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Can debt deal jumpstart tax reform?

By Kay Bell · Bankrate.com
Thursday, October 17, 2013
Posted: 1 pm ET

Congress has done what it is best at -- putting off hard work for a little while longer.

That delay also likely postpones any serious tax reform work.

On the eve of the expiration of the United States' borrowing limit, representatives and senators agreed to a three-part temporary fiscal reprieve.

They suspended the debt ceiling, allowing the Treasury Department to keep borrowing to pay the country's bills until Feb. 7, 2014. Given that the Treasury can use so-called extraordinary measures to juggle accounts beyond that date, another Congressional debt ceiling confrontation is projected for next March.

The House and Senate also must cobble together a new budget deal by Dec. 13.

As for furloughed federal workers, they should be back on the job today. The measure that President Barack Obama signed early Oct. 17 will pay their salaries (and back pay) through Jan. 15, 2014. If lawmakers can't come to an agreement by then over continuing automatic spending cuts known as sequestration, the federal government could shut down again.

Tax changes dropped from deal

A couple of taxes were part of the negotiations, although neither was a part of this latest deal.

First was the reinsurance tax, or fee, if you prefer, scheduled to be collected in 2014 through 2016 from employers, unions and other health-plan sponsors. It is intended to compensate insurance companies for taking on high-risk customers who get required coverage under the Affordable Care Act, also known as Obamacare. The fee goes into a fund to pay insurers if they end up with patients who file higher-than-average claims.

The reinsurance tax is an estimated $60 per covered person in 2014 and expected to decrease during the subsequent two years of the fee's existence. Any charge is likely to be passed along to consumers via higher premiums.

A more focused attempt was made to repeal the medical device tax. This 2.3 percent excise tax on items such as pacemakers and artificial hips is expected to raise around $30 billion over the next decade to help cover the cost of Obamacare.

The argument for the tax is that this specialty industry will benefit from having more covered individuals who will receive these treatments. The argument against the tax is that the added costs will stifle new medical device developments. Plus, it's a tax.

As noted earlier, proposed changes to these two taxes didn't make it into the debt deal.

Wider tax reform foundation?

There is hope, however, that Congressional budget negotiators could start inching toward broader tax reform as they work on the deal that must be completed by mid-December.

Rep. Dave Camp of Michigan, the Republican chairman of the House Ways and Means Committee, issued a statement noting that while he voted for the debt deal because of the time-sensitive fiscal implications, Congress missed an opportunity to address underlying financial problems.

Among those issues is the tax code, oversight of which is constitutionally granted to the Ways and Means panel. "I will continue to pursue commonsense, bipartisan reforms to simplify the tax code and improve our entitlement programs, both of which will help pay down the debt," Camp said.

Camp's optimism for significant tax law changes, however, appears difficult to achieve in the two months with which the lawmakers have to work. But because the consensus is that the tax code is out of control, there could be some tweaks.

Rep. Paul Ryan (R-Wisc.), the 2012 GOP vice presidential nominee and chairman of the House Budget Committee, had broached the possibility of his tax plan being a part of any deal as the fiscal stalemate wore on.

That was rejected, but don't be surprised to see some of Ryan's ideas come up again in the House-Senate conference committee. Ryan and his Senate counterpart, Sen. Patty Murray (D-Wash.) who chairs the upper chamber's Budget Committee, met this morning to get a head start on the conference talks.

Will Ryan's proposals actually make it into any pre-Christmas budget deal? Perhaps.

And regardless of whether you agree with or hate Ryan's suggestions, any start to reforming the tax code is good.

But don't hold your breath for major tax changes in December or in 2014, since that's a mid-term election year. Politicians would rather run on the promise of making changes than deal with the electoral consequences of any tax law alterations.

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Want the latest news on taxes, tax reform prospects, filing deadlines, political fights, Internal Revenue Service alerts and tax-saving tips? Subscribe to Bankrate's free Weekly Tax Tip newsletter.

You also can follow me on Twitter: @taxtweet.

Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and a co-author of the e-book "Future Millionaires' Guidebook."

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