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Washington Insider A Taxing Debate Washington, D.C., is preparing for a once-in-a-generation tax reform debate. Here's how it's shaping up and what's at stake for you. BY CHRISTIAN KLEIN With lawmakers back home campaigning, the Washington, D.C., lobbying community is preparing for the gathering storm: tax reform. Here's what we're hearing: It's going to happen. The stars have aligned to make tax reform inevi- table. The expiration of the Bush-era tax cuts and growing concern about the budget deficit (and the need for more revenues) are major factors. There's also broad consensus that uncertainty in the tax code is under- mining the recovery and that more predictability would encourage growth and job creation. A more subtle consideration is the radical change in the structure of the U.S. and world economies since the last major tax overhaul in the 1980s. It's going to happen fast. Combined, the House Ways & Means and Senate Finance Committees have held more than 40 tax reform hear- ings over the past two years. Specific proposals are being floated and regular meetings are taking place between key lawmakers on a bipar- tisan basis on both sides of Capitol Hill. With much of the foundational work done, we're expecting rapid action and a House vote by the end of March (constitutionally, tax bills must originate in the House). The lame duck will set the agree on expedited procedures for next year's tax debate. We're hearing that framework could look a lot like budget reconciliation (which allows bills to avoid Senate filibusters) minus the Byrd Rule sun-setting require- ments that have made the current tax code such a mess. Whatever happens is going to be permanent. Ramming the 2001 tax cuts through on reconciliation was the politically expedient thing to do at the time, but it resulted in a tax code that is constantly changing. Lawmakers know this and seem committed to ensuring that whatever comes out of the tax reform process will be the law of the land for a long time to come. It's going to be bipartisan. stage. Tax reform won't happen during the lame duck session imme- diately after the elections, but tax policy will be front and center in the final months of 2012. There's a good chance we'll see a short-term deal to avoid the tax increases and across-the- board spending cuts set to go into effect on Jan. 1. Lawmakers may also With a narrowly divided electorate, it's highly unlikely that either party will emerge from the November elec- tions with a strong mandate. As of late October the race for the White House is still too close to call, but the congressional elections will likely reaf- firm the status quo on Capitol Hill: a Democratic Senate and a Republican House of Representatives. However, the margins of control in both cham- bers will probably be narrower (a 50-50 Senate with the vice president casting the tie-breaking vote isn't outside the realm of possibility). That means the parties are going to have to work together to get anything done. The parameters of the debate are set. There are sound economic arguments for radically changing our tax system (e.g., converting from income tax to consumption tax), but it's unlikely to happen next year. Neither party has made radical tax reform a campaign issue. The focus of the debate has been on simplifying, eliminating deductions, and reducing rates, so that's what will probably happen. The Simpson-Bowles commis- sion report is a good starting point if you want to get an idea of what tax reform could look like. There will be winners and losers. Lawmakers are hunting for new revenue. Deductions will be elimi- nated to pay for rate reductions. The focus on the corporate reform means there's a risk that pass-through enti- ties could get lost in the shuffle. The bottom line: A simpler tax code with lower rates will have a positive impact on the economy, but with all the changes, someone is going to wind up with a higher tax bill. The equipment industry has a lot at stake. Equipment distrib- utors will be uniquely impacted. Equipment cost recovery periods may be extended to offset rate cuts. LIFO repeal is on the table as a pay-for. The ability to defer gain on some like- kind exchange transactions may be repealed. Interest deductions could be reduced to provide more parity for equity versus debt financing. The estate tax will be in play. And, on the positive side, there will be an opportu- nity to increase the gas tax and create other new user fees to pay for highway investment. It's going to be a busy year. We're standing by for action. We hope you are too. CHRISTIAN KLEIN (caklein@aednet.org) AED's vice president of Government Affairs and Washington counsel. He can be reached at 703-739-9513. November 2012 | Construction Equipment Distribution | www.cedmag.com | 51