Following Tuesday’s closely contested election, the prospects for tax reform in the 113th Congress are not immediately clear. What we do know is that Congress and President Obama will have limited time to contemplate the election results; they must immediately address the budgetary “fiscal cliff” as well as a constellation of expiring tax provisions. Most of the expired tax provisions can be addressed by Congress retroactively if an agreement is not reached during the lame duck Congressional session.
The Alternative Minimum Tax (AMT ) is not one of them. The Joint Committee on Taxation has estimated that if Congress fails to update the exemption for the tax, the number of taxpayers subject to it will increase from about 4 million to roughly 31 million. The Senate Finance Committee and the House of Representatives have both passed extender packages that include similar AMT relief provisions.
Rhetoric on the campaign trail has done little to bridge the divide between Republicans and Democrats and show what a compromise on tax extenders would ultimately entail. Democrats remain steadfast in their intent to let the Bush-era tax benefits expire for families with incomes above $250,000. Republicans will certainly resist efforts to implement an income cap altogether: even the $1 million income compromise that seemed possible months ago.
In the waning days of the campaign, the House Republican Leadership squelched the idea of moving any significant debt agreement in the lame duck in favor of a temporary extension. This would allow time to develop a long-term deficit-reduction plan coupled with tax reform — a grand budget compromise. The Senate Majority Leadership will move ahead with an ambitious eight week session between the election and the 113th Congress being sworn in on January 2, 2013. Senate Finance Chairman Max Baucus expects President Obama to present to Congress a proposal that includes some tax cuts, with revenue-raisers structured so as not to stifle economic growth. Lame duck session negotiations will be shaped by what is in the Administration’s plan.
A philosophical split exists, with some Members of Congress looking to tax reform as a means of raising substantial new revenues to reduce future expected deficits and to curtail the increase in the national debt, while other Members are arguing that revenue increases are not necessary if one tackles entitlement and other federal spending programs sufficiently to reduce the deficit. Many of the proposals for comprehensive tax reform include options such as reducing corporate marginal rates in return for eliminating various deductions and credits and forms of “tax expenditures” that drain the Treasury. (One key issue for many companies will be to ensure fair treatment of passthroughs, such as LLC s that are taxed at individual rates and would not automatically benefit from lowered corporate income tax rates.) Proposals often seek to simplify the individual tax structure as well (with some proposals including caps on charitable deductions and home mortgage deductions). There are Members who advocate national sales taxes, consumption taxes generally, and flat taxes. Nonprofits should be particularly aware of the willingness of the President and some in Congress to consider some limiatations to the charitable tax deductions as a deficit reduction/tax reform component.
Any action occurring in the lame duck will set the stage for tax reform by the tax writing committees. Tax reform is likely to move forward if and when the shortterm budgetary obstacles have been addressed. The Republican-led House of Representatives is poised to move comprehensive tax reform after having passed framework legislation for fast-track consideration this summer. The legislation requires that the Ways and Means Committee report a bill out of committee by May 20, 2013, or it will be automatically discharged. Budget Chairman (and Ways and Means Committee member) Paul Ryan will return to Congress and (he is termlimited as Budget Committee Chairman but is expected to receive a waiver from the Speaker) play a role in negotiations with the Administration. With the House of Representatives maintaining a comfortable Republican majority, Ways and Means Chairman Dave Camp is sure to advance some of the tax provisions put forth in the House passed FY 2013 budget resolution. Although the success of fundamental tax reform seems very much in doubt in a divided Congress, one theme that seems to resonate across party lines is simplification of the tax code through base broadening and elimination of deductions and credits that distort the market. Compromise on the expiring tax credits — in particular the capital gains tax rate and any potential income cap — will be the biggest hurdle to real tax reform in the 113th Congress.
In a statement released today, Chairman Camp set the tone for these future discussions, noting that: “There is a better path forward than simply increasing tax rates, and one in which both sides can claim victory. We can address both our jobs crisis and our debt crisis by focusing on tax reform that strengthens the economy. There is bipartisan support for tax reform that closes loopholes and lowers rates. I believe the House and Senate are prepared to act next year on reform, and that not only means a fairer tax code and more jobs, but also more revenue to help solve our nation’s debt and deficit problems. The only mandate that comes from a divided government is the requirement to work together. Tax reform is the compromise and the solution, and I urge the President to take up the Speaker’s offer to work together in our nation’s best interest on fundamental and comprehensive tax reform – just as President Reagan and Speaker Tip O’Neill did in the 1980s.”