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Smaller Tax Changes on the Table

July 15, 2011 — The Wall Street Journal — By John D. McKinnon   Bookmark and Share

The scope of possible tax changes in a deficit-reduction deal has narrowed so sharply in recent days that taxes might disappear from a final deal altogether.

Congressional Republicans have warned they won't accept any tax increases, while President Barack Obama has repeatedly insisted that any agreement to curb budget deficits be "balanced" by both spending cuts and increased tax revenue.

The two sides have inched closer over the past days. Some, but not all, Republican negotiators have said they would consider ending some tax breaks if their value was offset by tax cuts, resulting in no net increase in revenue. And White House officials dropped on Wednesday a requirement that a deal result in increased revenue.

Among possible changes that have been discussed in recent days: ending some tax deductions for the oil and gas industry; repealing a tax-accounting system for business inventories; requiring investment-fund managers to pay tax on their income at regular rates instead of the lower capital-gains rate; and overhauling narrow breaks affecting the ethanol industry and corporate-jet owners. Together those changes could increase revenue by more than $100 billion over 10 years.

In exchange, Democrats have raised the prospect of offsetting the increases with tax cuts. These could include a one-year extension of a payroll-tax holiday that Mr. Obama pushed for last year, or a year of relief from the alternative minimum tax, which was designed to hit very high earners, but now threatens millions of middle-class earners.

For their part, Republican leaders have expressed willingness to consider closing a range of tax breaks in exchange for lower taxes elsewhere. Grover Norquist, president of Americans for Tax Reform and a relentless opponent of tax increases, said this week that his group would not view a tax overhaul as a violation of its no-new-taxes pledge, so long as the increases were fully offset by cuts.

But the chances for including any significant tax issues in a deficit deal could be diminishing. In recent years, Congress typically has extended temporary tax breaks at the end of the year, without raising other tax revenue. That could happen again this year with the AMT and payroll breaks, giving lawmakers less incentive to link them now to tax increases.

The appetite for raising any taxes also appears low, even in the Democratic-run Senate. A non-binding resolution calling for higher taxes on millionaires attracted only 51 votes this week in a procedural vote, short of the 60 needed.

Meantime, some business groups were going all out to avoid being the target of any new tax hits. The American Petroleum Institute has been running what it termed an "extensive" TV, radio and print advertising campaign. One TV ad argues that Mr. Obama's plan to tax oil producers could cost 170,000 jobs and reduce government revenue overall.

An email from the Private Equity Growth Capital Council argued its fund managers typically hold investments for several years and thus deserve to pay long-term capital-gains rates.