Hatch Says Tax Reconciliation Instructions in Budget would ‘Poison the Well’ for Bipartisan Tax Reform
In Speech On The Senate Floor Utah Senator Says, “Make No Mistake, If The Senate Majority Pursues This Course Of Action, It Will Poison The Well For Tax Reform, Making It All But Impossible.”
WASHINGTON – With Senate Democrats expected to unveil their first budget blueprint in nearly four years this week, Senate Finance Committee Ranking Member Orrin Hatch (R-Utah) said including reconciliation instructions to the Finance Committee to raise taxes through a so-called overhaul of the tax code would “poison the well” for bipartisan tax reform.
“Make no mistake, if the Senate majority pursues this course of action, it will poison the well for tax reform, making it all but impossible,” said Hatch in a speech on the Senate floor. “When my friends on the other side of the aisle talk about eliminating so-called loopholes for the sole purpose of raising revenue, they are either talking about raising taxes on the middle class or they are proposing changes that will have no meaningful impact on the deficit.”
“If the goal is to construct political talking points and raise relatively insignificant amounts of revenue by going after politically convenient targets – jet owners, oil companies, private equity firms, and the like – you can do that by eliminating a handful of so-called loopholes,” Hatch said. “But, that isn’t the stated goal of the President, nor is it what my colleagues on the Budget Committee talk about when they say they want to pursue quote-unquote tax reform through reconciliation. No, instead, they talk about reducing deficits and debt and attaining fiscal sustainability. Well, they can’t do that by focusing efforts on tax provisions that only benefit the wealthy. The money simply isn’t there.”
Below is the text of Hatch’s full speech delivered on the Senate floor today:
Mr. President, it is no secret that our tax code is in dire need of reform. Though there are differences of opinion about how best to fix our tax code, I don’t think there’s anyone in this chamber who would argue in favor of keeping our current code as-is.
As I’ve said before, I believe there is, for the first time in many years, real momentum to get something done on tax reform this year. The leaders of the tax writing committees – on both sides of the aisle – have expressed a desire to move forward on tax reform. And, there is real, bipartisan support in both the House and Senate.
This is going to be difficult, Mr. President. There’s no question about it. It’s going to be hard to form and maintain a coalition in favor of a set of reforms that will simplify the current tax code and promote economic growth. It’s going to take a lot of hard work and it’s going to take people from both parties to get it done.
But, I think we can succeed.
However, last week, it was disheartening to hear the Chairwoman of the Senate Budget Committee talk about the possibility of including instructions for tax reform in a budget reconciliation package.
This news was discouraging for a number of reasons.
First and foremost, reconciliation is, by its very nature, a partisan process.
In the few instances in recent history when reconciliation resulted in bipartisan legislation, there was bipartisan support at the outset. That simply isn’t the case with this proposal.
If the Budget Committee goes this route, it will needlessly inject partisanship into a process that, if it is going to have any chance of success, must be bipartisan. There is simply no way to pass a purely partisan tax reform package with the current makeup of Congress.
Make no mistake, Mr. President, if the Senate majority pursues this course of action, it will poison the well for tax reform, making it all but impossible.
I would urge my colleagues on the Budget Committee to resist this temptation. If they really want to see tax reform succeed, they should let the tax-writing committees in both the House and Senate do their jobs.
Another concern I have is that the statements by the Budget Committee Chairwoman make it unclear whether she’s arguing in favor of tax reform or simply in favor of raising taxes. My suspicion is that she’s talking about the latter.
It has become more and more common for my friends on the other side of the aisle to argue in favor of simply eliminating so-called tax loopholes in order to raise revenue, and then calling that process quote-unquote tax reform.
Indeed, the President used this very same tactic in the State of the Union. He stated his support for “comprehensive tax reform,” but he talked almost exclusively about using the process to raise more revenue.
Some of my colleagues have made similar arguments here in the Senate.
Well, Mr. President, that isn’t tax reform at all.
Tax reform, as it has been traditionally understood, is a process of eliminating certain preferences in order to broaden the tax base and lower the rates.
This is how you simplify the tax code. This is how you make it more efficient and fair. And, most importantly, it’s how you make the tax code more conducive to economic growth.
If you’re eliminating select deductions and preferences only to pocket the revenue for future spending, you’re not reforming the tax code, you’re simply raising taxes.
So, if the Budget Committee is about to report a budget that includes instructions for tax reform, I can’t help but assume that the process will be more about raising revenues than it will be about actually fixing our broken tax system.
Once again, Mr. President, if that’s the case, the Budget Committee would be injecting partisanship into what has, up to now, been a mostly bipartisan effort.
At the same time, they’d be perpetuating the myth that our tax code is full of so-called loopholes that benefit only the rich. I’ve spoken about this at length here on the Senate floor, but the message bears repeating.
The term we hear most often to describe deductions and preferences in the tax code is “tax expenditure,” which implies that, by allowing people to keep more of their money, the government is somehow engaging in spending. Indeed, the President has even gone so far as to refer to deductions and preferences that reduce an individual or business’s tax burden as “spending in the tax code.”
As I said before, when many of my Democratic friends talk about tax reform, they’re usually talking about eliminating these provisions in order to raise revenue. Far too often, they refer to these provisions as loopholes.
For example, the Budget Committee Chairwoman was quoted last week as saying that her committee is looking at closing loopholes as a means of reducing the deficit.
Let me make one thing clear. Describing tax expenditures as loopholes is simply and deliberately inaccurate.
A loophole is something that Congress did not intend, and, in general, we would eliminate loopholes once we learned they were being improperly exploited.
Tax expenditures, by contrast, are placed by Congress into the tax code deliberately.
For example, the largest tax expenditure is the exclusion for employer-provided health insurance and benefits. Another one of the largest tax expenditures is the home mortgage interest deduction.
Whether these expenditures benefit someone in the middle class or one of the so-called rich, they are not loopholes. These aren’t tax schemes that some lawyer or accountant concocted to help his clients game the system. These are broad-based tax incentives used by many Americans.
Favorable tax treatment of tuition expenses could be labeled spending through the tax code, or a “loophole,” but you don’t hear many people using those terms. Rather, my friends on the other side of the aisle use the term “loophole” to describe things they don’t like, and “investment” to describe things they do like. That is about picking winners and losers, and not about true tax reform.
Even if you disagree with a particular tax expenditure, it is simply dishonest to refer to it as a loophole. An honest debate requires recognition that all of these tax expenditures were designed by Congress with economic or social goals in mind and are not tax escapes created by accident or sneaky abuses of the tax code.
Furthermore, if we’re going to talk about eliminating tax expenditures, we need to be clear about who benefits from them. If you look at a list of the biggest tax expenditures, you’ll find that the ones most often cited by my colleagues on the other side – like bonus depreciation on corporate jets, or tax breaks for oil companies – are not among them.
What you’ll find is a list of deductions that disproportionately benefit the middle class. That being the case, if my colleagues are serious about significantly reducing the deficit by eliminating deductions and so-called loopholes, they will necessarily be talking about raising taxes on the middle class. Indeed, if they only focus on those provisions that benefit the so-called rich, they won’t be able to raise enough revenue to make a serious dent in the deficit.
For example, let’s take a look at the mortgage interest deduction. According to the Joint Committee on Taxation, only 35 percent of the benefit of the mortgage interest deduction goes to taxpayers with incomes over $200,000 a year. The remaining 65 percent goes to taxpayers who make less than $200,000 a year.
So, by a ratio of almost two-to-one, the mortgage interest deduction benefits the middle class, not the so-called rich.
We can also look at the Earned Income Tax Credit, another large tax expenditure. This is a fully refundable tax credit, meaning that taxpayers can receive it whether they pay income tax or not. High income earners receive no benefits from the Earned Income Tax Credit.
The story is the same with the Child Tax Credit, which is limited to lower and middle income earners. None of it goes to taxpayers with higher incomes. Likewise, all education credits go to taxpayers making less than $200,000 a year.
The list goes on and on.
Deductions for real property taxes, medical expenses, child care, and student loan interest – all of them predominantly – if not exclusively – benefit people making less than $200,000 a year.
Benefits from some other large tax expenditures are distributed almost proportionately between higher and middle income earners. One such provision is the state and local income and sales tax deduction.
According to JCT data, 55 percent of the benefit of this deduction goes to taxpayers making more than $200,000 a year, and 45 percent of the benefit goes to people making less than $200,000.
This expenditure accounts for about half of the revenue loss attributable to itemized deductions and, since the benefits are slightly more in favor of those with higher incomes, it would likely be a target for a quote-unquote tax reform exercise designed to raise revenue.
However, much of the burden of limiting or eliminating this deduction would still fall on the middle class.
It’s also interesting to note that, this past December, the New York Times editorial page, which is usually very much in synch with the philosophy of the Democratic Party, recommended caution when considering limits to this deduction.
I ask unanimous consent that a copy of a New York Times editorial from December 6, 2012, titled “Keep the State Tax Deduction” be entered into the record.
So, once again, Mr. President, when my friends on the other side of the aisle talk about eliminating so-called loopholes for the sole purpose of raising revenue, they are either talking about raising taxes on the middle class or they are proposing changes that will have no meaningful impact on the deficit.
If the goal is to construct political talking points and raise relatively insignificant amounts of revenue by going after politically convenient targets – jet owners, oil companies, private equity firms, and the like – you can do that by eliminating a handful of so-called loopholes.
But, that isn’t the stated goal of the President, nor is it what my colleagues on the Budget Committee talk about when they say they want to pursue quote-unquote tax reform through reconciliation.
No, instead, they talk about reducing deficits and debt and attaining fiscal sustainability.
Well, they can’t do that by focusing efforts on tax provisions that only benefit the wealthy. The money simply isn’t there.
So, if we’re not going to cut spending, and if our deficit-reduction efforts are only focused on eliminating so-called tax loopholes, then the middle class is the target.
We need a different approach.
We need tax reform that focuses on eliminating preferences in the tax code, not for the purpose of raising taxes, but for lowering the rates and encouraging economic growth. This, unlike the idea of tax reform advanced by some of my friends on the other side, will benefit the middle class.
That, Mr. President, is what tax reform is all about. Anyone talking about raising taxes or closing loopholes for the sole purpose of generating revenue isn’t talking about tax reform.
For these reasons, I hope the Budget Committee will go a different route. I hope that they will let the bipartisan tax reform efforts underway in both the House and Senate run their course.
If they don’t, if they hijack the process in order to once again raise taxes on the American people and to vilify Republicans as being the “party of the rich,” we won’t see tax reform happen this year or, quite likely, any year in the near future.
Mr. President, our nation is facing a number of challenges. In addition to mounting debts and deficits, our economic recovery remains on a slow and tenuous path.
We need people who are willing to make difficult choices in order to solve these problems.
That will mean structural reforms to our entitlement programs, which are the main drivers of our debts. And, once again, that will mean real, meaningful changes to our tax code, which continues to be an obstacle to sustainable economic growth.
As I stated, I do believe that there are people on both sides of the aisle who recognize these needs, particularly when it comes to tax reform. Sadly, there are also those who would rather campaign on these problems, attacking anyone who proposes real solutions while offering only political talking points in return. That, Mr. President, is not what the American people deserve. I yield the floor.