Tax cut debate dooms deal to cut deficit

WASHINGTON -- A long-running war between Democrats and Republicans over Bush-era tax cuts doomed the debt supercommittee's chances of reaching a deal. Efforts to overhaul the tax code may await the same fate as both parties gear up to make taxes a central issue in the 2012 elections.

Republicans insisted during the supercommittee negotiations that curbing tax breaks to raise revenue be coupled with guarantees that all the Bush tax cuts would continue beyond 2012. The tax cuts, which affect families at every income level, were enacted under President George W. Bush and were extended through 2012 under President Barack Obama.

Republicans for years have bashed Democrats as eager to raise taxes -- a theme they will employ often in next year's elections -- so they weren't about to agree to a tax increase unless they also could take credit for preventing a huge tax increase scheduled to take effect in 2013.

Democrats countered that the supercommittee was created to reduce the budget deficit, not add to it by extending tax cuts. Most Democrats, including Obama, want to extend the Bush tax cuts only to individuals making less than $200,000 a year and married couples making less than $250,000.

"We simply could not overcome the Republican insistence on making tax cuts for the wealthiest Americans permanent," said Sen. John Kerry, D-Mass., a member of the supercommittee. "This was simply doctrine for some of our Republican colleagues, even as many worked very hard in good faith to find a better way forward."

Another member of the supercommittee, Rep. Dave Camp, R-Mich., said, "It is deeply regrettable that my Democrat colleagues could not see their way to addressing these much-needed reforms without at least $1 trillion in job-killing tax increases on families and employers."

Extending all the Bush tax cuts, including provisions to spare millions of middle-class families from paying the alternative minimum tax, would add $3.9 trillion to the budget deficit over the next decade, according to projections by the nonpartisan Congressional Budget Office. The Democratic plan would add about $3.1 trillion to the deficit over the same period and make the wealthiest Americans pay about $800 billion more in taxes.

The supercommittee was formed to come up with a package that reduces government borrowing by at least $1.2 trillion over the next decade. But with a Wednesday deadline approaching, the committee's co-chairs conceded failure Monday.

Democrats had said they would accept significant cuts to benefit programs like Medicare and Medicaid, but only if Republicans would agree to tax increases. Despite Republicans' aversion to tax increases, a growing number of GOP lawmakers said they would consider higher taxes if they were coupled with significant spending cuts.

Other Republicans wanted even more political cover: a guarantee that all the Bush tax cuts would be made permanent.

"It's not easy during this hard economic time to go back and justify any kind of tax increase," Rep. Wally Herger of California, a senior Republican on the tax-writing House Ways and Means Committee, said while talks were still ongoing. "But I think if it's going to be justified, this is the one exception that maybe you could use to justify it."

At one point, supercommittee member Sen. Pat Toomey, R-Pa., proposed a tax overhaul package that Republicans said would raise about $290 billion in additional revenue over the next decade but lock in all of the Bush tax cuts.

Democrats, however, never seriously considered an agreement to continue the Bush tax cuts for high earners. Agreeing to extend them would make it harder for Democrats to accuse Republicans of supporting policies that favor the wealthy, a staple of Democratic political campaigns.

"If anybody in our party votes for that, they will have a real problem for themselves in the next election," said Rep. Jim McDermott of Washington, a senior Democrat on the Ways and Means Committee.

The debate has played out even as lawmakers, presidential candidates and interest groups from across the political spectrum have called on Congress to simplify the tax code. The two tax-writing committees in Congress, the Ways and Means Committee in the House and the Finance Committee in the Senate, have held numerous hearings on tax reform. Their respective chairmen, Camp and Sen. Max Baucus, D-Mont., both served on the supercommittee.

But tax reform won't happen until Congress resolves the dispute over the Bush tax cuts, said Howard Gleckman, a fellow at the Urban Institute and editor of the blog TaxVox.

"You can't do tax reform unless you agree in advance how much revenue you want to raise," Gleckman said. "The problem is, there is simply no consensus at all on what the revenue goal is."

Tax reform is already a hot topic among Republican presidential hopefuls. Businessman Herman Cain has gotten a lot of attention for his 9-9-9 plan, which would impose a 9 percent national sales tax, a 9 percent income tax and a 9 percent business tax.

The election could go a long way toward deciding the fate of tax reform, unless it results in more divided government, said Clint Stretch, a tax expert at Deloitte Tax LLP.

"The problem is, the 2012 election might not solve the issue," Stretch said.

Until then, don't look for any movement on the issue, said Dean Zerbe, former tax counsel to the Senate Finance Committee and now national managing director of Alliantgroup, a tax consulting firm.

"'For this Congress, you might as well send the lilies for tax reform," Zerbe said. "We will not do anything significant on taxes until after the election, and even after that it may take a while."

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TaxVox blog: http://taxvox.taxpolicycenter.org/