Based on some further development and feedback I’m going to update last week’s post on how Senate Democratic plans for the budget resolution interact with the prospects for enacting significant tax reform. My core projection is still quite pessimistic, but I think I have a better feel for the legislative dynamics.

Update: During debate on H.R. 8, the New Year’s tax increase law, House Chairman Camp made clear that he will move through the House a bill that is revenue-neutral (after H.R. 8 took effect). This makes a “preconferenced” Baucus-Camp-Hatch bill highly unlikely, and means that any agreement would come only in a conference after the House had passed a revenue-neutral bill. Such a conference report might or might not be revenue-neutral, but at least the first stage of the process would not increase revenues.

Sen. Schumer’s Senate reconciliation for “tax reform” won’t happen.

A couple of friends pointed out that a Senate reconciliation bill can only be produced by the House and Senate passing identical versions of a budget resolution in the form of a conference report. This means that Senator Schumer’s push last week for a 51-vote procedural path to enacting a tax bill can happen only if the Senate Democratic majority reaches an agreement on deficits, debt, and aggregate spending and tax levels with a Republican majority House. This leads me to four obvious conclusions that I missed in last week’s post:

  1. Senate Democrats can’t force the Senate to pass a partisan tax bill through reconciliation without House Republican acquiescence on creating the process to do so.
  2. Even in the unlikely scenario where House Republicans and Senate Democrats agreed to create such a reconciliation “vehicle” for tax reform, they couldn’t do so unless they also agreed on the other components of a budget resolution: deficit and debt levels, spending and tax aggregates, and the aggregate size of changes to major entitlement programs and discretionary spending.
  3. Therefore, Senator Schumer’s prediction early last week of a 51-vote reconciliation path for Senate passage of “tax reform” has almost no chance of happening.
  4. And if tax reform is even to pass the Senate it will need bipartisan support. For Chairman Baucus this means he needs Finance Committee Ranking Member Hatch early in the process, and House Ways & Means Committee Chairman Camp after/if the Senate passes a bill.

In support of this, I’d note that in a press conference last Wednesday Senator Schumer did not push the reconciliation idea, instead describing it as something that Chairmen Murray and Baucus would work out. I’ll bet that idea is now dead.

Baucus v. Schumer

I think Sen. Schumer

[and President Obama] wants the Senate to pass a tax bill that raises aggregate taxes and moves tax policy pretty far to the left. For individuals this would mean different tax preferences based on a taxpayer’s income as well as higher capital gains and dividend tax rates. For firms it would mean higher total corporate taxes, higher taxes on flowthrough businesses (subchapter S firms, LLCs, limited partnerships), and a move toward worldwide taxation of overseas income for C corps. Corporate tax rates would vary based on the type of business—higher for the major oil companies, lower for renewable energy firms and high-tech manufacturing. The tax code would become [even more of] a vehicle for industrial policy and the higher total taxes would finance continued increases in government spending.

Tax reform has traditionally meant broadening the tax base and lowering rates and reducing economic distortions by creating more horizontal equity in which taxpayers in similar situations are treated the same by the tax code. In the Schumer[/Murray/Reid/Obama?] view a new tax bill would introduce as many new tax preferences as it eliminates, it would favor certain industries and firms over others, and it would finance more government spending. That is not tax reform, that’s liberal tax policy labeled as tax reform.

I think Chairman Baucus wants to do bipartisan tax reform while the President and Senator Schumer want to raise taxes on certain individuals and businesses. Those are fundamentally different goals. Chairman Baucus’ path is, in theory, something that could be worked out with his Republican House counterpart Chairman Camp. The Obama/Schumer path leads to partisan stalemate once again.

I also think Chairman Baucus recognizes that Republicans will not agree to large net tax increases. Whatever his own fiscal policy preferences, I think Mr. Baucus knows that a Senate budget resolution that requires a tax bill to raise “too much” revenue will make enactment of a bipartisan tax reform bill much more difficult.

At the same time, I think Chairman Camp may feel a similar degree of flexibility on aggregate revenues. In mid-2011 and even as late as December, the Boehner-led House Republicans were willing to agree to higher total revenues if accomplished through a tax reform bill they liked. Now the policy and political wounds of the recent tax increase law are still fresh, and so while Chairman Camp might still be willing to compromise and agree to higher total taxes, most of his House and Senate Republican colleagues would now reject them, even if they were part of tax reform. I think Mr. Camp would be more optimistic than I am about the additional revenues that could be generated from a pro-growth tax reform (I assume a pessimistic +$100-$150B over 10 years), and he might think that reformed tax code and stronger IRS enforcement could raise revenues without constituting “tax increases” in a traditional sense. Nevertheless, I think he’d have a difficult time rallying Republican support for any tax reform bill that contained a net revenue increase. With the last fight and the new law the President has used up any prior Republican flexibility on total tax levels.

It appears that Chairmen Camp and Baucus are trying to find both an aggregate revenue level and a set of tax reforms where they (and Finance Committee Ranking Member Hatch) can agree. At the same time, their respective caucuses will continue to argue and fight over whether or not total taxes can go up. On the Senate side Budget Chairman Patty Murray and Democratic thought-leader Senator Schumer are staking out the left flank for a likely budget resolution and tax reform stalemate. House Republicans and Senate Democrats are unlikely to pass a common budget resolution, to agree to a common aggregate revenue level for a tax bill, or to create a fast-track legislative process to enact such a bill. Messrs. Camp, Baucus, and Hatch will have to see whether they can substantively agree and build a bipartisan legislative coalition in support of true tax reform after a bruising set of partisan fights on the sequester, continuing resolution, and budget resolution. That will be very hard to do, and it’s why I’m still pessimistic about the prospects for real tax reform.

What to watch

  • Watch Chairman Baucus, who was notably absent from the Reid/Durbin/Schumer/Murray budget press conference last week. Do you see signs that he is arguing (behind Democratic closed doors) for a budget resolution that allows him to pursue bipartisan tax reform? Do you see signs of a Schumer vs. Baucus argument on total tax levels?
  • Watch in-cycle Senate Democrats during the budget resolution process. Are they onboard with the Schumer strategy? Are they OK voting for a budget resolution that raises taxes a lot, given that it’s unlikely to be worked out with the House in a final version?
  • Watch the President, Press Secretary Jay Carney, and Mr. Lew if he’s confirmed. If they support the Murray/Schumer argument instead of the Baucus view, then they are not looking to enact tax reform, but instead to position themselves for what they anticipate will be a[nother] aggressive policy debate that will likely result in a legislative stalemate.
  • Watch for any signs of Camp-Baucus-Hatch cooperation as they try to forge an alliance while being pulled apart by their respective caucuses.

 (photo credit: ajagendorf25)