Tax Reform Prospects

Just about every tennis player of a certain age – and every serious tennis buff – knows of Ken Rosewall.  Despite losing some of his best years to a period when professionals were barred from the major tournaments, Rosewall, an Australian born in 1934, compiled an incredible record.  He won eight “grand slam” singles tournaments, and in his prime and on his day was widely considered almost impossible to beat.

Ray Ruffels (2)

In contrast, only the true tennis buff – of a certain age – has heard of Ray Ruffels.  Ruffels, another Australian, born in 1946, evolved into a doubles specialist, notably mixed doubles.  In 1978, when Billie Jean King had just about reached the zenith of her remarkable career and sought a 20th Wimbledon championship to surpass the lifetime record of 19 long held by Elizabeth Ryan, she chose Ray Ruffels as her mixed-doubles partner to do it.

Ironically in the nascent Australian tennis madness of the late 1950s and early 1960s, there were few quality public courts.  Serious players had to build their own behind their homes.  Rosewall and Ruffels were good friends, and often would visit each other’s homes to practice and play.  The story goes that in these private matches, Ken Rosewall never beat Ray Ruffels.  But in major tournament play, and despite being 12 years younger, Ray Ruffels very rarely beat Ken Rosewall.  Somehow, when the cameras were focused and the money was on the table, Ken Rosewall always could find the steel in his spine to withstand the pressure.  Ray Ruffels couldn’t.

Graceful transition to tax policy:  As they declared in their April 8 opinion column in the Wall Street Journal, House Ways & Means Committee Chairman Dave Camp (R-MI) and Senate Finance Committee Chairman Max Baucus (D-MT) have begun to collaborate on a tax reform bill.  As required by the Constitution, this bill, if it in fact proceeds into the legislative process, must originate in the House.

And therein lies a cautionary tale.

Chairman Camp’s process appears to be conscientious and fair.  He has invited Ways & Means Democrats to participate.  He has created bipartisan working groups to map out various aspects of tax policy – including effects on particular industries or on investment in general, retirement, education finance, and so on.  (I was privileged to be invited to speak to one of the working groups in an informal session earlier this week.)

Still, given their differences, the two parties have an enormous mountain to climb to achieve agreement.  Various observers have pointed out that the word “revenue” does not appear in the Baucus-Camp op-ed column.  Thus, a fundamental question about broad tax legislation today – should it contribute new and additional revenues to achieve deficit reduction, or should it be “revenue-neutral” – has not yet been resolved.  And though the two Chairmen agree that a new tax code should be as progressive in its distribution of the burden as the current one, that can be a difficult standard to apply or even to measure when the new system is changed fundamentally.

But in the spirit and intellectual rigor of the discipline of economics, let’s assume that the House Ways & Means Committee can agree internally and privately on a bill.  It is time to go public and take the bill to the floor for a vote.  If that bill meets the standard of “comprehensive” reform enunciated by the two Chairmen, it will eliminate many preferential provisions in the current law – in order to close special-interest loopholes, and pull in large corporations that pay zero tax, to cite two of the failings of the current law that the Chairmen identify in their Wall Street Journal column.  Clearly, the interests that benefit from such provisions do not see them as illicit.  They used their influence and their persuasiveness to make the case that such incentives were (and they will argue, still are) needed to make the nation productive and competitive in the world economy.  Those firms and individuals will not go down without a fight, and they by definition had the political moxie to get their provisions in the law in the first place.

Suppose that you are a Member of the House, and you have heard from strong interests far and wide that would prefer to keep the tax code pretty much the way it is.  And some of those interests might well speak for special tax provisions – the home mortgage interest deduction, the charitable contributions deduction for your local hospital and houses of worship – that your own rank-and-file constituents believe are in their personal interest.  Still, you are convinced in your heart of hearts that the fundamental change before you is in the long-run best interest of the nation.  Are you willing to put your House seat on the line to vote those convictions?

An old friend from the policy wars pointed out recently that there will be a strong subtext to those first public votes on a tax reform bill.  Is the vote before you the real thing – the major tournament, with the money on the table – or is it just a backyard exercise?  After you take on every powerful interest that is dead set against the legislation, will there be any chance that the bill actually will become law?

In other words, can the House – controlled by one party – trust the Senate – controlled by the other party, and of a very different mind on many issues – to take up the bill for which you have put your political life on the line?

A bit of history:  In 1993, the Clinton Administration pressed the large Democratic Majority in the House to pass a major deficit-reduction package.  Inevitably, that bill gored any number of powerful oxen, and the House Democrats were understandably nervous.  Many voted against the bill – in fact, so many that it appeared likely to be defeated.  At the last moment, two Democrats changed their votes, and the bill passed by the narrowest possible margin (two votes, with an even number of Members voting – so that if one vote changed back, the count would have been a tie, and the bill would have been defeated).  Notably, one of those Members who changed her vote was Marjorie Margolies (then known as Marjorie Margolies-Mezvinsky), who had explicitly promised the constituents of her relatively conservative suburban Philadelphia district that she would vote against the bill.  Republicans derisively chanted “Goodbye, Marjorie!  Goodbye, Marjorie!” and waved at her on the House floor after she changed her vote.

Of all of the sensitive provisions in that 1993 bill, the one that raised the most hackles was a fuel tax that was calculated on the basis of the energy content – the number of BTUs, or British Thermal Units – of the fuel consumed.  That proposal was of course the brainchild of then-Vice President Al Gore.  Voting for the BTU tax in the House was perceived to be an act of considerable courage (regardless of one’s view on the merits).

But it also turned out to be an act of futility.  The Senate was so disenchanted with the BTU tax – whether because of politics or substance is impossible to say – that it did not include the provision in its bill.  Instead, it substituted a much smaller increase in the existing gasoline tax.  The Senate then proceeded to pass the bill so modified, again by the smallest possible margin (a tie, broken by Vice President Gore’s vote), and the deficit reduction program became law.

But not without sinking the re-election campaigns of dozens of House and Senate Democrats, giving control of the Congress to the Republicans in the sea-change election of 1994.

So the naïve among you might believe that the acronym “BTU” stands for a modified noun.  But the worldly in Washington are better informed, and know that “BTU” is in fact a verb.  A House Member is “BTU’d” if he or she takes a painful vote for a provision or a bill that then never actually comes to a vote in the Senate.  That House Member therefore suffers all of the pain from an act of courage, but for no real-world reward.  (Some day, I’ll explain to you what it means to be “Guarini’d.”)

So if Chairman Camp is successful in his monumental task of formulating a fundamental tax reform in his Committee, and takes that bill to a public vote on the House floor, the ghost of the BTU tax will be lurking in the shadows.  All of the House Members who are asked to cross all of those powerful interests – and even the preconceptions of many of their rank-and-file constituents – will wonder in the backs of their minds whether a very differently oriented Senate will even consider the potential fruits of their courageous vote.  Will they be BTU’d?  Will it be worth the risk?  Is this vote the real thing, with the money on the table, or is it just a backyard exercise?

Postscript:  In 1978, Billie Jean King and Ray Ruffels made it to the Wimbledon mixed-doubles final.  But they lost that match, 6-2, 6-2.  Somehow, they just didn’t have it when they needed it.  (Ms. King was suffering from a heel spur during that tournament.)  Billie Jean King finally won her record 20th Wimbledon title the next year, playing in the women’s doubles with Martina Navratilova – taking the final one day after Elizabeth Ryan collapsed and died at the tournament.

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