Wednesday, December 25, 2013

Senators Take ‘Blank Slate’ Approach to Tax Reform

After working on bipartisan tax reform for the past three years, the Senate Finance Committee's leaders have said they want to start with a blank slate.

Chairman Max Baucus and the committee’s ranking member, Sen. Orrin Hatch, sent a letter to their fellow lawmakers Thursday asking for their input by July 26 on how to reform the tax code, as they’re “now entering the home stretch.”

Baucus, D-Mont., and Hatch, R-Utah, told their colleagues “now it is your turn” to give your ideas and “partnership to get tax reform over the finish line.” Both said they want to complete reforming the tax code in this Congress.

To ensure “that we end up with a simpler, more efficient and fairer tax code, we believe it is important to start with a ‘blank slate’—that is, a tax code without all of the special provisions in the form of exclusions, deductions and credits and other preferences that some refer to as ‘tax expenditures,’” the two write. “This blank slate is not, of course, the end product, nor the end of the discussion.”

The senators went on to say that “some of the special provisions serve important objectives.” Indeed, they said, “some existing tax expenditures should be preserved in some form. But the tax code is also littered with preferences for special interests.”

To clear out all the unproductive provisions and simplify in tax reform, Baucus and Hatch said they “plan to operate from an assumption that all special provisions are out unless there is clear evidence that they: help grow the economy, make the tax code fairer, or effectively promote other important policy objectives.”

Hatch and Baucus asked that lawmakers submit legislative language or detailed proposals for what tax expenditures meet the above mentioned tests and should be included in a reformed tax code, “as well as other provisions that should be added, repealed or reformed as part of tax reform” by July 26. “We will give special attention to proposals that are bipartisan,” they said.

The two senators explained in their letter that the "blank slate approach would allow significant deficit reduction or rate reduction, while maintaining the current level of progressivity." The amount of rate reduction “would of course depend on how much revenue was reserved for deficit reduction, if any, and from which income groups,” they said.

The specter of a tax code stripped of "special provisions" is stoking worries in much of the financial sector. Cities and other localities have been nervous for some time about the effects of a possible end to the muni bond tax exemption.

Brian Graff, CEO of the American Society of Pension Professionals and Actuaries, says the senators’ blank-slate approach means that to begin the tax reform process, “the tax deferral incentive for retirement savings is to be thrown out along with every other tax incentive in the Internal Revenue Code that represents permanent lost revenue.”

But Graff said that while ASPPA “appreciates the senators’ acknowledgement that some tax incentives should be preserved — and we believe the incentive for retirement savings is clearly one of them … we are disappointed that there is no recognition that the tax incentive for retirement savings is a deferral, not a true ‘tax expenditure,’” he said in a statement.

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Tens of millions of workers, Graff continued, “count on their employer-based retirement plans, and it is the tax incentive that powers these programs. In fact, the primary factor in determining whether or not a worker is saving for retirement is whether or not they have a retirement plan at work.”

The benefits of this deferral incentive “are very real,” Graff said, “and the revenue that would be gained by eliminating it is not. Every dollar of retirement savings excluded from income today will be included as income when it is paid out in retirement. Treating the retirement savings income deferral like a permanent exclusion is terribly misleading, and could lead to bad policy decisions.”

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Check out Repeal of Muni Tax-Exempt Status Would Devastate Counties: Report on AdvisorOne.

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