Former congressional tax counsels John Buckley and Jon Traub on Tuesday sparred over the recent experiment by the Joint Committee on Taxation to see how much marginal tax rates could be reduced if certain major tax expenditures, including tax exemption, were eliminated.
The results were detailed in a JCT 14-page letter to leaders of the Senate Finance Committee late last week. It found that eliminating the tax expenditures would generate enough revenue to pay for repealing the alternative minimum tax and reducing marginal tax rates by 4% without adding to the federal deficit. The top individual tax rate of 39.6%, for example, would only be reduced to 38.02%.
The large tax expenditures eliminated included itemized deductions, taxing income from capital-gain realizations at preferential rates, and the interest on tax-exempt bonds. The JCT also assumed several changes to current law, such as that the AMT would be repealed.
However, Thomas Barthold, the JCT’s chief of staff, told lawmakers the committee did not eliminate the earned-income tax credit, the child credit, the exclusion of employer-provided and self-employed health benefits, or the current treatment of various forms of retirement income and pension plans.
During a tax policy summit sponsored by the National Journal, Buckley, former chief Democratic tax counsel for the House Ways and Means Committee, said the JCT letter was very instructive. “We talk about lowering rates but we don’t talk about the big elephants in the room, which is the mortgage interest deduction, the charitable deduction, employer-provided health care exclusion,” he said. “Those are the only items available. We are promising the good things and hiding the necessary painful aspects of it.”
But Traub, a principal at Deloitte and former Republican staff director for the House Ways and Means Committee, argued that the JCT did not broaden the tax base but instead used the experiment to “redefine” the base. If the JCT had used a different baseline scenario, they would have gotten a different result. The committee, for example, assumed most of the tax cuts enacted over the last decade had expired.
“The JCT in some ways is a little bit shooting a shot across the bow to say, hey people, you are ignoring a lot of things; we’re the official scorekeepers and by the way, they decided if you do base-broadening we will pay for getting rid of the AMT,” said Gene Steuerle, former deputy assistant secretary for tax analysis at the Treasury Department, who was also on the panel.
“The issue is there are a lot of big items out there that if you want to do removal of itemized deductions to pay for rate reduction, you can only do so much, but then you can’t pay for AMT,” Steuerle added.
Panelist Rosemary Becchi, a partner at Patton Boggs LLP, weighed in during the summit and said the JCT letter is telling because eliminating “tax preferences really don’t raise a lot of money and have a whole lot of impact.”
Susan Collett, Bond Dealers of America’s senior vice president of government relations, said the JCT letter underscores the larger issue that tax exemption unfortunately keeps getting thrown into broad tax-reform ideas. “It’s a pretty big number that could be used to fill in these holes when Congress tries to do a massive redesign of tax policy, but it comes at a great cost,” she said. “Sure there is revenue, but at what cost to the economy, citizens and local governments and infrastructure?”
Collett said BDA, which is leading an effort to form a coalition to fight threats to tax exemption, will continue to point out to policymakers the additional costs to state and local governments that come from eliminating or scaling back tax exemption.
Separately, Buckley predicted that despite historically uneventful congressional lame-duck sessions, it’s likely there will be some legislative action on “patching” the AMT after the November election because it affects 2013 tax returns.