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Max Baucus retires: What next for US tax reform?

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Max Baucus, Senate Finance Committee chairman, has decided to not seek re-election and opinion is divided over whether this announcement improves or hampers the prospects for a comprehensive reform of the US tax code.

With Baucus retiring at the end of next year, Barack Obama in his last term as president, and Dave Camp due to hand over the House Ways & Means Committee gavel in 2014, there is a growing number of men on Capitol Hill with a legacy to build (or who at least might be motivated by leaving a mark to underline their time in office). Given the protracted nature of reform discussions up to this point, such motivation might be necessary to get tax reform truly up and running.

Some argue it will go the other way, with Baucus becoming a lame duck that will lose sway with his peers as quickly as he loses the motivation to complete reform. But without the distraction of gearing-up to a campaign for re-election, and without needing to appease his Democratic colleagues, Baucus could emulate Chris Dodd’s 2010 feat of devoting his attention to drafting the Dodd-Frank Act after announcing his retirement. Whether Baucus uses impending retirement as a springboard from where he can make one last push, or as a means to slowly fade out, will have a large bearing on whether reform is achieved in 2013 and 2014 or beyond.

Confirming his retirement, Baucus said he will serve out his term and “then it will be time to go home to Montana”.

“But, I’m not turning out to pasture because there is important work left to do, and I intend to spend the year-and-a-half getting it done,” added Baucus. “Our country and our state face enormous challenges – rising debt, a dysfunctional tax code...and the need for more good-paying jobs.”

Orrin Hatch, the ranking Republican on the Senate Finance Committee, was unequivocal in his claim that the announcement of the chairman’s retirement would have positive repercussions for the tax reform effort.

“There will be renewed effort on tax reform,” said Hatch. “I think Max will pour everything he has into it now and so will I.”

Camp also spoke of reform when he reacted to the news, emphasising that it will be a focal point during this Congress.

“I look forward to continuing our work to fix the tax code,” said Camp. “Max has made clear that his commitment to comprehensive tax reform that lowers rates and makes the code simpler and fairer for our families and job creators remains a top priority. I couldn’t agree more, and I share his vision for enacting real tax reform this Congress.”

“I actually think it makes tax reform more likely because he will be able to devote - as he said in his statement - his full attention to his responsibilities as chairman,” added Camp, who has repeatedly stressed that getting tax reform pushed through in 2013 is a priority.

Truncated period

Ken Kies, managing director of KPMG’s federal policy group, and former Republican chief tax counsel to the Ways & Means Committee, says this is understandable for a number of reasons.

“His term ends in 2014, so he wants to get everything done in 2013. The President is already, like any second-term president, thinking about legacy and, if they’re smart, they realise the second two years of the second term don’t tend to produce a lot,” said Kies. “The folks that are thinking clearly realise the two-year window for opportunity here is 2013 and 2014, and if it doesn’t get done by then, we’re off until after the 2016 election.”

“It really is a truncated time period,” added Hank Gutman, KPMG principal and former chief-of-staff of the US Congress Joint Committee on Taxation.

This period has become even more truncated with Baucus’ impending retirement and the end of Camp’s term as Ways & Means chairman.

“Questions have been raised as to whether or not his new lame duck status will energise or impede tax reform efforts on Capitol Hill,” said Jon Traub, managing principal, tax policy at Deloitte. “With tax reform at the top of the to-do list for both Baucus and Camp, we can expect to see substantial additional progress on this during the remaining days of the 113th Congress.”

Traub said that despite the enthusiasm of figures like Baucus and Camp, “the hurdles that must be cleared for tax reform to become law are daunting”.

For instance, a major stumbling block is that Democrats and Republicans remain far apart on the fundamental question of whether tax reform should be revenue neutral or whether it should result in deficit reduction.

Traub feels it is “certainly possible” that tax reform will gather momentum on its own, but considers it more likely to succeed “if there is some outside event that compels action”.

“The next action-forcing event to look for will occur later this summer, when Washington confronts yet another battle over raising the debt ceiling,” he said. “If legislation arising from a debt ceiling agreement includes some instructions and procedural protections for tax reform, then the prospects for a Rose Garden signing ceremony in 2014 brighten substantially.”

Whatever the impact of Baucus’ impending departure, some taxpayers are pessimistic about the tax reform efforts coming from both sides of the aisle.

“I have previously expressed my views on the Republican proposals to increase the federal deficit and reduce US employment by lowering the corporate tax rate through base broadening and enacting a territorial tax system financed by an unconstitutional retroactive tax on pre-enactment foreign earnings and profits,” said Jim Ditkoff, senior VP, finance and tax at Danaher Corporation. “But the Obama Administration has some pretty bad tax reform proposals of its own.”

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