As the deadline to raise the debt ceiling nears, there are signs that the GOP's hard stance against tax hikes of any kind may be softening. The party's focus on deficit reduction has uncovered a GOP fault line splitting the deficit hawks from the anti-tax true believers.
The virtues of tax cutting--and the corollary, that raising taxes is verboten—remain articles of faith in the GOP. But what is at issue now is the definition of "tax increase"—whether it only includes actual raising of rates, or whether any measure to raise tax revenues—including eliminating loopholes—should be taboo in the conservative movement. [Read: Momentum Grows for Payroll Tax Cut]
The answer could be key to solving the impasse over raising the debt ceiling, where Republicans have pushed for deep spending cuts but Democrats have countered that any deal to reduce the deficit must address both increasing revenues as well as cutting spending. While House Republicans have ruled out any increase in tax rates, Democrats, and a few Republicans, have been pushing for eliminating billions in so-called tax expenditures, or tax breaks that reward specific industries or activities. Republican leaders aren't against reforming the complex and loophole-ridden corporate tax code, but they say they want the savings to be offset by an overall cut in the rate, so the reforms will be "revenue-neutral."
The fight over the definition of "tax increase" played out in the Senate last week when that body voted 73-27 o eliminate ethanol tax subsidies. During that debate key Republican senators indicated that they are open to further reducing such tax preferences as a way to tackle the debt.
But anti-tax activists claim that they're not softening their position and that in fact they don't need to. Ryan Ellis, tax policy director for the conservative economic group Americans for Tax Reform, pegged the chances for any type of tax increase passing the House of Representatives at "virtually nonexistent." Ellis cited the group's Taxpayer Protection Pledge, which most Republican candidates for office sign, promising not to raise taxes. "The guys who run the House believe in [the pledge], and even if they had a moment of indiscretion, they've got 100, 150 House conservatives who would skin them alive, and would prevent them from doing it," Ellis says.
Tax incentives could be a key part in striking a deal between the two party's over the debt ceiling. Republicans are insisting on deep cuts for a debt ceiling compromise. Democrats haven't shown much willingness to make deep cuts, especially to entitlement programs such as Medicare or Medicaid, unless the cuts come paired with some type of measure to raise revenue, such as an overhaul of the corporate tax system. Anti-tax conservatives, such as Grover Norquist, president of Americans for Tax Reform, have found themselves in an increasingly bitter feud with some Senate Republicans, such as Tom Coburn of Oklahoma, who has said that Congress must look at raising revenues by eliminating tax expenditures. [Read: Why the GOP's Medicare Strategy Just Might Work]
Increasingly, the internal Republican debate has pitted GOP senators against their House counterparts. For instance, Republican Sen. Lindsey Graham threw his support behind Coburn on NBC's Meet the Press on Sunday. "No one on the Republican side's going to vote to raise taxes," the South Carolina senator said. "But I think many of us would look at flattening the tax code, doing away with deductions and exemptions, and take that revenue to help pay off the debt." The Senate's vote last week to eliminate ethanol tax credits may only be symbolic--it was attached to a bill with an uncertain future—but it is being hailed by supporters as signs of a sea change in the thinking on taxes. "Conservatives are no longer going to be badgered into defending tax earmarks," one GOP Senate source says. But House Republicans haven't budged yet. Conor Sweeney, spokesman for Wisconsin Rep. Paul Ryan, a key Republican voice on deficit matters, says that any tax reform that does not offset eliminating tax preferences with an overall tax cut, so it does not raise tax revenue overall, is a non-starter. "If the president is having trouble finding places to cut, our House Budget included $6 trillion in savings," Sweeney says.
ATR and like-minded conservatives claim that the ethanol subsidy vote doesn't signal any radical change in Republican thinking. In fact, the ATR did change its position on the ethanol tax vote as it neared passage, claiming that senators were free to vote for it without dishonoring their pledge, so long as they also voted for an amendment that would have eliminated federal mandates for ethanol fuel production, and also would have eliminated the estate tax. That amendment never came up for a vote in the Senate. "Coburn cherry-picked a particularly nasty piece of policy here, that none of us agree should be in the tax code," Ellis says, noting that most of the $1.2 trillion in tax deductions are much broader and effect the middle class, such as the deduction for mortgage interest. Eliminating those without a tax offset is a tax hike, Ellis argued. "You keeping your own money is not the same thing as the government taking your money," he says. [Slide Show: 5 Bright Spots in the U.S. Economy]
Without a grand bargain including entitlement and tax overhauls, staffers predict that a debt ceiling compromise will likely be smaller, which could force lawmakers to revisit the issue again soon. Such short-term extensions helped give Congress some breathing room while they were debating the budget earlier this year. But economists warn that short-term debt ceiling increases could rattle the market. How the Republicans resolve this internal debate will go a long way toward solving the debt ceiling issue—and shaping America's long-term fiscal future.