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October 30, 2013
Top 10 Things to Know Heading Into the Budget Conference
by Lindsey McPherson

Full Text Published by Tax Analysts®

As the joint conference committee on the budget gets ready to hold its first meeting October 30, here are the top 10 things you need to know about the budget conference, in reverse order:

10. The First Meeting Is for Show. The first meeting of the budget conference, which will be open to the public, will be "consumed with opening statements," House Budget Committee Chair Paul Ryan, R-Wis., told reporters, estimating it will take about three hours for all 29 conferees to give statements. Given that both sides have already made clear what their opening positions are, this meeting is effectively for show.

9. Recess Could Further Delay Substantive Talks. After the first meeting, the House will be out of session until November 12. Ryan declined to say whether the House conferees would stay in Washington so the conference could continue meeting, saying only, "We're going to stay in communication." If meetings are put on hold until the House gets back, the conference will have only one month to come up with a plan before its December 13 deadline.

Rep. Tom Cole, R-Okla., a budget conferee, said he hasn't heard any discussion of the House conferees staying in Washington to continue talks through the recess but that he would be open to it.

A Democratic conferee also expressed interest in working through the recess. House Budget Committee ranking minority member Chris Van Hollen, D-Md., said he will be around. "There's obviously going to have to be conversations taking place" during the recess, he said, adding that "a lot of us would like to speed this process up a lot, and it seems to me we should be able to determine whether we're going to make progress sooner rather than later."

8. More Senators Doesn't Mean More Votes. The majority -- 22 of 29 -- of the conferees are from the Senate, but that doesn't mean senators will control the outcome. For the conference to come to an official agreement, any proposal that emerges must have majority support from each chamber's conferees, meaning at least four of the seven House conferees and at least 12 of the 22 Senate conferees must agree.

Cole said he believes it will be easier for the House conferees to reach consensus since there are fewer of them. Asked if he saw any strategy in the Senate appointing its entire budget committee to the conference, Cole said, "I just think you have a lot of needy people in the United States Senate that want to be part of this process, and that's fine. They'll all bring something to contribute."

Senate Budget Committee Chair Patty Murray, D-Wash., hinted that senators' interest in participating was the reason all of her committee members were appointed to the conference. "Our Democrats have worked really well together putting together a budget this year," she said. "They know the issues. They feel very strongly about finding a compromise and working us towards a balanced, fair approach to our budget. And they're great members, so I'm glad to have them as part of my team."

Ryan said that historically, the House has appointed a total of five or three conferees but that leaders decided to add a few more members to this budget conference so the difference between Senate and House conferees wouldn't be so overwhelming.

7. Some Interest Groups Want a Tax Reform Process. In an October 29 statement, 29 coalitions and trade associations urged the budget conference to "seize this opportunity to pave the way for pro-growth, comprehensive tax reform in 2014." The Reforming America's Taxes Equitably Coalition issued a similar appeal.

6. Other Groups Feel Vulnerable. Since some members of the budget conference may be looking for ways to raise revenue, the American Petroleum Institute (API) has been meeting conferees to impress upon them the importance of maintaining tax preferences for energy producers, such as expensing for intangible drilling costs, Stephen Comstock, API's director of tax and accounting policy, told reporters October 29.

API is informing members that changes to the tax treatment of energy and manufacturing may have unintended consequences, such as decreased job creation and energy production. A poll conducted by Harris Interactive for API found that 56 percent of voters oppose changes to the tax code that could decrease investment in energy production and reduce energy development in the United States, he said.

Comstock said that API's lobbying effort is not responding to a specific proposal to curtail tax expenditures for oil and gas production such as expensing for intangible drilling costs. He added that budget and tax reform discussions have been "pretty closed-door -- even staff sometimes isn't a part," but that "we do know that these items are in the mix."

The Alliance for Charitable Reform in an October 28 blog post said that "any potential proposal that emerges from the conference committee could have ramifications for tax reform and the charitable deduction" and urged philanthropic organizations to "continue to demonstrate the need for lawmakers to protect the charitable deduction."

5. The Sequester Is the Main Focus. Although some lawmakers would like the budget conference to come up with a framework for tax and entitlement reform, several have made clear that the priority is reaching an agreement on government spending levels that would replace the across-the-board sequester cuts.

"I would love to get as big a deal as we can, but I think the aim here is to arrive at a common [appropriations] number so we can do a real budget this year," Cole said.

House Minority Leader Nancy Pelosi, D-Calif., has said she would like to see the sequestration cuts replaced, at least in part, with revenue. Her decision to pick two House Appropriations Committee members -- ranking minority member Nita M. Lowey, D-N.Y., and member James E. Clyburn, D-S.C., -- and Van Hollen as the Democratic conferees on the House side suggests that replacing the sequester is most important to the caucus.

Republicans have also expressed interest in replacing the sequester but said it should be done with entitlement savings, not new revenue. "In terms of the Budget Control Act, there's no support on our side for replacing the agreed [upon] spending levels . . . by increasing taxes," Senate Budget Committee ranking minority member Jeff Sessions, R-Ala., said.

Senate Majority Leader Harry Reid, D-Nev., said he won't support any deal to replace the sequester that doesn't include revenues.

4. Lawmakers' Expectations Vary. Some budget conferees are more optimistic than others that the conference committee will reach an agreement. Expectations are especially low for the possibility of a larger deficit reduction deal.

"I think we have to be realistic," Sessions said, adding that it would be "a real challenge to do some really big things" before the December 13 deadline. However, he said the conference committee should talk about larger reforms.

"Given the performance of the institution, having relatively modest expectations is probably a good place to start," Cole said, but noted that sometimes negotiations can exceed what was originally thought to be possible.

"I'm in the school that says just let's wait and see," Van Hollen said. "I don't think anybody should jump to any conclusions."

Senate conferee and taxwriter Patrick J. Toomey, R-Pa., said he supports drafting a substantial agreement but added that "the prospects of that are not great."

3. Tax Talk Could Create Stalemate. With the two sides divided on whether revenue should be used to replace the sequester, any talk of whether tax reform should raise revenue will likely result in an impasse. Revenue has been the primary issue dividing Republicans and Democrats on tax reform. The Republican-led House passed a budget resolution calling for revenue-neutral tax reform, while the Democrat-led Senate passed a budget resolution calling for nearly $1 trillion in new revenue from tax code changes.

Ryan predicted the conference will fail if Democrats continue their revenue demands. "If people see this as an excuse to raise taxes, we're not going to get anywhere," he said.

Van Hollen said such hard-line positions are discouraging. "What we need is for people to come to the negotiating table with an open mind," he said.

2. Cole Offers Glimmer of Hope. Cole, however, has refused to rule out revenue being part of a deal, saying that's like Democrats ruling out all entitlement reforms. "I don't think it's helpful for each side to be taking things off the table when you're going into negotiations," he said.

Cole said there are ways to raise revenue without increasing taxes, offering repatriation of offshore earnings and enhanced drilling on federal land as two options. He also said Republicans would be open to revenue raised from switching the government's standard measure of inflation to a chained consumer price index.

During an October 25 interview with Bloomberg's Al Hunt, Cole mentioned changing the tax treatment of carried interest as a revenue option the budget conference could discuss. But he later issued a statement saying he supports raising revenue from pro-growth policies.

Asked October 29 whether eliminating the carried interest preference is still a tax change he could support, Cole said, "I don't have a huge objection, but I don't think that's likely."

Noting that both House Ways and Means Committee Chair Dave Camp, R-Mich., and Senate Finance Committee Chair Max Baucus, D-Mont., have prepared their committees to do tax reform, Cole said he would support the conference entering a larger negotiation on taxes. "So we might be able to stumble into something that would be a larger deal, and that would be all to the good," Cole said, explaining that the budget conference "could posit a number and give [the taxwriting committees] instructions to reach the number."

1. Agreement Isn't Law. Even if negotiators can produce an agreement and both chambers of Congress approve the conference report, a budget resolution does not carry the force of law, leaving open the possibility that changes discussed during the conference may never be enacted.

For example, if the conference committee were to produce tax reform instructions for the House Ways and Means and Senate Finance committees, it would still be up to taxwriters to draft a tax reform bill that can pass both chambers -- no easy feat, even with a pre-negotiated revenue level.

Eric Kroh, David van den Berg, and Meg Shreve contributed to this report.

Follow Lindsey McPherson (@lindsemcpherson) on Twitter for real-time updates.

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