Tax reform plan puts small breaks at risk

The zero-break tax reform strategy favored by the top tax writers in both chambers underscores the challenge in rewriting a code where expensive provisions have also proven politically popular, according to both lobbyists and lawmakers.

In effect, Senate Finance Chairman Max Baucus (D-Mont.) and Sen. Orrin Hatch (R-Utah), the tax-writing committee’s ranking member, stripped the tax code clean of preferences, and asked their 98 colleagues to make a positive case to get their favored tax breaks back into the system. 

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House Ways and Means Chairman Dave Camp (R-Mich.), who has been working closely with Baucus on tax reform for years, has endorsed a similar strategy.

That set-up, according to both K Street and members of both parties, gives an advantage to tax incentives with broad bases of support, like the mortgage interest deduction and the exclusion for employee-sponsored health insurance. 

Meanwhile, smaller tax breaks that might have been able to fly under the radar in a fight over what should stay in the tax code will face a harder time getting lawmakers’ attention if they start from scratch.

“If that’s the approach they’re taking, then the really obscure provisions are going to have a hard time finding a strong champion,” Jade West of the National Association of Wholesaler-Distributors said about Baucus and Hatch.

At the same time, as both Baucus and Hatch hinted at this week, putting those big-ticket items back in the code will reduce the amount of rate or deficit reduction that a tax overhaul can produce.  

“There’s a natural tension there, because they’re also expensive items,” said Jonathan Traub of Deloitte Tax, a former aide to Camp. “They’re going to push up the rates more measurably.”

A Congressional Budget Office study released last month said that a group of 10 major tax breaks will cost about $900 billion alone in 2013, and account for about two-thirds of the cost of all tax breaks. 

In addition to the mortgage and healthcare breaks, those preferences include the deduction for charitable giving and state and local taxes, and an exclusion for pension contributions.

Rep. Richard Neal (Mass.), a senior Democrat at Ways and Means, said that very conflict was a major reason he had concerns about what Baucus and Hatch call the “blank slate” plan.

“I’m skeptical of it, only to the extent that I think that the home ownership deduction’s not going away, employer-based health insurance is not going away, and charitable giving is not going away,” said Neal, who is seen as a Democrat willing to work with the GOP on tax reform. “After that, revenue gets scant.”

That tension accounts for just part of the reason Camp, Baucus and Hatch are seen as having a heavy lift in getting tax reform across the finish line, even as some in the House applauded the Senate for taking a concrete step forward.

Recent votes and comments about priorities like immigration and the farm bill have shown just how different ideologically the House and Senate are, giving tax writers a challenge in crafting a bill that can pass both chambers. 

Camp has vowed to pass a tax reform bill out of committee this year, but House members have also expressed some concern that they could take some political heat if they pass a measure and the Senate doesn’t follow suit.

For right now, Camp has no plans in formally asking colleagues to go to bat for their favorite provisions, like Baucus and Hatch. 

The Ways and Means chairman has been meeting with every member of his panel, both Democrats and Republicans, to take their temperature on tax reform. He has also gotten input from rank-and-file members of the GOP conference through meetings hosted by Majority Whip Kevin McCarthy (R-Calif.).

But that outreach has also illustrated the challenge of tax reform. Rep. Tom Cole (R-Okla.), one of the House GOP’s top strategists, said he has already talked to tax writers about preserving incentives for the oil-and-gas industry, like the ability to quickly write off the costs of equipment.

"I have certainly talked to them personally about things that are important for Oklahoma. Oil and gas is a big deal in our state,” Cole told The Hill. “I haven't said anything is a dealbreaker. Look at how many Republicans are from Louisiana, Oklahoma and Texas. It better be a very attractive package is that is going to go."