How Obama and Congress could work together on tax reform in 2016

There is a list, albeit a small one, of goals that President Barack Obama shares with Congress for policy reform on taxes and other issues.

Carolyn Kaster/AP/File
President Barack Obama speaks during a news conference in the White House Brady Press Briefing Room, in Washington (December 18th, 2015)

Can Congress and President Obama, who have battled over policy for seven years, reach consensus over key tax and other issues in the months leading up to the 2016 election? To ask the question is practically to answer it, but it is worth taking a closer look at the policy dynamics.

Start by building a Venn diagram that describes the priorities of Obama, House Speaker Paul Ryan, and Senate Majority Leader Mitch McConnell. They are obviously not the only players, but in a heated election year, the goals of these leaders will take on outsized influence--at least until the parties settle on their Presidential nominees.

The area of overlap among their priorities is very small. And time is short. The House, for example, plans to be in session for only about 110 days this year. Still, the leaders do share a modest to-do list.

They all want to pass individual appropriations bills (for the first time in years)—a task that should be a bit easier since Congress already has agreed to overall spending levels for this year. They may try to tackle bipartisan criminal justice reform. A workout bill for Puerto Rico is possible. And Congress may approve the Trans-Pacific Partnership trade bill, though McConnell has warned that may not happen until after next November’s elections.

It is harder to see much progress on big tax issues. Lawmakers may deal with tax extenders again, though, thanks to the December budget deal, the number of expiring provisions will be much smaller than in the past. There is no chance that Congress will pass broad-based tax reform. Obama seems uninterested and the gulf among lawmakers on key issues is unbridgeable in 2016.

Ryan has vowed to include a tax code rewrite as part of a “bold, pro-growth agenda” that he promises for 2016. But it is unclear whether he’ll offer a full-blown plan. It is highly unlikely that just months before an election GOP lawmakers would unilaterally endorse any proposal that eliminates popular tax subsidies, especially since it is certain to go nowhere.

Some still hold out hope for business-only tax reform, and there have been quiet staff-level talks on this issue for many months. But the odds of anything happening in 2016 are extremely remote. Ryan and Senator Chuck Schumer (D-NY), who is in line to become his party’s Senate leader in 2017, continue to talk up the possibility. However, their public optimism may be as much a fundraising ploy as a prediction.

Any business tax reform faces huge hurdles. Would it raise the same amount of money as current business provisions or cut taxes? Would it apply to all firms or just C corporations? If it does apply to pass-through firms, how would Congress manage what would be a substantial gap between rates paid by business owners (including sole proprietors) and salaried workers? If reform excludes pass-throughs, how will lawmakers explain to local businesses that they will not be getting a rate cut while large public companies will?

That leaves some form of international tax reform that would apply to U.S.-based multinationals.  Such a bill could be aimed at tax-motivated inversions, where a U.S. firm reduces its taxes by marrying a   foreign partner. Such a measure is possible, but because Democrats want to curb the practice directly while Republicans want to make it less attractive by lowering rates, it is hard to imagine what a consensus bill would look like.

In the end, policy will play second-fiddle to politics. Ryan’s real goal this year is to turn the fractious House GOP caucus into a cohesive group that can drive a realistic conservative agenda. McConnell wants to preserve a tenuous GOP majority in the Senate. And Obama wants to elect a Democratic majority in the Senate and, of course, another Democrat to replace him in the White House.

Already, these hard-nosed political calculations threaten to overwhelm any residual interest in reaching policy consensus. Within days, Obama will attempt to curb gun sales through executive action, a step sure to enrage Hill Republicans.  Within weeks, Congress will send the president a bill repealing his signature health reform--a measure he will promptly veto. And once the parties choose their presidential standard bearers, this partisan tension will only worsen.

Of course, outside events can derail even modest initiatives. A wave of terrorism, a foreign policy crisis, or an unexpected economic meltdown can easily suck all the oxygen out of even the best-planned agenda.  But even if the world outside the Beltway remains placid, don’t expect much action from Congress this year.

This article first appeared on TaxVox.

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