Temporary tax deal no easy fix

Punting on the tax part of the “fiscal cliff” would create a nightmare of payment issues for the country, lawmakers and business officials say, a reality that could limit Congress’ ability to avert the increases by the end of the year.

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Policymakers are scheming behind closed doors on how to deal with the year-end mix of tax increases and spending cuts after the election, no matter which party controls Congress or the White House. Some lawmakers have said a short-term fix might be needed to buy time for more negotiations.

But a three- or six-month extension of current tax rates could leave the IRS a slew of difficult administrative issues that would not be easy to solve.

Small businesses and individuals, meanwhile, would be forced make more frequent trips to their accountants as they wade through a year of piecemeal tax policy.

That dynamic has left Democrats and Republicans agreeing that at least a one-year extension of all or some rates is preferable. But there's the rub: given the hard line that both sides have drawn over which of the Bush-era tax rates to extend, that could also make it that much more difficult to reach an agreement.

Rep. Chris Van Hollen (Md.), the top Democrat on the House Budget Committee, told reporters recently that he was more confident a compromise could be reached on the looming $109 billion in automatic spending cuts through sequestration that will hit in 2013.

“On the revenue piece, you’ve got a different situation because it is much more harder to do a temporary measure for part of the year,” said Van Hollen, who has taken part in several bipartisan fiscal negotiations in recent years.

With the election a month away, President Obama and Democrats continue to press for allowing the Bush-era rates to expire for the highest earners. Meanwhile, Obama — who signed off on a two-year extension of all current rates in December 2010 — has vowed not to do so again.

But House Republicans passed a yearlong extension of all current rates this summer, which they said should serve as a final bridge to a full-fledged rewrite of the tax code.

A spokeswoman for Rep. Dave Camp (R-Mich.), the chairman of the House Ways and Means Committee, said a full year extension was needed to give businesses certainty and make it easier for them to plan.

“We've long been told by job creators of all sizes that incremental tax policy doesn't get it done,” said the spokeswoman, Michelle Dimarob.

With tax rates expiring in less than three months, Sen. Kent Conrad (D-N.D.), the Budget Committee chairman and part of a small group of lawmakers searching for a grand deficit bargain, said that the so-called Gang of Eight had not even started negotiating tax rates.

Senate Majority Whip Dick Durbin (D-Ill.), another member of the group, off-handedly floated the idea last month of finding the offsets to stave off both the scheduled tax increases and spending cuts for six months.

“The notion is we would come up in the lame duck with the savings to show we're serious,” Durbin said at an event sponsored by Bloomberg at the Democratic National Convention. “We bought six months. We're paying for six months.”

But aides say Durbin is not working on such a plan, and is instead focused on reaching Gang of Eight agreement that that would reduce the debt by $4 trillion over 10 years.

The IRS declined to comment Friday on what challenges they would face if they faced a three- or six-month extension of tax policy.

But Doug Shulman, the IRS commissioner, has long urged Congress to offer taxpayers as much certainty as they can.

The commissioner, for instance, has urged policymakers to deal with this year’s expiring tax provisions as soon as possible, after the IRS had to delay the start of the filing season for some in the wake of the 2010 lame-duck tax deal.

“One of our real jobs that we take very seriously is to make sure that as Americans wrestle with a complex tax code, that it's as seamless as possible for them,” Shulman said in April.

Marc Gerson, a tax attorney at Miller & Chevalier, said something short of a full-year extension of current rates would force the IRS to publish and enforce two rate schedules for 2013, creating major headaches for companies and their payroll systems.

Gerson said the fallout from a temporary solution would bleed into April 2014, when the 2013 filing season for individuals ends. He joked that the only group that would benefit would be accountants.

“It’s a jobs program,” said Gerson, a former Republican tax counsel at House Ways and Means. But while Washington groups of all stripes agree that a plan of half a year or less is far from ideal, they’re far from on the same page over what how to proceed.

Steve Wamhoff of Citizens for Tax Justice, a liberal group, called a part-year extension “crazy,” and said Congress should choose to let all the Bush-era rates expire over a short-term extension.

“There are a lot of things Congress can do to help the economy,” Wamoff told The Hill, citing a greater bang for the buck from food stamp spending than from continuing current tax rates.

Chris Whitcomb of the National Federation of Independent Business said that a short-term extension would merely add to the confusion for companies that already face the frequent expiration and extension of targeted tax breaks like the credit for research and development.

“The shorter the extension, the harder it is,” Whitcomb, tax counsel at NFIB, told The Hill. “They can't really know what tax provisions they’re going to be able to rely on.”

But Whitcomb also noted that many companies file their taxes quarterly, and suggested that any short-term extension would be better than allowing any tax rates to expire.

“Anything is workable,” Whitcomb said. “The problem is, with all the added complexity, policymakers should take into consideration what is the most workable solution.”