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legislative update Tax Reform: Can Congress Do It Again? NAILBA and its industry and association partners have been preparing for years for Congress’ latest attempt to reform the tax code, with a specific focus on tax-free inside buildup falling under threat of taxation. There has not been a comprehensive reform of the tax code since 1986. The timing could not be better, but the chances of Congress passing a substantive tax reform bill remain uncertain because of the political climate. The gridlock we are currently witnessing on Capitol Hill is a result of the lack of consensus over where the country should be headed, compounded by election-year politics. The key issue that could make or break tax reform legislation is that Democrats want a bill that will bring in more revenue to bridge the budget deficit while Republicans would prefer at least a revenue-neutral bill with lower individual and corporate tax rates. The issue is part of a broader argument over the role of government. Government needs revenue to uphold its end of the social contract, but how those revenues are collected and disbursed has become a debate about fairness and efficiency. On one side of the debate, it is believed that in order for the government to continue providing services at its current levels, it needs more revenue: this leads into an argument over who will pay more in taxes (and/or give up tax breaks) in order to maintain the current level of government services. Should wealthier individuals pay a higher rate in order to raise more revenue, or should the tax base be broadened so that more people are paying taxes? This leads to another argument about whether or not government provides too many services, some of which are wasteful, costly, or otherwise unnecessary. Should Congress find new sources of revenue or scale back what it provides in order to become less expensive to administer? This then leads to yet another argument about which services to cut: should Congress cut back on defense, which constitutes nearly half of discretionary spending, potentially putting the country at greater risk? Or should it reduce social services with the hope that citizens become less reliant on government, though many would still have no safety net and fall further into poverty? There are credible arguments on all sides of this dispute. The problem is that it is this very dispute that has kept Congress from reforming the tax code. This is not some minor discrepancy on public policy; this reflects a fundamental disagreement on how lawmakers believe the Federal government should function. If the people who write our laws can’t agree on this basic premise, the natural result is going to be gridlock, not just on tax reform but on any legislative issue. The upcoming mid-term elections make confronting the tax reform debate even more tricky. Incumbents are increasingly worried not just about their general election prospects but the preceding primary elections as well, especially Republicans facing Tea Party challengers early next year. Because primary elections tend to take place earlier in the election year, this means that lawmakers are in campaign mode at least a year before November elections, spending more time attending fundraisers and travelling back to their home districts, and less time legislating. Not only that, vulnerable Republicans may be reluctant to support a tax reform bill that might be viewed by their base as insufficiently lowering taxes and cutting back on spending; vulnerable Democrats don’t want to associate with a bill that might be viewed by their base as going too far in cutting entitlements for the needy and other programs that benefit their constituents. Getting a tax bill passed before the end of 2013 would at least give voters time to cool off before heading to the polls, but Congressional leaders may scrap the whole idea of tax reform if it means voting on a bill in the middle of election season. Tax reform would still face hurdles after 2014, as Presidential candidates (many of whom would be coming from Congressional ranks) will prepare for their primaries. It’s likely that neither party would want their nominee to carry the baggage of a tax reform bill that would be unappealing to either their bases or the electorate, thus delaying any viable tax reform package until 2017. It is true that the 1986 Tax Reform Act was passed during an election year; however, lawmakers on both sides were not as threatened by primary challengers (if any) as they are today and were much more willing to cut deals in order to get something done. 2009 might have been a good year to move a comprehensive tax reform bill, as a new President had just been elected with his party dominating both houses of Congress. However, President Obama spent his political capital on health care and financial services reforms (one issue on which he campaigned, the other being a response to the market upheaval of 2008). By the time the Patient Protection Act and Dodd-Frank were passed, it was mid-term campaign season— there was simply no time or political will to undertake such a monumental endeavor. After Democrats lost their House majority in addition to a few seats in the Senate in the 2010 elections, Washington’s focus shifted to the 2012 Presidential campaign. Now that the 2012 elections are behind us, and with some time left before mid-term campaign season goes into full swing, there seems to be more of a willingness to confront the task of reforming the tax code. House Ways and Means Committee Chairman Dave Camp (R-MI) set up eleven working groups within the Committee at the beginning of the year, each tasked with assessing certain areas of the tax code. A publicly available tax reform discussion draft has also been circulated among Members of Congress to stimulate constructive debate on the issue. On the Senate side, Senate Finance Committee Chairman Max Baucus’ (D-MT) retirement at the end of 2014 means he can take some legislative risks without fear of backlash from his state’s voters. And if we must draw comparisons with the 1986 act, that legislation came on the brink of failure many times before passing with significant bipartisan support; perhaps we’ll see that again this time around. It’s a big step for Congress to even have this debate. NAILBA Government Affairs has been meeting with key lawmakers on Capitol Hill to ensure any legislation maintains the current tax treatment of the products you distribute. But make no mistake: even though the failure of Congress to pass tax reform would mean inside buildup remains tax-free, that would hardly be considered an achievement. Mark Valentini, MPP is NAILBA’s Director of Government Affairs. You can contact him at 703.383.3073 or mvalentini@nailba.org to learn more about NAILBA’s advocacy efforts. 44 perspectives SEPTEMBER/OCTOBER 2013
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