When House Ways and Means Committee chairman Dave Camp, a Michigan Republican, introduced a major tax reform proposal at the end of February, the entire tax policy world in Washington was set into motion. I have friends who lobby on tax issues who claim they did not sleep the two days after the release, working through consecutive nights to read the bill, confer with colleagues, and conceive of a plan to counter what’s in the bill that impacts their clients.
At first glance it appears to be useless wheel-spinning. No one in D.C. operates under the illusion that tax reform is happening anytime soon: John Boehner has signaled indifference to convening a vote on any reform, and Harry Reid openly mocks the notion of reform. The current administration’s coolness to the issue is pretty obvious as well to anyone paying attention.
If tax reform ever happens it will be with a new chairman of the Ways and Means Committee, as well as a new president and a new majority leader of the U.S. Senate. That’s 2017 at the earliest. And there’s no reason to think that Paul Ryan or whoever succeeds Camp will feel himself bound in any way by this proposal, or that some future Senate Finance Committee will pay any heed to this report. Three years is a long time, and the economic conditions and political realities are likely to be quite different from today.
Then why are lobbyists working with such urgency to kill something that’s already dead? While lobbyists have always excelled in scaring their clients over remote possibilities, the real reason is that they fear falling victim to what is known to the cognoscenti as a “Guarini.”
A bit of background: In the world of “pay as you go” budget rules that Congress has ostensibly operated under in some form since the 1990s, tax relief for one industry or constituent must be offset by something that raises revenue by the same amount—typically the closure of a tax break of some sort. A “Guarini” occurs when a revenue-raiser originally proposed by a member of Congress to pay for one set of tax reductions or spending plans gets hijacked to pay for an entirely different one.
The term is named for a former Ways and Means member, Rep. Frank Guarini, a New Jersey member from the 1980s and early ’90s who yelled particularly loudly when Dan Rostenkowski made off with some clever revenue-raisers that Guarini had identified to pay for Rostenkowski’s pet projects rather than Guarini’s.
When former Ways and Means chairman Charlie Rangel proposed what came to be known as the “Mother” bill (as in “the mother of all tax reforms”) in 2007, he complained bitterly about being Guarini’d by Speaker of the House Nancy Pelosi, who refused to let the bill come to a vote on the floor, instead choosing to use various tax pay-fors from Rangel’s bill to finance other legislation.
The key to creating a pay-for is to locate a tax break that has relatively little support and whose disappearance is unlikely to anger other committee members or important lobbies.
Finding revenue-raisers that no one objects to is an impossible task, of course, but in the days before we got to trillion-dollar deficits the members of the Ways and Means Committee and its Senate counterpart, the Finance Committee, devoted a great deal of effort to finding such things, which they would then hoard for themselves, to be used when the moment was right to try to get another pet project through the committee.
The greatest pay-for of all time was the “black liquor” ruse. Congress had created a tax incentive to encourage companies to use waste product to produce energy, part of a gaggle of energy-efficiency provisions rolled into a large tax bill. While the original score suggested this would have only a minimal impact on revenues, an IRS staffer one day declared that the almost ancient practice of paper companies using the waste byproduct from creating paper—so-called black liquor—qualified for the tax credit. No one on the tax-writing committees had conceived of this when writing the legislation. The Joint Committee duly placed a score on the new interpretation of the provision of nearly $7 billion a year. That meant that closing the provision (although the paper companies fought furiously to keep it) would generate $70 billion over the next decade that could be used to pay for other tax provisions.
In reality the low-hanging fruit dried up even before the financial crisis, when members began paying for one-year extensions of various tax breaks (such as the annual exercise of passing tax “extenders”) with permanent changes in the tax code. And it illustrates the very real danger facing industries and corporations with Camp’s DOA tax reform: A tax increase that would hurt them might have been included in this bill for the purpose of paying for lower rates. Staffers might borrow the idea to pay for some other reform that has less for them to like than the current one—or to pay for something else entirely.
While Camp’s bill may be going nowhere, it’s not because he didn’t do his homework. Camp has devoted his entire chairmanship to accomplishing reform: The committee held dozens of hearings on various topics related to reform, producing several well-received white papers on various intricacies related to the tax code. He and his staff have met with anyone who had an interest in tax reform, and Camp went on a highly publicized trip this summer with Finance Committee chairman Max Baucus across the country, talking to denizens outside the Beltway with an abiding interest in tax reform.
This diligence suggests that at least some of the revenue-raisers included in the bill to help pay for lower marginal rates have already passed muster with at least one group of Republicans—those on Camp’s committee—along with a few Finance Committee Democrats. That a tax on big banks or a reduction in the cap on the mortgage interest deduction from $1 million to $500,000 could potentially get through the Ways and Means Committee opens up a range of possibilities for entrepreneurial members.
With tax reform going nowhere fast, what’s to keep members from borrowing these pay-fors to pay for something else—like infrastructure improvements, a permanent solution to the Medicare “doc fix” that Congress agonizes over every year, or some other tax or spending proposal that somehow unifies the White House, Senate, and House?
A new list of revenue-raisers is officially in play, and tax lobbyists will be staying up late to fight over them while tax reform languishes.
Ike Brannon is a senior fellow at the George W. Bush Institute and president of Capital Policy Analytics, a consulting firm in Washington, D.C.