Republican-majority Congress scales back tax reform hopes

But with Barack Obama in the White House and enough Democrats in the Senate to uphold a filibuster, Republican lawmakers are quietly playing down any hope of comprehensive tax reform and instead have set their sights on just the corporate portion of the tax code.

“I don’t think you can get the individual side of the tax code done next year,” said Douglas Holtz-Eakin, former head of the nonpartisan Congressional Budget Office.

Holtz-Eakin, who once served as President George W. Bush’s top economic adviser and is now president of American Action Forum, a center-right think tank, noted the wide gulf between President Obama and congressional Republicans on how to go about reforming the individual tax code.

The GOP favors a simplified tax code with a lower, but broader, tax base.

That proposal is a nonstarter with Democrats because while it would reduce taxes overall, it would draw tax revenue from more people on the lower end of the income spectrum.

“The one area [where] we can hold out hope is corporate tax reform,” Holtz-Eakin said.

But even that may be a long shot.

Congress in 2014 struggled for months to come up with a bipartisan proposal to extend dozens of tax breaks important to both businesses and individuals.

Even though Democrats and Republicans generally supported most of the cuts, they were unable to agree on a tax cut package that lasted beyond 2014 because of objections from Obama, who felt a bipartisan proposal the two sides were negotiating favored corporations over lower-income workers.

Lawmakers gave up and instead were forced to pass a retroactive extension of the tax cuts in late December that will cover only 2014 tax filers.

The exercise left both sides frustrated, particularly Sen. Ron Wyden, D-Ore., who will become the top Democrat on the Senate Finance Committee in January.

The tax cut deal Congress passed “doesn’t have the shelf life of a carton of eggs,” Wyden lamented before the Senate adjourned.

While the 2014 tax cut effort represented just a tiny slice of the tax code, it served to remind Republicans of an important lesson in tax reform.

Congressional Republicans have come to realize that even though they will control both the House and Senate in 2015, they won’t get far on tax reform unless they do so in concert with the president.

In other words, the GOP isn’t planning on passing its own bill for Obama to reject.

That has been ruled out.

Said one top GOP aide close to the Senate talks, “There is only so much that can be done without the White House involved.”

Republicans like to point out that the last time the tax code was significantly overhauled, in 1986, the effort was led by President Reagan.

So far, Obama hasn’t shown much interest in leading tax reform. Now that he has become a lame duck president entering his final two years in office, the GOP isn’t expecting his attitude to change.

“If you look at how much this administration has worked in a bipartisan fashion over the past six years,” one GOP aide said, “there hasn’t been a lot of it.”

But Republicans are far from giving up.

In Congress, the tax reform effort will be led by Rep. Paul Ryan, R-Wis., the one-time GOP vice presidential nominee, and Sen. Orrin Hatch, R-Utah.

Neither Ryan nor Hatch has ruled out comprehensive tax reform, but most lawmakers say Congress likely will only attempt corporate tax reform, maybe with changes to benefit small business owners who file as individuals.

Ryan, who authored several Republican spending plans as the head of the House budget panel, will be taking the helm of the powerful tax writing panel, the Ways and Means Committee, in January.

He has not released an official 2015 tax reform plan, but Ryan has outlined his ideas in past spending blueprints.

He has proposed lowering the U.S. corporate tax rate, now the highest in the developed world, from 35 percent to 25 percent, and ridding the tax code of many loopholes to help offset the cost.

Ryan also wants to change the way tax plans are evaluated so that they account for revenue that would be generated by economic growth.

Hatch, who will become chairman of the Senate Finance Committee, outlined a similar proposal in a floor speech he delivered before the Senate adjourned in December.

Hatch called for lowering the corporate tax rate and eliminating loopholes.

Like Ryan, Hatch wants to end taxation of foreign corporate earnings, a policy that is unique to the United States and has prompted large U.S. companies to pull up stakes and move their headquarters to other countries.

Republicans are eager to stop the exodus by making the corporate tax code more attractive to businesses.

“The result would be more worldwide American companies establishing or retaining their corporate headquarters in the United States, more exports to global markets, and retention and reinvestment of money in the United States rather than abroad,” Hatch said.

Republicans and Democrats have some common ground to start with, but it’s not much.

Obama in 2012 proposed lowering the corporate tax rate to 28 percent, and proposed paying for it by eliminating corporate loopholes and adding some new taxes.

But in 2014, Obama pushed to spend the revenue that would be raised by closing tax loopholes on repairing the nation’s crumbling infrastructure. The GOP wants to use those funds to lower corporate tax rates.

“That’s just a big, big difference,” one GOP aide said.

Senate Democrats have their own ideas. Wyden, who will work opposite Hatch on the Senate tax-writing panel, has proposed lowering the corporate tax rate to 24 percent. But Wyden has also pitched the idea of raising taxes on capital gains and dividends as well as multinational corporations, which won’t gain traction with Republicans.

Perhaps the biggest obstacle for tax reform is time.

Some lawmakers and aides said that if Congress and the White House have any hope of working out a deal on tax reform, they’ll have to do it by this summer.

“If nothing happens by the summer, then you are rolling into the presidential season and you are going to have all of your 2016 candidates coming out with their plans.” an aide said. “The window is short.”

Lawmakers have suggested that if larger efforts fail, tax reform could be achieved on a smaller scale by including reforms, such as a permanent tax credit for research and development, in must-pass legislation.

One target bill under consideration is the legislation to raise the nation’s debt ceiling, which could come in March.

Republicans are also considering passing corporate tax reform within the budget reconciliation process, which would require just 51 votes for passage rather than the typical 60-vote supermajority.

“We may want to have that as an alternative, just in case,” said Sen. Roy Blunt, R-Mo.