Is There Any Chance Congress Will Pass Business Tax Reform Next Year?

In the run-up to next week’s congressional elections, Republicans are saying that if they win control of the Senate, they will try to pass business tax reform as part of an ambitious “we can get things done” agenda. Is there any possibility that a GOP-controlled Congress could rewrite the business provisions of the tax code?

The chances are not zero. But the odds are very long.

In effect, Republicans have a choice: They can go to war with President Obama over federal spending and the Affordable Care Act or they can try to build bipartisan consensus around an issue such as business tax reform. Similarly, Obama has his own choice: He can declare open war with congressional Republicans by using executive action to rewrite immigration laws or he can try to build bridges with the GOP.

Grand Bargains are so 2011. The only path to tax reform in 2015 would require a GOP Congress and Obama to call a truce on irresolvable issues such as spending and immigration and decide to do one big thing for the next two years. And that could be business tax reform.

In a nice piece by Politico’s Jake Sherman, Rep. Kevin McCarthy (R-CA), the new #2 Republican in the House leadership, laid out perhaps the only roadmap to reform.

McCarthy, who replaced Eric Cantor as House Majority Leader after the Virginia lawmaker was defeated in a primary last spring, never mentioned tax reform in Jake’s story. But he described a legislative strategy that could make it possible.

“No more cliffs,” McCarthy said, harkening back to the never-ending fiscal crises that have paralyzed Washington since 2011. While he did not say exactly what he has in mind, it is easy to imagine: Lawmakers use the coming lame duck session to pass a compromise two-year budget that puts off the automatic sequester spending cuts, modestly trims some planned federal spending, and temporarily restores dozens of now-expired tax breaks.

Such a deal would look much like the agreement Senate Budget Chair Patty Murray and House Budget Chair Paul Ryan cut in late 2013. In effect, it would put off the budget wars until after the next presidential election and give both sides the breathing space they need to address business taxes.

But is such a deal realistic? From the perspective of Tea Party conservatives, it is hard to imagine a greater heresy. Could Republicans, having won control of Congress, temporarily abandon the spending wars? I’d like to be in the room when McCarthy tells Ted Cruz that House Republicans are calling a fiscal truce until 2017.

Yet, as McCarthy suggests, the only alternative is two more years of bloody trench warfare. Democrats will never accept a bill that melds deep cuts in spending with business tax reform that raises no additional revenue. And Republicans won’t support a rewrite that does raise revenue.

Republicans might use the budget process to get such a bill out of the Senate. But few if any Democrats would back tax reform under those conditions and Obama wouldn’t sign it. That would leave Republicans to take the heat for eliminating popular business tax breaks, even if they came in trade for modestly lower tax rates. And all for a bill that is veto bait. It is not going to happen.

Obama has a similar choice. He vowed to unilaterally open the doors to broader immigration after the election. He has already disappointed Hispanic voters by delaying such action once. It is hard to imagine him abandoning that hot-button issue again for business tax reform, which has precious little support among the Democratic base.

With a week to go, pols of both parties are talking up cooperation (and, of course, claiming that the other guy is for continued gridlock). Do they mean it? I don’t think so.

But we’ll know soon enough. If the McCarthy roadmap is any guide, just watch what happens over the next month or so when Congress has to address those tax extenders. That will be the first clue whether Washington is really serious about tax reform in 2015.

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