Republican shift on taxes masks divided party

WASHINGTON — When Republicans in Congress say they are willing to put tax revenues on the table in budget talks with President Barack Obama, that offer obscures a divide within their ranks that could thwart a year-end fiscal compromise.

Most Republicans are willing to limit popular income tax deductions as part of a tax overhaul that also lowers rates — a combination they believe will spur economic growth and eventually produce more revenue.

But some are less enthusiastic about simply capping those deductions alone, even on upper-income households as Obama prefers, which would create immediate revenue that can be applied to a broad deficit-reduction package.

Without explicitly drawing lines, House Speaker John Boehner, R-Ohio, has acknowledged that some revenues must be part of any deal if his party expects Democrats to compromise on the other end of the ledger — with cuts to Medicare and other entitlement programs.

“To show our seriousness, we’ve put revenue on the table, as long as it’s accompanied by significant spending cuts,” Boehner said last week, as he and other congressional leaders emerged from their first post-election meeting with the White House. The talks are aimed at averting an economically destabilizing $500 billion in tax increases and spending cuts that would kick in at year’s end without a deal.

The definition of “revenues” will prove key in the weeks ahead.

“Traditional revenues to me means economic growth,” said Rep. Steve Scalise, R-La., the incoming chairman of the House’s influential Republican Study Committee. “If you take away deductions, but you don’t couple that with lower rates, that would be a tax increase.”

And that would be a deal the Republican congressman, and probably many other conservatives, would oppose.

Obama has warned against the Republican preference for relying on economic growth alone – so-called “dynamic scoring” in Washington-speak — to generate more money.

“What I will not do is to have a process that is vague, that says we’re going to sort of, kind of, raise revenue through dynamic scoring or closing loopholes that have not been identified,” Obama said at his own post-election news conference. “And the reason I won’t do that is because I don’t want to find ourselves in a position six months from now or a year from now where, lo and behold, the only way to close the deficit is to sock it to middle-class families.”

For Republicans to even consider new revenue signifies a post-election shift for the party, whose leaders and rank-and-file lawmakers still maintain that Washington’s budget imbalances are a result of excessive spending, not its historically low levels of taxation.

Revenues have been mentioned in past budget battles, but they gained new prominence after Obama was re-elected promising a “balanced approach” of tax increases and spending cuts.

As budget talks head toward the year-end showdown, the revenue debate is drawing scrutiny from anti-tax stalwarts on and off Capitol Hill.

Grover Norquist, the president of Americans for Tax Reform, sparked a war of words last year as Congress considered whether closing a tax break for ethanol manufacturers constituted a tax hike if the new revenue was not used to lower other tax liabilities.

Norquist said yes then, and he says so now, as lawmakers consider changes that could cap itemized deductions for popular write-offs, including mortgage interest and/or charitable giving.

“It would be problematic,” said Norquist, the keeper of the “pledge” most Republican lawmakers have taken not to raise taxes. “If it’s a tax increase, it’s a violation of the pledge.”

Tax policy experts have skirmished for years over the best way to measure the economic impact of changes in the tax code.

Many conservative economists, including some who backed Republican presidential nominee Mitt Romney’s proposal to cap loopholes and also lower rates, suggest economic growth would be sizable.

Others say the result would be difficult to predict and warn that the projected economic growth would be too small to offset the revenues lost from the tax cuts.

Democratic Sen. Charles E. Schumer of New York calls the GOP’s desire to count on growth from lower tax rates “Rumpelstiltskin economics” — akin to spinning straw into gold.

But it is clear that capping deductions would provide immediate revenue and could be engineered to target the wealthy, as Obama prefers, hewing to his insistence that families with incomes above $250,000 should contribute more.

“Paring back those deductions would hit high-income taxpayers hardest,” according to the nonpartisan Tax Policy Center, which is a joint project of the Brookings Institution and the Urban Institute.

At the White House, Democrats and Republicans agreed to draft a broad overhaul of tax and spending policy that could be undertaken in 2013 as part of a potential budget agreement.

Republicans continued to resist Obama’s proposal to raise the top income tax rate, which is now 35 percent. Unless there is a deal, it will automatically revert to 39.6 percent on Dec. 31.

But less clear is whether Republicans will agree that revenue should come from tax changes alone or will maintain it must count on future economic growth.

“We’ve seen a fundamental shift in the positioning of Republicans where they’ve fully embraced a scenario of more tax revenues – but that is far cry from accepting higher statutory tax rates,” said Alex Brill, a research fellow at the conservative American Enterprise Institute and a former economist for House Republicans. “While I firmly agree the growth effects are not zero, I think it’s important to be realistic what the growth effects are.”