Top Dem strategist's reform plan: $500 billion in new taxes

 Sen. Charles Schumer (N.Y.), the Senate Democrats’ chief political strategist, sees a joint budget resolution between the Senate and House as the key to raising another $600 billion in new tax revenues.

Democratic leaders say that will be the minimum amount needed from tax reform to stop automatic spending cuts to social and defense programs mandated by the 2011 Budget Control Act. The revenue would come from limiting deductions and closing loopholes and would affect only people earning above $250,000.

President Obama has set the goal that additional deficit-reduction legislation should consist of a balanced or dollar-for-dollar ratio of spending cuts to tax revenues. Schumer's contribution is to call for a joint budget resolution as the best vehicle to accomplish this target.

The biggest obstacle will be getting House Republicans to sign on to any joint agreement that sets a target for raising taxes.

A Schumer aide acknowledged it will be difficult to get Republicans to agree to a joint budget resolution that calls for tax reform to raise $500 billion to $600 billion in new tax revenues.

“I agree that it’s challenging, but it’s not more challenging than the negotiation over replacing the sequester, where we’re asking them to swallow $500 [billion] to $600 billion in revenues,” the aide said, in reference to House Republicans.

Schumer reasons it will be easier to get House Republicans to agree to raise half a trillion dollars in new tax revenue as a part of tax reform than as a straight offset to the sequester of funds from domestic and defense programs.

Simplifying the tax code has long been a Republican priority, and some of the revenue gained from eliminating special tax breaks could be used to lower income tax rates, another GOP goal.

Schumer’s plan to enact tax reform through the budget process would ensure additional tax revenues would be matched by an equal amount in spending cuts. This would give Republicans further incentive to strike a budget deal.

House Republicans say they have little interest in adopting a joint budget resolution that raises taxes.

“We need to cut out-of-control Washington spending to get our economy growing and creating jobs,” said Michael Steel, spokesman for Speaker John Boehner (R-Ohio). “The sooner Washington Democrats face that reality, the sooner we can begin to make progress.”

In the short term, Schumer needs to convince Senate Finance Committee Chairman Max Baucus (D-Mont.) and Budget Committee Chairwoman Patty Murray (D-Wash.) to go along with his vision.

Schumer could have a particularly tough time selling the idea to Baucus, who might not be thrilled by the prospect of reforming the tax code within the confines of budget reconciliation rules.

“He is committed to doing comprehensive tax reform but not convinced that reconciliation is the best way to accomplish it,” said a Senate Democratic aide, in reference to Baucus.

The advantage of negotiating a joint budget resolution is that it would include “reconciliation” language instructing committee chairmen to meet specific revenue-raising and spending-reduction goals. It would allow Democrats to pass tax reform with a simple majority of votes in the Senate.

Baucus, however, may chafe at being restricted by the Budget Act’s Byrd Rule and its implications for one of his top priorities, corporate tax reform. The Byrd Rule would interfere with corporate tax reforms that raise revenue in the 10-year budget window but lose revenue in the ensuing decades.

Some liberal-leaning policy experts say the revenue-raising effect of tax reform could be exaggerated without the stricture of reconciliation instructions from a Senate-House budget conference agreement.

“There are a lot of ways that corporate tax reform can be gamed that would be very costly in the long run,” said Chye-Ching Huang, a senior tax policy analyst at the Center on Budget and Policy Priorities.

The Byrd Rule, which applies to legislation passed under reconciliation protection, would pose a problem for tax reform that generates revenues in the short term but drains federal coffers beyond the coming decade.

This could prove problematic to proposals to switch to a territorial tax system, a reform on the lobbying wish list of multinational companies. Switching to a territorial tax system would eliminate taxes on overseas business profits but would likely create a short-term bump in federal revenues by imposing a relatively small tax on profits returned to the United States, Huang said.

The Budget Act’s Byrd Rule also requires that all elements of tax reform affect the deficit. Therefore, revenue-negligible changes, such as changing tax-filing dates, may be ruled out of order.

“Technical changes that don’t produce a budgetary effect could be a problem,” said Joel Friedman, vice president for federal fiscal policy at the Center on Budget and Policy Priorities. “Sometimes they do a technical corrections act or include technical provisions that have a negligible [budgetary] impact.”

Despite the complications of passing tax reform under budget reconciliation orders, Schumer thinks it provides advantages.

It would give the chairmen of the Senate and House tax-writing committees fast-track authority to move bills meeting a specific revenue target.

Schumer told The New York Times that reconciliation is “a tactic we need to go on offense.”

Obtaining reconciliation instructions would not be easy.

Murray and House Budget Committee Chairman Paul Ryan (R-Wis.) would have to forge a joint budget resolution. This is made even more difficult by Ryan’s pledge to pass a budget eliminating the budget deficit within 10 years. Democrats say the cuts needed to reach such an ambitious goal are not acceptable.

But Schumer believes Republicans have strong incentive to compromise.

Budget reconciliation language would direct the chairmen of the Senate Finance and House Ways and Means committees to reform the tax code and achieve a revenue goal.

Schumer thinks that’s the best strategy for turning off the sequester, a mandate adopted in 2011 to cut domestic discretionary and defense programs by $1.2 trillion over the next year.

Republicans vow they will not turn off the sequester unless the cost of doing so — $12 billion per month — is offset.

Democrats say any offset to the sequester must be divided equally between spending cuts and revenue increases, which means Republicans must agree to about $600 billion in tax increases to erase the sequester.

“The Senate budget would call for tax reform yielding x amount in revenues. And the House budget would call for zero in revenues. The budget negotiations would become the negotiations to replace the sequester,” said a Schumer aide. “Once we agree on something, we deliver the revenues to turn off the sequester.

“We can use the conferencing of the budget resolution as the vessel for achieving the revenues to pay down the sequester,” the aide added.

The joint budget resolution could also call for Medicare reforms and using the chained CPI formula to curb the cost of Social Security benefits. These entitlement reforms combined with tax reform would give Republicans political cover to accept tax increases — or at least more cover than if tax increases were merely packaged as an offset to the sequester.

Schumer has been an outspoken proponent of raising tax revenues through tax reform.

Schumer says tax reform cannot be revenue-neutral, as it was in 1986, the year Republicans want to use a template for this Congress.

“Our needs are different from 1986 and we cannot take the same approach we did then,” Schumer said in an October speech to the National Press Club.

Schumer then argued that the government needs to raise revenue from tax reform to reduce the deficit.

Baucus agrees with Schumer in principle. He said in a speech to the Bipartisan Policy Center in June that tax reform should raise fresh revenues to reduce federal deficits.

“Tax reform is a once-in-a-generation opportunity,” he said. “We can cement America’s pre-eminence.”

Murray will consult with Baucus before endorsing Schumer’s plan to raise new tax revenues through budget reconciliation.

“She’s not going to agree to the process without first working with members of the [Budget] Committee and Chairman Baucus on the specifics,” said Eli Zupnick, Murray’s spokesman. “She’s not ruling out that option, but she’s not going to commit to any specifics before working with other members.”