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Tax Policy After The Midterm

Posted: Nov. 16th, 2010  |  By Forbes

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Leonard Bickwit Jr.

In the 111th Congress, tax legislation, like most other areas of congressional policy-making, has been dominated by partisan conflict. The results of the midterm elections, however, are likely to intensify that conflict and provide significant additional obstacles to the movement of the Obama administration's tax agenda.

That agenda, as described in the president's Fiscal Year 2011 budget, has focused largely on providing "tax relief to working families while asking corporations and high-income families making more than $250,000 to pay more after the economy recovers from the effects of the recent recession." The administration bases this position both on fairness considerations and on its view that tax relief to working families is an effective way to address the nation's economic problems, since working families will be more inclined than wealthy taxpayers to spend incremental dollars and increase consumer demand.

By contrast, Republican party leaders have routinely argued that the best solutions to the country's economic problems are to provide tax relief across the board, to reduce government spending and the nation's debt, and to allow the private sector to function without fear of new taxes and regulations. Put these positions side by side, and the basis for legislative conflict between the parties can be clearly seen.

But that conflict existed prior to the midterms. What has been added as a result of the elections are two new obstacles that the administration will now have to confront in advocating its proposals. First, the administration will not be able to enact any proposal without convincing the House Republicans to support it. House Republicans will have an absolute veto over all administration initiatives.

Second, in most circumstances the administration will not be able to enact its proposals without the support of a significant portion of the Senate Republican caucus. In the current Congress the administration and supporting Senate Democrats have been able to enact tax-related legislation by persuading a small number of Senate Republicans to help them reach the 60-vote cloture threshold of the Senate. Examples include the 2009 stimulus bill (with the support of three Republican votes), the 2010 bill providing additional assistance to states and localities for education and Medicaid (with two Republicans), and the recently enacted small-business tax and lending bill (with two Republicans in support). It will now be necessary to obtain at least seven Republican votes to invoke cloture--a much taller order.

On top of that, it should now be harder for the administration to persuade individual Republicans on these matters. Republicans are keenly aware that a number of their incumbents were defeated in primaries this year by Tea Party and other conservative activists, based on the incumbents' votes supporting administration proposals.

The implications of all this for tax legislation are that the administration's tax proposals are far less likely to prevail than in the past two years. Corporate tax increases that the administration supports, such as international tax proposals that the administration argues will keep U.S. jobs safe at home, will have much longer odds against their enactment than in the past. Put another way, such proposals and other administration revenue-raising provisions will be less likely to serve as "offsets" for tax-reduction proposals under the statutory pay-as-you-go system and more likely to be replaced with spending reductions advanced by Republicans.

That is not to say that compromises between the parties on tax policy will be impossible to achieve. A few potential areas of agreement could well emerge with respect to the following:

--Matters where both parties believe it is in their substantive and political interest to compromise. The best example here could relate to an extension of the Bush tax cuts. The administration has argued that the cuts should be permanently extended only for families earning over $250,000, while the Republicans would make the cuts permanent for all income levels. Recently, however, there have been indications that the two sides may agree on a temporary extension for all taxpayers for at least one year. It appears that neither party wishes to prevent--and thus be viewed as responsible for preventing--any extension at all from occurring.

--Matters that are not completely partisan. The president recently indicated that he would seek cooperation with Republicans on energy matters, which presumably would include energy tax matters. Positions on such issues often break down along geographical, rather than partisan, lines.

--Matters that Republicans have historically supported. An example might be the president's proposals on capital equipment expensing and bonus depreciation. The president has reached out to Republicans on this issue, indicating that it is "an idea business groups and Republicans ... have supported for a very long time."

--Matters on which there is genuine consensus. The wild card in all of this, of course, is the forthcoming recommendation of the president's deficit reduction commission. If any of the tax proposals considered by the commission can command 14 of the 18 commission votes, thus allowing the proposals to be included in a report of the commission, they will be likely candidates for enactment. But don't expect too many of those.

In sum, the midterm elections should breed increased partisan tension on tax policy and will undoubtedly create additional political and procedural issues for administration initiatives. Yet in spite of those circumstances, there may still be areas where bipartisan compromise is possible.

Leonard Bickwit Jr. is a partner at the law firm of Miller & Chevalier Chartered in Washington, D.C.

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