Mundaca Sees Tax Reform Opportunity in Debt Ceiling Debate

WASHINGTON — President Obama’s former top tax official said that raising the government’s statutory borrowing authority could be key in determining how the White House and Congress proceed on tax reform.

In an interview with The Bond Buyer, Michael Mundaca, who is now co-director of national tax at Ernst & Young, said that in the past raising the debt ceiling has been associated with fiscal matters more generally and not solely just about raising the limit.

“It’s not unconnected because the reason why we need to borrow more money is because there is this gap between collections and expenditures,” Mundaca said.

Earlier this year, the President signed legislation suspending the federal debt ceiling through May 18, though the government isn’t currently on track to reach that limit until the fall.

The former Treasury assistant secretary for tax policy said it’s difficult to predict if the upcoming debate over raising the debt ceiling will model the debacle in 2011, where the U.S. was on the brink of default and Standard & Poor’s downgraded the nation for the first time in history. But it’s not out of the question, he said.

On Thursday the House passed a bill, the Full Faith and Credit Act, that would allow the Treasury Department to pay foreign and domestic investors and Social Security recipients first in the event lawmakers are at loggerheads over raising the debt ceiling. Earlier this week the White House said that if that bill passed through Congress, Obama would veto it.

Obama has made clear he will not negotiate on the debt ceiling and House Republicans have said they are looking for spending cuts in order to raise it.

“There will be a potential for conflict but one way through that is having some agreement on general principles around resolving the difference between revenues and spending and perhaps a path forward for dealing with those issues in an expedited way,” Mundaca said. “That’s where I think the issue of tax reform can come into play.”

Mundaca, albeit somewhat optimistic about tax reform happening in the next year or year-and-a-half, said tax reform in the context of the debt ceiling won’t be easy.

“Even if there is agreement on a way forward on taxes and tax reform as part of the debt ceiling discussion, it’s still a very difficult job to get agreement given the various competing views on what tax reform should accomplish,” Mundaca said. Generally, Republicans believe it should be revenue neutral while Democrats want to raise more revenue.

Nonetheless, it would be a step forward and a positive indication that tax reform could get done before the next election, he said. As the 2014 elections draw near, the window of opportunity for tax reform dwindles as other issues cloud its prospects.

When asked about proposals to raise revenue such as the 28% cap on the value of tax exemption, Mundaca said that is one of a number of controversial issues that will have to be worked through.

“Whenever you have the sort of cap the administration and others have proposed, there will always be cases made as we move through the process for exceptions to that cap,” he said. “I think that’s where we need to have the debate continue so we can have an airing on the various views about what should and shouldn’t be subject to the cap.”



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