Thursday, October 26, 2006

What if Democrats Win? Spotlight on Taxes


By Martin Vaughan, CongressDaily© National Journal Group Inc.Wednesday, Oct. 18, 2006
This is the third in a series of articles exploring the impact on key committees and issues if Democrats win control of the House and Senate in November’s elections.
Democrats are stressing that, if given control of the House or Senate, they will seek to work with Republicans to improve the tax code in areas where there is bipartisan support for change -- for instance, on making the research and development tax credit permanent or in reining in the alternative minimum tax. “We need to pick some issues initially where we can come together and build trust,” said a senior House Democratic tax aide. In doing so, they hope to deflect attention away from GOP charges that Democrats would make wholesale changes like reversing some of the tax cuts passed in Bush’s first term. This is in part tactical -- Republicans in the run-up to Nov. 7 have been getting lots of mileage out of the bogeyman of coming Democratic tax increases.
Over the past several years, House Republican leaders have turned back a host of proposals passed by the Senate that would have raised taxes on specific industries by closing what Democrats say are loopholes in the code.

But it also reflects a recognition that if Democrats manage to take control of one or both chambers, they will be dealing with slim majorities and an unsympathetic White House. That means larger priorities like tax simplification and reform will be impossible without bipartisan cooperation, and makes the more partisan goal of rolling back tax cuts that expire in 2010 less likely.
“Let’s tackle tax cuts that people are in danger of losing right now,” said an aide to Senate Finance ranking member Max Baucus, D-Mont., noting that the one-year cost of extending taxpayer protections from the alternative minimum tax rises to $45 billion in 2007. House Ways and Means ranking member Charles Rangel, D-N.Y., has repeatedly stressed a desire to deal with the AMT problem on a permanent basis. And R&D tax credit permanency -- rather than the current practice of extending the research credit on a year-by-year basis -- remains a major goal for Baucus. Democrats will have other tax priorities they will want to pursue. In an Oct. 5 speech at Georgetown University, House Minority Leader Pelosi pledged to make the child tax credit more generous for lower-income families and “dramatically increase the tax deductibility of college tuition.”
But Democrats are pledging to return to pay-as-you-go budgeting rules, meaning all those initiatives will have to be offset by spending cuts or tax increases -- and therein lies the rub for the business community and anti-tax advocates. “All of us are going to be hanging onto our checkbooks and alerting our members to be very careful, because there will be an effort to find new sources of revenue,” said Jade West, senior vice president for government relations at the National Association of Wholesaler-Distributors.
Democratic aides said a Democratic majority would seek to offset some of that cost by tightening the “tax gap,” taxes that are owed but go uncollected each year, a figure estimated by the IRS to reach as high as $345 billion per year. But some Democratic sources would not rule out reversing the benefits of the Bush tax cuts for the wealthiest taxpayers before those tax cuts expire in 2010. House Democratic alternatives to GOP tax bills in recent years have proposed raising taxes on households with annual income over $500,000 per person.
“I can see that in the picture, because we’ve proposed that several times to pay for these things,” said one House Democratic tax aide. The aide also noted that the sooner such a change is enacted, the more revenue will be generated for goals like AMT relief, as the 2010 expiration of those tax cuts approaches.
But more fearsome for downtown lobbyists is the prospect of targeted tax increases affecting the oil and gas, financial services and other industry sectors. Over the past several years, Ways and Means Chairman Thomas and House Republican leaders have turned back a host of proposals passed by the Senate that would have raised taxes on specific industries by closing what Democrats say are loopholes in the code. A recent example is the one-time, $5 billion tax on oil inventories, known as the “last-in first-out,” or LIFO accounting change, some Democrats will likely seek to revive. Pelosi vowed to “repeal current tax incentives that serve to export American jobs overseas,” in the Georgetown speech.
“House Republicans under Thomas have been a thumb in the dike” with regard to such proposals, said West. “With the House in Democratic hands, one could expect a very different dynamic where offsets are concerned.”

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