ANALYSIS - Storms ahead as U.S. debt deal sets up tax fight

WASHINGTON Tue Aug 2, 2011 4:31am IST

A man dressed as Captain America poses as dozens of Tea Party supporters rally near the U.S. Capitol against raising the debt limit in Washington, July 27, 2011. REUTERS/Jonathan Ernst

A man dressed as Captain America poses as dozens of Tea Party supporters rally near the U.S. Capitol against raising the debt limit in Washington, July 27, 2011.

Credit: Reuters/Jonathan Ernst

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WASHINGTON (Reuters) - If Congress passes the debt ceiling deal by Tuesday, as expected, it could trigger a battle over tax reform within weeks and turn Washington once again into a dateline for deadlock.

The deal calls for a 12-member special congressional panel to locate $1.5 trillion in budget savings by late November. Some panel members will push for the first major tax code overhaul in 25 years.

At stake in any such effort would be tax breaks dear to big corporations and ordinary Americans alike, with the outcome uncertain in a politically super-charged climate.

Provisions such as tax deferral for offshore corporate profits, the mortgage interest deduction and accelerated depreciation would hang in the balance.

"The debt ceiling agreement sets up a frenetic fall in Washington ... and puts tax reform squarely on the table," said Keefe Bruyette & Woods policy analyst Brian Gardner.

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Whether lawmakers could ultimately hammer out a comprehensive agreement is another question. The special committee's work will be clouded by sharpening political rhetoric as the November 2012 elections near, and by the impending expiration of the Bush tax cuts at end-2012.

In such a feverish atmosphere, it will take considerable skill and fortitude to solve tax-and-spending problems that have defied the good intentions of many since 1986, when the last comprehensive tax reform got done. It cleaned up the tax code, but scores of new loopholes have been added since then.

Whether a new tax overhaul results from the debt deal or not, an effort to shape one could make the last few weeks of high drama over the debt ceiling look mild by comparison.

"Corporate tax reform and all of its implications for multinationals ... could be here by Christmas," said MF Global policy analyst Chris Krueger.

The proposed debt deal would raise the debt ceiling by $2.1 trillion in three steps, cut spending by $2.4 trillion over 10 years, and create a powerful new congressional committee to recommend a deficit-reduction package by late November 2011.

Democrats will look for the committee to raise more government revenue by closing tax loopholes for corporations and the wealthy, something that is distinctly missing from the debt deal, much to the consternation of progressives.

"Remarkably, there is nothing here that would increase taxes on corporations or the wealthy," said Dean Baker, co-director of the Center for Economic and Policy Research, a left-leaning think tank.

Republican House Speaker John Boehner said on Sunday that the framework of the debt compromise makes it effectively "impossible" to use the deal to raise taxes.

But White House economic adviser Gene Sperling in a blog on Monday said any such assertion "is simply wrong."

Sperling said the special committee could reduce the deficit by cutting spending and getting rid of tax loopholes.

"Everything is on the table, as it should be," he said. "First, the Committee can consider getting rid of tax expenditures like subsidies for oil and gas companies or corporate jet owners."

If tax reform does not get done by the special committee, Obama wants to let controversial tax cuts made law by President George W. Bush expire in 2013.

Despite the possibility that high-rolling financiers might come out losers in a tax reform debate, it was evident that Wall Street was more worried at the moment by the potentially catastrophic impact of a U.S. debt default.

The Financial Services Roundtable, a lobbying group for large banking, insurance and investment firms, urged approval of the debt deal. "Congress must act now," said Steve Bartlett, president of the group and a former Texas congressman.

(Editing by Howard Goller)

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