The Baucus-Hatch “Blank Slate” Approach to Tax Reform Could Be Revolutionary

By :: July 3rd, 2013

No one quite knows what exactly Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT) mean when they say they will rely upon a “blank slate” as the starting point for tax reform discussions. But done carefully and with political artistry, taking advantage of their unique power, Baucus and Hatch could revolutionize how members of Congress negotiate the future of taxes.

But it’s all in the practice, not the theory. Done right, the strategy could reenergize the tax reform debate. Done wrong, it will be just another dead-end.

The idea of reforming the tax system from a “zero base” or building up from a blank slate is hardly new. And lawmakers always talk about everything being on the table. The challenge is in making it happen.

Baucus and Hatch must accomplish two goals. First, they must shift the burden of proof from those who favor reform to those who would retain the status quo. Second, they must force members to pay for their favored subsidy, denying them the opportunity to pretend it is free.

As a veteran of the Tax Reform Act of 1986, I always emphasize the crucial role of process. Sure, serendipity smiles or frowns unexpectedly on any endeavor, but the ’86 effort took off when Treasury, President Reagan, House Ways & Means Chair Dan Rostenkowski (D-IL), and Finance Committee chair Bob Packwood (R-OR) all put forward proposals that started with specific rate cuts and removal of many tax preferences.

Their plans were all somewhat different, but each changed the burden of proof. Lobbyists won many later battles, but now they were forced to explain why they needed to retain special preferences when others would not be so favored. Moreover, given a fixed revenue target, restored preferences had to be paid for. Lawmakers had to acknowledge that the price of adding back tax preferences was a higher tax rate.

Baucus, ideally with the support of Hatch, can put forward a “chairman’s mark” from which committee members can debate amendments. As both senators have suggested, that mark can be a relatively clean slate. Further, Baucus can require that amendments must not add to the deficit or change his revenue target, effectively requiring members to offer what are called “pay-fors.”

Normally, members debate items one at a time. Each adds a new subsidy without worrying about who pays for it—perhaps those currently too young to vote or the yet-unborn.

In dark times, politicians try to reduce the deficit by figuring out what tax increases or spending cuts will restore order to the budget. But identifying losers is immensely unpopular among voters, and politicians shy away from it. Worse, they blast those from the other party brave enough to provide details.

But if Baucus sets a revenue target at the beginning of this tax reform exercise, the dynamic shifts—from simply identifying winners and losers to explicit trade-offs. Winners and losers march together. With a blank slate or zero base, every restoration of a tax break requires higher rates (even an alternative tax), especially if there are few or no alternative preferences to sacrifice.

This process not only gives new life to a broad rewrite of the tax code but also makes it much easier to reform specific provisions. For instance, tax subsidies for homeownership, charity, and education can be much more effective and provide more bang per buck out of each dollar of federal subsidy. But politicians largely ignore such ideas because they create losers who scream loudly. Thus, the default for elected officials who fear negative advertising and loss of campaign contributions is to do nothing to improve these tax subsidies.

But when the burden of proof changes, a lobbyist can appear to be helping his masters simply by saving a subsidy, even if the net benefit is smaller than in the old law. After all, preserving a preference in some form is success relative to a zero baseline. Of course, as we learned in 1986, this argument grows stronger as the probability of tax reform grows.

Can Baucus and Hatch change the burden of proof and force members to pay with higher rates for the subsidies they want to keep? They can certainly lead their committee and Congress in that direction, but only by specifying precisely a chairman’s mark that sets revenue and rates while slashing tax preferences.

If they do, Baucus and Hatch may force fellow senators to acknowledge that every subsidy must be paid for. And that, in turn, will open a window to design alternative tax subsidies that are fairer and more efficient. This sort of process revolution could remake policy in ways that extend well beyond tax reform.

79Comments

  1. STEVEN J. FROMM, ATTORNEY, LL.M. (TAXATION)  ::  4:55 pm on July 3rd, 2013:

    I would be very, very surprised that such a bill will ever get passed. The ideas are sound but the reality is much different.
    For example, why is there is still an AMT in our code when the 1986 tax act basically gutted tax shelters by introducing the passive loss limitation rules. Tax revenue is why it is still there; if fairness was ever a consideration with these guys the AMT would have been long gone. And this is just one example.
    All I can say to Baucus and Hatch is “Good luck with that!”

  2. Robert  ::  5:36 pm on July 3rd, 2013:

    Zero-based tax reform went nowhere when Simpson/Bowles proposed it and it will go nowhere now. It’s not the starting point that matters but the end product. True tax reform doesn’t start with zero-based budgeting, it ends with zero-based budgeting.

  3. Michael Bindner  ::  2:19 pm on July 4th, 2013:

    The pay-for idea has merit. I hope they go for it. Getting Obama on board, however, is problematic, as his tax reform goals were met on January second when the ATRA was passed. Indeed, the deficit is smaller than expected – although this may be due to people realizing capital gains prior to the January 1 rate increase. I doubt that the current bump in revenue will continue.

    We must also be wary of unintended consequences. For example, retaining the second mortgage interest deduction in 1986 led to the practice of “cashing out equity” which in large part led to the Financial Crisis of 2008. That is the first thing that should be fixed.

    I made further comments about this topic on Howard Gleckman’s TaxVox post and Bruce Bartlett’s Economix column.

  4. Steve Hounig  ::  7:55 am on July 6th, 2013:

    I have devised a 12 point plan to reboot our Internal Revenue Code I call it the Nickel, Dime, Quarter Tax. The starting point is that ALL ( yes, every last one of them) personal deductions, credits, phase outs and limitations must end in favor of much lower rates of 5, 10, and 25%. (Hence the name “Nickel, Dime, Quarter) If any deductions remain, the K street lobbyists stay in the game. They must be sidelined. So the Chairman’s mark should get rid of all tax expenditures. It’s the only way to avoid getting bogged down. It would take guts Senator Baucus. Lets see what you are made of.

    If you would like to learn more about my proposal, go to Nickeldimequartertax .com.

  5. Kellyj  ::  11:08 am on July 8th, 2013:

    This all starts with the false premise that keeping our own money is considered a “subsidy” by the Government.

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