Major Tax Issues on Hold Until After November

Work on extending the estate tax repeal and hiking the minimum wage has been rapid and frenzied in Congress, but broader tax reform has been slow like molasses, say tax reform advocates.

The difference in approaches demonstrates the clash between election-year priorities and deficit budget realities, they say.

Louisiana Democrat John Breaux, appearing before the Senate Finance Committee on Thursday, called tax reform efforts almost non-existent. He said the pace of change has been glacial since the presidential advisory panel he headed issued its recommendations last November on how to reform the tax code to make it simpler and fairer.

In the nearly 300-page, nine-chapter tome, the President's Advisory Panel on Federal Tax Reform, proposed how to maintain incentives that encourage investment and savings while remaining revenue-neutral — or not increasing or decreasing the overall amount of taxes collected.

Breaux joked pointedly that nothing seems to have been done since the publication's release.

"Thank you for having this hearing because I thought this report had been lost somewhere," Breaux told Chairman Charles Grassley, R-Iowa, and Ron Wyden, D-Ore. He noted that at the time the report was issued, Treasury Secretary John Snow signed Breaux's copy, saying, "John, thank you for your great work, now it's up to us."

Snow isn't even part of the Cabinet anymore.

Other witnesses offered more serious warnings, saying the ever-expanding federal debt will eventually hurt American taxpayers, especially since no remedies have been offered to rein in the problem.

Instead, the most pressing priority in the Senate now is the three-part legislation that is likely to be approved before lawmakers depart on their August recess this weekend.

Having passed the House last week, the bill would increase the minimum wage to $7.25 an hour over the next three years and extend the rollback on the estate tax, whose repeal is set to expire at the end of 2010. A number of narrower tax breaks and benefits are also sandwiched in to entice broader support in the Senate.

The contrast between the juicy political issues and the dry ones is a simple political reality, said Eugene Steuerle, a former high-ranking Treasury Department official who now is co-director of the Tax Policy Center in Washington. Lawmakers want to get re-elected, and they do so by winning the popular issues.

"As far as I know, no one has ever won office on the tax increases or the spending cuts they were going to support [or] how they balanced the book," Steuerle said.

"We have not been able to — in quite a number of years — to do systemic reform of anything," he added, noting that no major fixes have been made to big-ticket items like the Medicare or Social Security accounts.

Last month, President Bush flaunted recent federal revenue data that he said shows the 2006 budget deficit is on track to be smaller than officials had predicted earlier this year. According to the data, this year's deficit is projected to be $296 billion rather than $420 billion

Bush credited his tax cut program, first adopted by Congress in 2001, as the driving force behind the improving budget numbers. That claim, however, didn't wash with Democrats, who clashed loudly this week with Republican leaders for their decision to attach the minimum wage hike to tax cuts. Republicans countered that it is unfair to collect taxes on individuals because of the death of a family member.

"They're holding the minimum wage and middle-class tax relief hostage so they can repeal the estate tax," Senate Minority Leader Harry Reid said of his Republican colleagues.

The estate tax is "a cruel and unfair burden inflicted on America's small businesses, on farmers and on families during a time of grieving and pain," said Senate Majority Leader Bill Frist.

"I think we should stop arguing about process on this and start getting things done," Sen. Sam Brownback, R-Kan., a supporter of the legislation, told FOX News.

Looking Beyond November

Despite the estate tax vote, the tougher tax and revenue issues will not be dealt with until after the November midterm election.

Grassley said if things go as he has planned, congressional action geared to broad reform efforts could occur next year.

The four members of the president's tax code reform panel who testified Thursday advocated broad adoption of their recommendations rather than a cherry-picking of their proposals. But they did not outright reject the idea of lawmakers using one or more of their prominent recommendations, specifically doing away with mortgage interest deductions and the Alternative Minimum Tax, reducing the overall amount of work that needs to be done to file taxes or moving toward more internationally accepted tax structures.

Meanwhile, one of the strongest warnings to Congress comes from the chief of its main investigative arm. Government Accountability Office Comptroller General David Walker said tax code reforms aren't the issue, balancing the budget is.

"We need to have enough revenue to pay our current bills, and deliver on our future promises," Walker said. But soon enough, that won't be possible under current policies.

"Although each plan [presented by the presidential tax panel] provides significant simplification, neither of them addressees the nation's large and growing fiscal imbalance. We must address that balance," he said.

The national debt has risen during the first six years of Bush's term by more than $2.6 trillion to $8.4 trillion, according to Treasury Department data. In the previous eight years under President Clinton, the debt rose about $1.26 trillion to about $5.7 trillion.

Political analyst and University of Virginia professor Larry Sabato said the creeping national debt is a political liability for Republicans, who are unlikely to talk much about it before November.

"President Bush has done some good things ... but he's done some bad things, and I put at the top the dramatic addition to the federal debt. ... Our kids and our grandkids will be paying that off. There's no way around it," Sabato said.

But, Sabato said in an interview with, the American people are not making the debt a major issue.

"The people have to insist [on fiscal responsibility]. Because if they don't insist, it will never happen," he said.

Breaux said he believes huge support exists for tax reform, especially making it easier for people to file taxes.

"I don't think there's an issue of national importance like simplifying the tax code that you could have more agreement by the Republicans and the Democrats.

"If the president of the United States stood before a joint session of Congress and said, 'You know, I asked for this report, here it is, and I now challenge Republicans and Democrats to do something for the American people to simplify the Internal Revenue Code so we don't spend $140 billion complying with it,' both sides of Congress would stand up and give him a standing ovation," Breaux predicted.

Indiana University's Kelley School of Business accounting professor William Kulsrud said in a phone interview that Congress' main objective should be to solve the deficit problem while simplifying the tax code.

"The real problem over the years is that Congress looks at these things and they've got to have the balanced budget, and so they'll just suddenly tweak the law just a little bit. .... When they do that, they just make a mess of the law," Kulsrud said.

But Mark Steber, vice president of tax resources for the Jackson Hewitt Inc. tax preparer service said tax reform might not necessarily be the best way to go. While there is great concern among his company's customers over the AMT, many are unaware of subsidies, breaks and other benefits available in other parts of the code, he said.

"The tax system in its current form ... it's pretty well constructed," Steber said. "That price of fairness is complexity."