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The New Normal

Congress is underperforming to a new low. And with an election looming, don’t expect improvement. But is there a case for last-minute tax reform that hits brokers in an appeal to voters?

By  Joel Wood

I’m not much for quoting The Washington Post, the paper we D.C. Republicans love to hate. But the paper nailed it on December 18, commenting on how Congress failed even to live up to the low regard in which the American people already held it. “It wasn’t just that lawmakers didn’t do much in 2011,” the Post editorialized, “it was that they didn’t do much in a year in which the economy continued to struggle, the nation’s collective anxiety soared and, for the first time in modern memory, our fiscal foundations seemed genuinely shaky.”

As Congress limped out of town in December, conventional wisdom held that 2012 could be marked by equally unproductive political gridlock. Senate Republican leader Mitch McConnell, R-Ky., has long held that the GOP’s top legislative goal is to defeat President Obama. Don’t expect the party to lose sight of that mission in a presidential election year.

Is there even a chance of major bipartisan legislation this year? The best case I’ve heard for it came in a small breakfast meeting in mid-December with—you guessed it—Senator McConnell.

The man who could well be the Senate majority leader in 2013 reminded us that three horribly unpalatable circumstances are going to collide at the end of 2012. First among these is that automatic budget cuts—mostly in defense and Medicare—will begin next January. The failure of the “super committee” to reach a deficit-reduction deal triggers the imposition of $1.2 trillion in long-term cuts starting in 2013. Democrats will hate the Medicare cuts, and Republicans (and the Pentagon) will hate the defense cuts.

The second circumstance will be the expiration of the Bush-era tax cuts. Preservation of those cuts will be the top GOP fiscal priority.

The third is that the debt ceiling is going to have to be raised again. Far too many members of Congress were willing to risk default on government debt in 2011. But the American public was not amused. As the Post put it: “If the showdown over shutdown left Americans with a sour taste in their mouths, the fight over whether to raise the nation’s debt limit made them downright nauseous.”

For those reasons, McConnell argues that major tax reform in 2012 is not as unlikely as one would think. He says the fear of all the bad stuff slated to occur at the end of the year could be sufficient motivation for both parties to approve, collectively and preemptively, some sort of comprehensive tax reform.

House Ways & Means Chairman Dave Camp, R-Mich., has already started a series of hearings that could set the stage for such reform. It’s been 25 years since the last round, and there are lots of reasons why a balanced package might allow both parties to forego the campaign histrionics and get it done. The clock, however, is an enemy. Even Ronald Reagan’s deal with then-Speaker Tip O’Neill, D-Mass., and then-Ways and Means Chairman Dan Rostenkowski, D-Ill., took a couple of years to hatch.

Broad-based tax reform sounds good, of course, until you’re the one whose ox is being gored. As in every legislative accomplishment, there are winners and losers. The big loser in the Reagan-era tax reform was the commercial real estate industry. Everyone agreed that there were abusive real estate tax shelters, but some in that industry assert that the baby got thrown out with the bath water.

Commercial insurance brokers will have to stay on guard in any massive tax bill, as plenty of influential Republican leaders are hostile to tax breaks for employer-sponsored health coverage. As a stand-alone measure, that Republican sentiment couldn’t survive a vote. But in a broader context, especially as employers are exasperated with the growing number and cost of mandates and regulations, it is worrisome.

The libertarian Cato Institute is leading the charge in ending employer-sponsored coverage, and it can count luminaries as varied as Sen. John McCain, R-Ariz., House Budget Committee Chairman Paul Ryan, R-Wis., and Sen. Ron Wyden, D-Ore., as philosophical champions.

Certainly the life insurance industry, many of whose products are fully dependent upon tax preferences, could come under scrutiny. The tax code favors life insurance by excluding death benefits from taxation and by permitting life insurance premiums to be invested on a tax-free basis. The latter tax benefit is called tax-free inside buildup. It is of particular value for the holders of permanent life insurance policies such as whole life or universal life policies. Even the administration of George W. Bush proposed to whack inside buildup.

There are many examples of industries that doze while Congress makes sausage and then pay the price in the fine print, particularly when big tax bills are negotiated in the middle of the night. We at The Council will guard the interests of commercial insurance brokers, as there are great risks to tax reform. Still, the public would be well served were Congress to engage in a robust debate and reach a conclusion, as Sen. McConnell suggests. Just don’t hold your breath. As The Washington Post concluded: “What 2011 proved is that failure has become the new normal on Capitol Hill.”

Wood is The Council’s senior vice president of Government Affairs.


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