Bloomberg
July 09, 2013

Democrat Embraces Republican in Unlikely Big Tax Law Bid

Senator Max Baucus and Representative Dave Camp, wearing pink hairnets, yellow hard hats and three-quarter-length baker’s aprons, ducked beneath a river of warm hamburger buns in Minnesota as they searched for a path around the obstacles they’re encountering in Washington.

The bipartisan duo is trying to rewrite the U.S. tax code in the next 18 months by leveraging their friendship into legislation. They brought their chummy rapport -- Democrat Baucus introduced Republican Camp as his “buddy” and “comrade” -- to Baldinger Bakery in St. Paul and 3M Co. (MMM)’s headquarters in Maplewood yesterday at the start of a national tour intended to take them outside the Washington bubble.

The roadshow, burgers-and-beer lunches and what Baucus described as the “glue and trust” of their relationship are part of the pair’s attempt to overcome tax-policy inertia. The partisan divide over tax increases, the challenge of removing breaks embedded in the economy and the lack of an immediate deadline conspire to make the task difficult.

“What they’re doing is necessary for success, but I’m not sure if it’s sufficient for success,” said Keith Hennessey, a lecturer at Stanford University’s business and law schools who was an economic adviser to President George W. Bush. “The debate oversimplifies the legislative task that needs to be undertaken and therefore it makes it seem like tax reform should be easier than it actually is to do.”

Multinational Corporations

U.S. multinational corporations such as 3M are counting on the Baucus-Camp effort to enact a lower corporate tax rate and changes to international tax rules. Companies are holding about $2 trillion in untaxed profits outside the country in part because of tax rules.

Baucus, of Montana, and Camp, of Michigan, have been the top two tax-writers in Congress since January 2011, and they’ve been building toward this final push. An agreement may lead to limits on individuals’ mortgage-interest deduction and a simpler system that would prompt fewer people to use tax preparers.

Failure to agree could require a restart after January 2015, when the two will give up their positions as leaders of Congress’s tax-writing committees. Baucus plans to retire, while Camp faces a Republican Party term limit for committee chairmen.

Camp, who turns 60 today, has pledged to get the Ways and Means Committee he leads to approve a bill by the end of 2014. He wants to lower individual and corporate tax rates without raising additional revenue.

‘Stumbling Block’

Baucus and other Democrats want a revenue increase, and that divide is a “stumbling block to even getting started,” Senator Mitch McConnell of Kentucky, the chamber’s Republican leader, said today.

“So I don’t see how we get anywhere, candidly,” he said. “The point of this ought to be to make our country more competitive, not to give the government more revenue.”

Senate Finance Committee Chairman Baucus, 71, is working with Orrin Hatch of Utah, the panel’s top Republican, on a blank-slate approach. They’ve given other senators until July 26 to explain the need for every tax break or risk its elimination.

“It puts pressure on those who want to justify adding back a deduction or a credit or what-not,” Baucus said.

Through joint hearings and weekly meetings over the past few years, the Camp-Baucus relationship deepened, making the tour that started yesterday possible.

Dinner Date

They had dinner in Minnesota July 7 while their Washington-based staff was stuck in airline delays. Yesterday, they marveled at flexible transparent film at 3M’s Innovation Center and took questions from employees who wanted to know why the legislative process appeared so broken.

The visit to Baldinger gave them a chance to crack a few jokes -- Camp said the yeasty-smelling factory meant the “aroma of tax reform” was in the air -- and tour a 125-year-old family-owned business that pays taxes through its owners’ individual returns.

The bakery, which supplies McDonald’s Corp. (MCD) restaurants, benefited from one of the tax breaks Baucus and Camp may consider eliminating.

Baldinger used a New Markets Tax Credit for investments in struggling areas to help finance its $30 million, two-year-old facility, which produces more than 5,000-dozen buns an hour on an assembly line that’s far more efficient than the process for making tax law.

Revenue Dispute

Camp and Baucus have inevitable differences on policy, including some that surfaced yesterday.

Baucus, like most Democrats, wants a new tax code to raise more money to help reduce future budget deficits. Camp doesn’t.

Camp is aiming for a 25 percent corporate tax rate, down from the current 35 percent, the highest in the world. Baucus called that a “bit of a stretch” yesterday.

Camp favors a territorial international tax system that would lighten the burden on companies’ overseas income. Baucus hasn’t endorsed the idea.

Still, Camp told 3M employees “it doesn’t take a scientist” to figure out that compromise will have to happen, based on the divided control of Congress and the White House.

“There will be partisan differences, but ultimately there will be a bipartisan bill,” Camp said.

1986 Model

Through a series of one-day trips, Baucus and Camp are attempting to build the kind of public momentum that existed in 1986, when Republican Senator Bob Packwood of Oregon and Democratic Representative Dan Rostenkowski of Illinois rewrote the tax code.

Baucus and Camp have created a shared website and Twitter handle -- www.taxreform.gov and @simplertaxes -- and make a point of touting their bipartisan partnership as the best hope for tax changes.

Today, the two held a second burgers-and-beer lunch at a bar near the Capitol with eight fellow House and Senate members. It was a bipartisan gathering -- those attending included Wisconsin Representative Paul Ryan and Georgia Senator Johnny Isakson, both Republicans, and Connecticut Representative John Larson and Maryland Senator Ben Cardin, both Democrats.

As in 1986, the Senate and the White House belong to one party and the House of Representatives is held by the other. The solution offered by the tax-writers is similar -- broaden the tax base, lower rates, make the code simpler.

Change Roadblocks

The significant obstacles faced by Baucus and Camp include President Barack Obama’s limited interest in tax changes, the partisan divide in Congress, and their own reluctance to repeat the 1986 model that shifted some of the tax burden from individuals to corporations.

“People were ready for it” in 1986, said Thomas Hungerford, director of tax and budget policy at the Economic Policy Institute in Washington, which advocates for low- and middle-income workers. “Congress was ready for it. The administration was ready for it. And I just don’t see that now.”

Before Baucus and Camp can get to the negotiating table, each will likely have to produce a bill.

Closing industry-specific loopholes goes only so far. Any significant rate reduction would require curtailing some of the most popular tax breaks, such as the deductions for home-mortgage interest and business interest payments.

NASCAR Racetracks

“Everybody thinks that tax reform is all about getting rid of accelerated depreciation for NASCAR racetracks,” Hennessey said. “All the money is in the big five or six or seven provisions.”

Baucus must get Senate Republicans interested enough in his plan to set aside their ability to block legislation. He also needs to avoid alienating his fellow Democrats, who have a 54-46 majority in the chamber and produced a budget he voted against in part because he believed it would raise taxes too much.

“I get nervous about where Senator Baucus is coming from,” said Senator Bernard Sanders, a Vermont independent who caucuses with Democrats and said tax changes should produce “substantial” additional revenue, including from corporations. Sanders spoke with reporters today after Baucus briefed the Democratic caucus on his plans.

Senate Majority Leader Harry Reid, a Nevada Democrat, said he supports Baucus’s approach.

More Opportunities

“We’re going to have to have a lot more opportunities for senators to talk about this and we’ll do that,” Reid said today.

Camp must navigate a bill through the fractious House Republicans or look for Democratic votes there.

Baucus said he’s heard a “few naysayers” dismissing their chances and said he will prove them wrong.

“At least they’re talking to one another,” said Hungerford, a former analyst at the Congressional Research Service. “From where I’m sitting, it looks like a cordial relationship. Still, I think that things are very different in the House and in the Senate.”

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