Tax

Tax reform may find its way through partisan thicket

The idea of comprehensive tax reform received a boost from the New Year's Day measure that averted automatic…

The idea of comprehensive tax reform received a boost from the New Year's Day measure that averted automatic tax increases and spending cuts.

The partisan tension that punctuated congressional approval of a fiscal cliff bill is expected to stay high for several weeks, as Republicans battle the Obama administration over increasing the country's borrowing authority. But in making many Bush-era tax cuts permanent, the fiscal cliff bill set a baseline for government revenue at about 19.4% of the economy.

With that foundation in place, comprehensive tax reform could be a “sweet spot” that provides common ground between Republicans, who resist more tax increases and want to streamline the tax code, and President Barack Obama, who wants deficit reduction to include more than spending cuts, according to Jon Traub, managing principal of the tax policy group at Deloitte Tax LLP.

“This may be the key to unlocking the debt limit deal,” he said.

“I don't know anyone who could say how it will all play out,” Mr. Traub said. “There are clearly impediments to Congress' doing a big bill, but the dynamics that are driving tax reform are not going away.”

If Democrats and Republicans can agree on debt ceiling legislation, it may include instructions for an expedited tax overhaul process.

“There still remains a very strong likelihood for tax reform,” said Brian Graff, chief executive of the American Society of Pension Professionals and Actuaries.

Even observers optimistic about tax reform couch their comments in caveats, though. A huge political brawl over the debt limit could sap political energy in Washington.

DEBT FIGHT DELAYED

At the moment, such a fight appears to be delayed after House Republicans indicated last Friday that they will sponsor a bill to extend the debt ceiling for three months.

The debt measure itself may include additional tax changes, such as limiting deductions for high earners, said Andrew Friedman, principal at the Washington Update newsletter.

“Tax simplification is complicated stuff,” he said. “It's hard to get consensus on how to change the tax code. I'm not sure people are going to have the fire in the belly to deal with taxes again after having dealt with taxes twice in the last two months or so.”

A provision within a debt ceiling agreement to limit deductions for high earners would be misguided, said Steve Henley, national tax practice leader at CBIZ MHM LLC, an accounting firm.

“It introduces more complexity in the tax code,” Mr. Henley said. “That's not the broad-based reform people have been wanting.”

John Hauserman, president of RetirementQuest Wealth Management, comes down in the middle between optimists and pessimists.

“We're moving from zero likelihood to something north of zero,” Mr. Hauserman said. “I don't think it's going to be the broad reform we need, but it could be enough to kick the can down the road.”

Financial advisers welcomed the fiscal cliff bill for the certainty it provided on most tax rates. Now they want Congress to take the next step and make more-fundamental changes.

“What we got was duct tape; what we need is the nuts and bolts,” Zaim Hajdari, president of The Hajdari Group LLC, said of the fiscal cliff bill.

“Our government needs to think more outside the box when it comes to these solutions,” he said.

One way to shake things up would be for the political parties to drop their knee-jerk opposition to any tax increase on middle-income earners, according to Joel Redmond, vice president at Key Private Bank NA.

The burgeoning federal deficit and debt require substantial spending cuts and a more-even distribution of tax pain.

“This has to extend beyond the wealthy,” Mr. Redmond said. “The circumstances are dire enough that everyone should be a little uncomfortable.”

Mr. Hauserman advocates a more radical idea: replacing the income tax with a national sales tax.

That is precisely what a House bill introduced Jan. 3 with 53 co-sponsors would do. The measure, however, is a long shot.

“It would incentivize savings; it's progressive and it's not complicated,” Mr. Hauserman said.

“But I know [a national sales tax] is not going to happen,” he said. “For political reasons, it doesn't leave lawmakers enough room to pander to their bases.”

RARING TO GO

If tax reform is to become a reality, it will take a concerted effort on Capitol Hill. One key legislator in the process is raring to go.

Just before the House approved the fiscal cliff bill Jan. 1, Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee, promised to make broad tax reform next in line for consideration.

“Simply put, the tax code is a nightmare,” he said.

“It is too complex, too time-consuming and too costly. By making Republican tax cuts permanent [in the fiscal cliff bill], we are one step closer to comprehensive tax reform that will help strengthen our economy and create more and higher paychecks for American workers,” Mr. Camp said.

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