Tax Article - Tax Reform? Wait 'Til Next Year

Bush administration leaders vow to fight on for comprehensive tax reform two months after the President's Advisory Panel on Federal Tax Reform issued its final report. However, delays and Hurricane Katrina killed any momentum for legislation, according to Washington lobbyists, while the collapse of Social Security reform left the administration risk-adverse to another failed policy effort.

Administration Still Interested, Says Snow

Treasury Secretary John W. Snow had promised to study the final report and issue his own recommendations to President Bush by the end of 2005. By December, however, Snow refused to adopt a deadline because the issue is so complex. He repeated his stance in a January 5th speech in Washington, D.C., to the U.S. Chamber of Commerce, emphasizing, in prepared remarks, that "we're not going to rush the reform process, because America deserves a tax code that meets the president's goals for fairness, simplicity, and economic growth."

However, few lobbyists expect a comprehensive bill similar to the Tax Reform Act of 1986 in 2006. "On a scale of one to 10, no more than a six, [and] that may prove to be optimistic," predicted National Taxpayers Union Vice President Pete Sepp. The possibility is "about zero," claimed American Enterprise Institute Resident Scholar Kevin Hassett. There is no chance for comprehensive tax reform in this Congress, former House Speaker Newt Gingrich, R-Ga., said at a January 4th speech in Washington.

What happened? Delaying the panel's final report twice, so that it came out on November 1st instead of the summer, killed momentum for a bill, speculates Sepp, as did the focus on Hurricane Katrina and the subsequent federal spending that raised the national debt. President Bush also scaled down his agenda after his Social Security reform effort fizzled, said Hassett and Sepp. Democrats would have filibustered a popular reform bill to deprive Bush of a political victory, believes Americans for Tax Reform President Grover Norquist. "This is not a period like 1986, where Democrats were willing to work with the GOP," he explained.

The real battle will be over extending tax cuts made by the Economic Growth and Tax Relief Reconciliation Act of 2001 and Jobs and Growth Tax Relief Reconciliation Act of 2003, according to Gingrich, Sepp and Hassett. Congress will sway back and forth on what to include, but will almost certainly pass an alternative minimum tax patch, Sepp predicted. Lawmakers may also extend the reductions on capital gains and dividends, especially if the stock market gets jittery, he added. Expanding the amount of money Americans can sock away in 401(k)’s and individual retirement account (IRA) plans while eliminating income limits could garner some Democratic votes, Norquist suggested. He also noted that "every donor to Democratic campaigns has a 401(k) and an IRA."

He added that an increase in the amount businesses could expense may also win Democratic support because it is immediate and would win them votes for the 2006 general election.

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Administration officials have already signaled that they will not press for fundamental reform, U.S. Chamber of Commerce Vice President Bruce Josten said. In fact, Snow failed to mention tax reform during several television appearances on January 6th, while repeatedly calling on Congress to make prior tax cuts permanent. "We are gonna make sure America isn't hit with a tax increase," he remarked on CNBC.

So what does the future hold? The GOP may try again if they make substantial gains in the 2006 general election, said Hassett. It is too early to write off tax reform, Josten added. "Three years is a long time in a town where political memories are a nanosecond," he stated.

White House Tax Reform Outlook

Notably absent from the Bush administration's list of top domestic priorities in 2006 is tax reform. Instead, White House Press Secretary Scott McClellan, at a January 3rd press briefing, said that keeping the U.S. economy strong and helping to rebuild the devastated Gulf Coast region in the aftermath of Hurricane Katrina are President Bush's highest priorities. Regarding the likelihood of delaying tax reform proposals until 2007, McClellan acknowledged that 2006 is an election year and that "politics will come into play" in determining the legislative agenda.

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