Congress Gears Up for Tax Reform

I have been predicting for the past few months that as part of a bipartisan budget deal Republicans will agree to raise revenues by reducing tax breaks and then cloak this retreat in high-minded rhetoric about "tax reform."

Hints that such a retreat may be possible have been everywhere -- most recently the Senate ethanol vote in which conservative powerbrokers like the Club for Growth said it was okay for Republicans to vote to close loopholes.

A budget deal hasn't happened yet, needless to say. And according to new reports, tax breaks have emerged as a major sticking point in the high-level talks underway. According to a story today in The Hill, House Majority Leader Eric Cantor walked out of the budget talks last week because he disagreed with proposals to reduce tax breaks on high earners. Senate Minority Leader Mitch McConnell said over the weekend that closing tax loopholes wasn't going to secure a deal.

It's worth noting, though, that tax breaks have indeed emerged as one big focal point of budget talks. Meanwhile, in another sign of where things are headed, key committees of Congress have begun meetings over tax reform, with members of both parties showing an appetite for reform. According to the Wall Street Journal:

The bipartisan meetings have generated free-flowing discussion and may help lawmakers identify areas where they might find some agreement when the committee begins in earnest to overhaul the tax code, Rep. Charles Boustany (R., La.) said.

"My hope is that we will lay those foundations and build a working relationship with other members of the committee so we can get an agreement in place on how to proceed with tax reform," Mr. Boustany said.

Several top Republican lawmakers have pointed recently to the Ways and Means Committee as the proper venue for any major changes to the tax code, rather than the tense negotiations to raise the federal government's $14.29 trillion debt ceiling.

The conventional wisdom is that Republicans and Democrats are hopelessly divided over taxes. I don't think that's quite true: Many members of both parties are open to streamlining the tax system by closing loopholes. And, after the ethanol vote, it's clear that quite a few Republicans are open to raising overall revenues at the same time.

The House Ways and Means Committee is going to be holding meetings on tax reform throughout the summer. If the budget negotiations achieve a temporary deal to raise the debt ceiling, expect the real budget debate to unfold in part through a new national debate over tax reform.