the top individual rate to 25 percent. Roughly 99 percent of taxpayers, Camp says, will effectively pay 25 percent or less, while the rest will face a top bracket of 35 percent.
Camp did succeed in lowering the corporate rate to 25 percent, chopping off 2 percentage points a year over five years. In the process, Camp makes the prized credit for research and development permanent, while also stretching out depreciation schedules and getting rid of an accelerated cost recovery system.
Still, the chairman said he was at times hamstrung by the fiscal-cliff deal hashed at the end of the last Congress, which raised the top individual tax rate to close to 40 percent.
He also suggested his vow to not shift the tax burden away from the rich — a pact he made with his longtime partner, former Senate Finance Committee Chairman Max Baucus (D-Mont.) — also meant that some popular tax provisions with entrenched constituencies had to be changed.
Some Democrats, including Rep. Sandy Levin (Mich.), the ranking member at Ways and Means, said they would keep an open mind about the draft, with an eye toward how Camp’s plan tries to battle issues like income inequality.
But others, like Sens. Charles Schumer (N.Y.) and Patty Murray (Wash.), underscored the challenge in making progress on tax reform before the midterm elections.
“Any proposal that eliminates the deduction for state and local taxes, as the Republican plan would do, is dead on arrival,” Schumer, the No. 3 Democrat in the Senate, said in a statement.
Schumer and other Democrats have said that tax reform should be used to help close the deficit by raising more revenue for the government.
But Camp’s draft would have relatively little impact on the national debt over a 10-year span when analyzed under traditional scorekeeping methods.
His draft also illustrated why tax reform is often popular in the abstract but becomes a more difficult sell when lawmakers and lobbyists get to see what tax breaks have to be slashed to bring down rates across the board.
The plan generally ignores the raft of taxes found in President Obama’s healthcare reform law, except for two, including a tax on medical devices that has bipartisan opposition. The Ways and Means chairman also moves to tax capital gains as ordinary income, with a 40 percent exclusion.
Corporate America would also get a long-sought-after prize in a switch to a system that limits taxation of most offshore income, but business reaction to the plan was mixed at best.
Retailers and the slew of corporate coalitions were generally pleased. Jim Pinkerton of the RATE Coalition said his group’s push for a 25 percent top corporate rate had “penetrated the thinking of the political class in Washington and around the country.”
But the oil-and-gas industry and small-business advocates were angered by the proposal.
Perhaps no sector was more upset than the banks, which saw Camp propose a tax on the largest financial institutions while leaving a tax exemption for credit unions alone.
This story was updated at 8:38 p.m.