Sen. Max Baucus has taken on the gargantuan task of reforming our nation's tax code. If done right, it could turn out to be the most significant accomplishment of his career. But with well-established special interest groups standing in the way, it might be more likely that we just get more of the same, or worse yet, a bad deal for Montana.
Baucus' decision to start from a "clean slate" differentiates this effort from past attempts at major tax reform. In other words, Baucus' finance committee will begin by completely eliminating the existing tax code, and then rebuild it from the ground up. The idea is to force special interests to justify why certain tax policies, like credits and deductions, should be included moving forward.
The ultimate objective is to reduce tax rates for everyone and make the system far simpler to navigate. That would have positive economic impacts across the board and energize America's recovery.
This clean slate approach makes perfect sense. Our existing tax code is notoriously voluminous and complicated. Each year, American families and businesses spend an estimated six billion hours and $160 billion to complete their taxes. The vast morass of rules, regulations, credits and deductions makes it difficult for anyone to understand.
An unintended result of such a convoluted tax code is that we've made it our nation's policy to treat some individuals and businesses as winners with preferred tax treatment—and others as losers. That's because most tax rules were designed to incentivize certain behaviors, like home ownership or saving for your child's college education. But as any good economist will tell you, when you use government policy to incentivize one behavior, it inevitably results in bad outcomes somewhere else.
For instance, allowing home mortgage interest deductions has helped millions of Americans achieve home ownership, but it has also incentivized buying bigger, more expensive homes and ultimately driven up the cost of housing for everyone. It also means that we pay higher tax rates, overall, to "pay" for these tax deductions.
Clearly, the more complicated we make the tax code, the more likely it is that we will have these winner vs. loser scenarios. That's why the most important tenets of any tax reform package must be fairness and simplicity. Sticking to these we can produce a flatter, more equal progressive tax structure that everyone can understand.
It sounds so simple, but unfortunately, tax fairness will be very difficult to achieve. There are a myriad of special interest groups who will try to game the system, or worse, use the tax code to create disadvantages for specific industries.
For instance, over the last several years the oil and gas industry has been targeted for unequal tax treatment. The Obama administration and allies in Congress have attempted to single-out energy companies by eliminating certain credits and deductions that are standard for businesses in every other economic sector.
Such policies run contrary to what most of us consider fair play, but even so they have been very real threats to Montana's energy industry. And they certainly run contrary to the "clean slate" approach being taken with tax reform.
Nevertheless, it's important for Senator Baucus and his tax reform allies to keep a wary eye out for attempts to leverage the new tax code to create favorable tax treatment, or to punish certain industries as a way to pursue a political agenda.
This is a very big task Sen. Baucus has taken on, and he needs to know that Montana is backing him. Go and weigh in with your comments about what you think should be included in the tax reform package at taxreform.gov, and urge Baucus and his colleagues to keep fairness and simplicity central to the reform package.
Sen. Bruce Tutvedt
Montana Senate Taxation Committee