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Grassley Amendment Provides for Revenue Neutral Tax Reform

WASHINGTON – Sen. Chuck Grassley of Iowa on Wednesday filed an amendment to the budget before the full Senate that would strike the requirement to raise nearly $1 trillion through new revenue – most likely through tax increases – and create a deficit-neutral reserve fund for pro-growth, revenue-neutral, comprehensive tax reform.

“Raising revenues by closing so-called loopholes or reducing tax expenditures is a tax increase,” Grassley said. “Unless it’s used to offset true tax reform, it’s a tax increase that will support even more spending. Tax reform should be revenue-neutral, and my amendment would ensure that any reduction in tax preferences is used to lower tax rates, not to finance more spending.”

Grassley’s amendment is co-sponsored by Sen. Mitch McConnell, the Republican leader, and Sens. Mike Enzi, John Cornyn, Orrin Hatch, Richard Burr, Pat Roberts, Rob Portman, Johnny Isakson, and John Thune. It’s similar to an amendment he offered in the Budget Committee last week. The text of the amendment is available here. Grassley’s floor statement on the amendment follows.

Statement by Senator Chuck Grassley
Amendment Providing for Revenue Neutral Tax Reform

I would like to discuss an amendment I am offering to the majority’s budget to ensure tax reform is revenue neutral. I am pleased to be joined by Senator Enzi and Leader McConnell in offering this amendment.

In order to ensure tax reform does not become a tax raising exercise, this amendment eliminates the nearly $1 trillion in new revenue and the reconciliation instructions called for in the majority’s budget. It further creates a deficit neutral reserve fund for pro-growth revenue neutral tax reform.

The budget reconciles the Finance Committee to come up with nearly $1 trillion in revenues. This reconciliation instruction dashes the hopes that the Finance Committee can take a bipartisan approach to tax reform.

First, it puts in place an arbitrary deadline that requires the Finance Committee to produce a bill by October first of this year. Tax reform will be a long and difficult process.

Hopefully, it won’t take 3 years to produce as it did in 1986, but discussions should not be cut short to meet an arbitrary deadline. The Finance Committee needs to be allowed to do its work.

Second, reconciliation is not a suitable way to produce tax reform that simplifies the tax code. This is because it prohibits any changes to the tax code that score as adding to the deficit.

This requirement is incompatible with the goal of simplifying the code and making it easier to administer. Chairman Baucus has voiced similar concerns, which is why he has concerns about including a reconciliation instruction in the budget.

While the budget does not call explicitly for tax reform to be part of the reconciliation process, it has that effect by requiring the Finance Committee to come up with nearly $1 trillion in “savings… by eliminating loopholes and cutting unfair and inefficient spending in the tax code.”

If such large amounts of low hanging fruit exist in the tax code, you would have thought that either Chairman Baucus or I, when I was Finance Chairman, would have gone after some of this along with the billions of dollars in loopholes we have worked to close.

The truth is the majority’s definition of a loophole is so broad as to be void of any real meaning. And their idea of spending in the tax code is popular deductions widely used by middle class Americans, such as deductions for mortgage interest, charitable giving, and state taxes.

Referring to these tax increases as “savings” or as eliminating “loopholes” or “spending” in the tax code, does not change the fact that to raise nearly $1 trillion the middle class will see a higher tax bill.

The budget of course does not only assume nearly a $1 trillion in tax increases. Reserve funds in the budget assume another $500 billion in tax hikes to pay for more spending.

The underlying premise in this budget is that the federal taxes are too low to support much needed federal spending. The budget has this completely backwards. Until we get spending under control, we will never be able to raise enough revenue to suffice the spending appetite.

I have a chart here that lists the last five times we balanced the budget. As you can see, in each of these years, spending as a percent of GDP was significantly lower than 20% of GDP.

If you look closely you can see a dashed line far above the spending levels in these years. This line represents spending as a percent of GDP over the next ten years as projected by the Congressional Budget Office. Under current law, spending will average 22.1% percent of GDP over the next ten years.

Lower on the chart, I have another dotted line which represents projected revenues of 18.9% over the next ten years. As this chart shows, these revenues are more than enough to bring our budget into balance simply if we returned to the spending levels of the late 1990s and early 2000s.

The large gap between where spending was when we actually balanced the budget and current law spending is where the problem lies.

Yes, there is clutter in the tax code. There has been a proliferation of tax preferences that should be reexamined. However, they should be reexamined in the context of enacting pro-growth tax reform, not as a means to finance higher government spending.

The goal of tax reform is to simplify the tax code and make it more efficient. The ultimate goal is economic growth. But, true tax reform should be revenue neutral. It should not act as a way to increase taxes. Revenue raised by eliminating tax preferences should be used to lower tax rates.

The assumption in the budget that business and corporate loopholes are available for revenue reduction is particularly puzzling. We currently have the highest tax rate among our major trading partners. The President has even recognized the competitive disadvantage this puts us in. That is why he has called for reducing the corporate rate from 35% to 28%.

At a recent hearing before the Budget Committee on tax expenditures, the Democrats’ own witness, Professor Edward Kleinbard, similarly recognized the need to use revenue from eliminating business tax preferences to lower rates. It was his view that the corporate rate should be reduced into the mid-20s by eliminating corporate tax expenditures.

I want to stress, this was the opinion of the Majority’s witness.

Raising revenues by closing so-called loopholes or reducing tax expenditures is a tax increase. Unless it’s used to offset true tax reform, it’s a tax increase that will support even more spending.

Tax reform should be revenue neutral, and my amendment would ensure that any reduction in tax preferences is used to lower tax rates, not to finance more spending.

I yield the floor.

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