Last Tuesday the Senate Finance Committee held the first of several planned hearings on tax reform. These hearings are being held in preparation of the 111th Congress, when the Ways and Means and Finance committees will be tasked with re-writing a significant portion of the tax code.

As we’ve pointed out before, fully one-tenth of the tax code either expires in the next couple years or is made up from the marginal tax revenue captured by the individual Alternative Minimum Tax. Producing legislation in one Congress to address both those issues is going to be daunting.

Adding to the scope of the challenge is an increasingly strong chorus of policy makers who argue our corporate tax code is out of whack and hurting our international competitiveness. These advocates, including the current Treasury Department, would like to see the corporate tax base broadened and rates cuts.

And finally, there’s the growing consensus that Congress should address climate change through either a carbon cap-and-trade program or more directly through a carbon tax. The Finance Committee has a hearing planned for April 24th where they will focus on the tax aspects of cap-and-trade. The Congress Budget Office is scheduled to testify.

In past publications, the CBO has estimated the size of a cap-and-trade program at hundreds of billions per year – quite possibly the largest reallocation of wealth in US history. The size alone of such a program warrants our attention. The fact that a carbon cap-and-trade or direct tax is the economic equivalent of a consumption tax on energy also merits consideration. Several of the witnesses at last week’s hearing argued that tax reform in 2009 should include moving from the current income tax approach to a tax on consumption instead.

Expiration of tax cuts, corporate tax reform, and addressing climate change all point to a major re-write of the tax code in the 111th Congress. As Senator Baucus noted:

“The Finance Committee needs to be informed and ready to go in January 2009, and that means we have to work hard now. We have to first understand pretty comprehensively how the system works today. We have to talk about the natural tensions in tax reform, and what actually happens to working families, to American businesses, and to our country’s global competitiveness depending on how we change the code. Even in a year where much won’t get done legislatively, we can build a framework of knowledge on which to review options and proposals when it’s time for tax reform.”


While tax reform is a “next Congress” issue, addressing the Alternative Minimum Tax and the expiration of numerous tax benefits at the end of 2008 is very much a “this Congress” challenge.

We’ve discussed this issue several times before, so we’ll just point out that last week Finance Chairman Baucus and Ranking Member Grassley introduced legislation to extend the AMT “patch” for one year (2008) and other expiring provisions for two years (2009 and 2010).

As with last year, the debate is less about what to extend (there’s broad support for all of these provisions) but rather whether to pay for them and how to pay for them. At this point, there is simply no agreement on these two questions, which could mean the issue gets pushed back past the November elections and into a “lame duck” session in December.