Elections Analysis: Tax and Budget

November 6, 2014

pic-tax-wordBefore Republicans prepare to take control of the Senate in January for the first time in eight years, and we will enter into a divided government, there is still must-pass tax and budget items for the current Congress to deal with during the lame duck beginning on Nov. 12.

Omnibus Spending Package verses Continuing Resolution

Now that the midterm elections are over, lawmakers will return next week and their primary focus will be on moving ahead on negotiating a framework for a lame duck fiscal 2015 omnibus bill. The House and Senate Appropriations Committees need to resolve their differences on either specific top-line funding levels for the twelve annual spending bills or pass a continuing resolution (CR) before the current stopgap spending expires on Dec. 11.

House Appropriations Chairman Harold Rogers’ (R-Ky.) and his Senate counterpart, Barbara Mikulski’s (D-Md.) staffers have spent the recess laying out the framework for an omnibus package to allow negotiations to begin in earnest once their leaders give them the go-ahead. Most favor having an omnibus deal in place prior to the Dec. 11 deadline that would provide new appropriations for most, if not all, federal agencies in fiscal year (FY) 2015. It would likely be similar to the $1.1 trillion FY2014 package enacted earlier this year.

The parties are not that far apart on overall spending levels given last year’s budget deal, which eased across-the-board spending cuts and set bipartisan funding caps for FY2014 and 2015. Overall discretionary spending in FY2015 would only increase by $2 billion under those caps to $1.014 trillion.

If lawmakers opt to pass a full-year CR in December and then try to rework FY2015 appropriations bills next year, the Republicans—despite their huge gains on Tuesday—will still need to garner Democrats’ support in order to secure the 60 votes needed to pass any spending bill.

Tax Extenders

Also during the lame duck, lawmakers will have to come to a decision on the $50 billion in expired tax breaks—known as tax extenders—that have been in limbo since their expiration last December. These 55 tax credits will have to be reinstated by the end of 2014 in order to be part of the current year’s tax laws.

Leadership will have to reconcile the two competing chamber approaches to the extenders—House Republicans have voted to make a dozen tax extenders, including several business-specific ones permanent and let the rest expire, while the Senate Finance Committee would prefer to temporarily renew nearly all of the provisions for two years.

Renewing all of the extenders that expired on Dec. 31, 2013, for one year would cost about $54 billion in total, according to the Congressional Budget Office (CBO). The Senate’s two-year package of 51 breaks would cost $84.1 billion, spread over 10 years.

With the Republicans’ success on election night, some lawmakers may now favor only a one-year extension in order to raise the pressure for a broader tax overhaul in the coming year. Additionally, with the upcoming shift in power, Democrats may now be more willing to accept permanent extensions in a bid to get their own favorite breaks—such as the Earned Income Tax Credit and the American Opportunity Credit—made permanent before being relegated to the minority next year.

Retiring House Ways and Means Chairman Dave Camp (R-Mich.) has said he would push to make permanent as many of the committee’s favored 14 breaks as possible, setting the stage for his successor –likely either current House Budget Committee Chairman Paul Ryan (R-Wis.) or senior Ways and Means Committee member Kevin Brady (R-Texas)—which would allow a future tax overhaul to lower tax rates without having to incorporate as many offsets to maintain revenue neutrality. CBO projects just over $40 trillion in total revenue collection over the next 10 years, but if Congress continued to renew the extenders, the government would come up short by up to $1 trillion.

Comprehensive Tax Reform

In January, presumed incoming Senate Majority Leader Mitch McConnell (R-Ky.) is going to try to find potential compromise areas between Congress and the White House and one of his top items may be a comprehensive overhaul of the tax code.

Over the past two years Rep. Camp put together a framework for overhauling the tax code, but was never able to bring it to the House floor for consideration. If either Rep. Ryan or Rep. Brady replace him at the helm, both will likely move forward on these efforts. House Speaker John Boehner (R-Ohio) intends to unveil a five-point road-map for the coming session that, among other things, calls for fixing the tax code.

On the Senate side, Sen. Orrin Hatch (R-Utah), in line to become the next chairman of the Senate Finance Committee has said that tax reform would be a main priority on the Republican agenda—one that creates a simpler, fairer tax system and promotes savings and investment.

In order to accomplish fundamental tax reform, both Republicans and Democrats will have to set aside bedrock political positions on taxes and put on the table all significant tax breaks and provisions. The two sides are deeply divided on how to deal with overhauling the tax code. Republicans want to lower the top nominal corporate tax rate from 35 percent to 25 percent, but to do so in a revenue neutral fashion they would have to eliminate tax breaks that companies use to reduce their effective tax rates to even lower levels. Democrats want to focus on overhauling the corporate tax code, rather than restructuring individual taxes—which were last modified by the fiscal cliff law that made permanent the Bush-era tax cuts for lower- and middle-class taxpayers, but allowed tax rates to increase for higher incomes.

NSBA has repeatedly pointed out that that enacting corporate reform in a vacuum–absent individual tax reform–would drastically tilt the scales in favor of large corporations. Lowering corporate taxes while eliminating many of the tax benefits small businesses use would effectively result in higher taxes for the majority of small businesses, 83 percent of which are pass-through entities and therefore pay business taxes at the individual tax level.

Regardless of the Republicans’ success of the midterm elections, whatever approach they take to get tax reform done in the 114th Congress, they will need bipartisan support.

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