GOP quandary: Is a vote to eliminate tax breaks actually a tax hike?

One of the few potential points of bipartisan compromise in the budget stalemate is reining in tax breaks. A Senate vote Tuesday could reveal whether GOP senators are on board.

An expected Senate vote on ethanol subsidies Tuesday represents a test of a larger issue: Can Republicans embrace a view of tax loopholes that finds common ground with Democrats?

If so, that shared viewpoint could help build broader consensus on fiscal reforms designed to bring down federal budget deficits over time. If not, getting to a bipartisan "yes" on any major deficit-reduction would be much harder.

The point at issue goes beyond ethanol and the debate over whether corporations should reap a tax credit for putting the corn-based fuel into US gasoline. The deeper issue is a philosophical one: If Congress takes away a tax subsidy, should that count as a tax hike?

Many Republicans argue that any move that allows more tax revenue to arrive at the US Treasury is a tax increase. Killing the ethanol subsidy is a great idea, many say, but it should be done in a "revenue-neutral" manner, with new tax cuts designed to offset the change.

Others in Congress – including some Republicans – argue that rolling back this kind of spending is a good thing, even if the resulting boost to federal revenues is not offset by new tax cuts.

The poster children of this great tax debate are antitax lobbyist Grover Norquist and Sen. Tom Coburn (R) of Oklahoma.

Mr. Norquist, of the lobbying group Americans for Tax Reform, is pushing Republicans not to allow any new tax revenue to arrive in Washington. The rationale: The basic problem in the federal budget is too much spending, not too little taxes. And if more revenue flows in, Congress will spend it.

Senator Coburn is no lover of high taxes, but he’s backing a bill that would phase out the ethanol subsidies, and thus allow federal tax revenues to rise.

The ethanol vote is just one battle in a much larger budget war: Will fiscal discipline eventually be achieved by spending cuts, tax hikes, or a mix of both. Or not at all.

Currently, federal spending is running at historic highs, with only about 60 cents of tax revenue arriving for every dollar of spending.

But it will be very hard to fix America's long-term fiscal imbalances without a bipartisan deal. Democrats are wary of signing off on any plan to close the whole budget gap through spending cuts, as many Republicans would like to do.

If Republicans move toward the Coburn view and away from Norquist, it could help create conditions for a possible compromise, along the lines of a package proposed by President Obama's bipartisan fiscal commission last year.

That commission called for stabilizing the nation's debt over the next decade, with roughly $4 trillion worth of reductions in projected deficits. The plan included roughly $1 dollar in new tax revenue for every $2 in spending cuts.

Public opinion polls show a public that is not enamored of the budget policies of either party. American voters are willing to see some of both spending cuts and tax hikes as part of an effort to put the nation on sound footing for the future, a number of polls have found, including one new one by the Pew Research Center.

While the two parties have different opinions on economic policy and the size of government, leaders in both parties agree on the to cut spending. They also agree in general on the need to streamline the tax code.

That points to the elimination of tax breaks as a potential bipartisan solution.

"It seems like both sides want to do that," says Diane Lim Rogers, chief economist at the Concord Coalition, a group that supports controlling the national debt. "The big difference is the Republicans are stuck with this no new taxes pledge, the Grover Norquist pledge."

Such choices aren't easy for either side to make. But the alternative may be protracted gridlock – and the risk that the rising public debt sparks a crisis of confidence among investors.

The danger is that every year "our interest payments grow, the risk of a crisis grows," says Maya MacGuineas, who heads the nonpartisan Committee for a Responsible Federal Budget.

In the recent Pew poll, roughly three-quarters of Americans say the budget deficit is a major problem that the country must address now. In addition to cutting spending, a sizable majority say they would support reducing the deficit by raising taxes on high-income Americans and eliminating tax breaks for large corporations.

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