January 29, 2014
While the President’s State of the Union address last night covered a range of topics, it did little to move the needle on tax reform. The full transcript of the speech can be seen here, but the President’s only mention of tax reform came about 20 minutes into his address:
Both Democrats and Republicans have argued that our tax code is riddled with wasteful, complicated loopholes that punish businesses investing here, and reward companies that keep profits abroad. Let’s flip that equation. Let’s work together to close those loopholes, end those incentives to ship jobs overseas, and lower tax rates for businesses that create jobs right here at home.
Moreover, we can take the money we save from this transition to tax reform to create jobs rebuilding our roads, upgrading our ports, unclogging our commutes — because in today’s global economy, first- class jobs gravitate to first-class infrastructure.
What the President is describing is a rehash of his corporate-only tax reform proposal from 2012. That plan proposed to eliminate a number of tax expenditures in order to pay for an overall reduction in the corporate rate, while increasing taxes overall to pay for new roads and other infrastructure projects.
The President’s call for lower corporate rates is laudable, but it completely ignores the millions of pass-through businesses that pay their taxes using individual rates. As our friends at the National Association of Manufacturers observed in their response to the SOTU:
With his focus solely on corporate tax reform, the President totally ignores two-thirds of manufacturers—companies organized as “flow throughs,” like S corps and pay taxes at the individual level. These companies are a critical part of the manufacturing ecosystem and dealing them out of the tax reform effort could leave them with a higher tax bill.
The issue of corporate-only reform has been floated by this White House in the past and was met with hostility from the business community and on the Hill, particularly by Chairman Camp. As in the past, we expect a similar reaction to this iteration and remain focused on comprehensive tax reform that addresses both individual and corporate rates.
Outlook
Tax reform might have made an appearance in the SOTU last night, but the President’s tone signals that it’s not a priority. Marty Sullivan nailed it when he told Politico:
As in the past there is no indication he is willing to expend any political capital on these causes. Without forceful presidential leadership there is zero chance tax reform will be moving in this Congress and, barring some seismic shift in attitudes, next to zero chance of reform in the next Congress. For Republicans the Obama approach has too many deal breakers. Most notably, the President wants tax reform to raise revenue up front while the Republicans insist that tax reform be revenue-neutral. One of the biggest myths in Washington is that Republicans and Democrats agree on tax reform. The reality is they are gridlocked.
Meanwhile, of the two Congressional Members who were spearheading the effort – Senate Finance Committee Chairman Max Baucus, and Ways and Means Chairman Dave Camp – the former is departing Congress to serve as Ambassador to China, while Camp is expected to step down as Chairman at the end of the year.
Add to the mix the inherent challenges in eliminating favored tax breaks, and the fact that Democrats and Republicans haven’t even decided whether to lower rates or raise revenues, and the prospects for tax reform look even more limited.
But is tax reform dead? The simple answer is that no policy idea is ever dead in Washington. The President’s speech last night made that clear. It was full of policies that have been lying around for years.
Beyond tax reform, the SOTU included little that was useful to taxpayers. The Tax Policy Center blog sums it up this way:
What other changes in the tax code did Obama propose?
There are a couple of new ways to restructure retirement savings. Obama will create a new myRA (shorthand for my retirement account) to encourage working people to begin savings through Roth-type Individual Retirement Accounts. In a fact sheet accompanying the speech, the White house said Obama would also propose reducing tax benefits for retirement accounts for high-income households.
The president will also propose a new tax credit for alternative energy biofuels–a bit of what my Tax Policy Center colleague Gene Steuerle likes to call tax “deform.”
Finally, the president’s speech was notable for what it did not say. Reducing the budget deficit and reforming entitlement spending for programs such as Medicare, Medicaid, and Social Security seem to have fallen off his radar screen.
So tax-free Treasury bonds for low income workers and higher taxes on savings for high income ones. Not exactly an aggressive agenda. What about extending the R&E tax credit, or bonus depreciation, or Section 179 expensing, or the 5-year built-in gains holding period? All those items expired at the end of last year, and the business community is eager to see them renewed. But to the White House, they might as well not exist.
So as with tax reform, if Congress is going to make any progress on tax extenders or other tax policies this year, it’ll have to move forward without the help of the Administration. None of this should come as a surprise. Aside from its ability to redistribute wealth, this White House has always treated tax policy with a certain degree of nonchalance. They like the revenues, but don’t appear too concerned about how they get them.