Two leaders of a group of senators who are trying to convert last year's recommendations from the presidential deficit commission into legislation say they will take a hard look at eliminating tax breaks that they say contribute to the nation's fiscal imbalance.
Their vow puts further pressure on tax-favored treatment of retirement savings plans — one of the biggest of the so-called tax expenditures. In the nearly obsessive focus on deficit reduction in Washington, there is much talk of “skin in the game” and “sacred cows” — as in, everyone should have some of the former, and nothing should be designated as the latter.
The deficit-first approach also might portend tough legislative sledding for a measure that would establish automatic individual retirement accounts at companies that don't offer retirement plans for their employees.
In an appearance before The Economic Club of Washington last week, Sen. Saxby Chambliss, R-Ga., and Sen. Mark Warner, D-Va., said that the so-called Group of Six will continue its efforts despite the recent — perhaps temporary — defection of one of its key conservative members, Sen. Tom Coburn, R-Okla.
Mr. Warner stressed that the bipartisan team is embracing the deficit commission's idea of eliminating tax breaks and deductions known as tax expenditures, which total $1.1 trillion annually.
“Tax expenditures are government spending by another name,” Mr. Warner said. “We have to cut back on the way we spend through the tax code.”
Doing so would allow for lower tax rates across the board and could generate revenue to pay down the burgeoning federal deficit and debt, according to Mr. Warner.
Mr. Warner and Mr. Chambliss did not indicate when their group might introduce its deficit reduction plan.
They said that they are not pegging its release to negotiations between Vice President Joe Biden and bipartisan lawmakers to reach an agreement to cut spending substantially while raising the $14.23 trillion debt ceiling by Aug. 2 to avoid a default.
Just as the presidential deficit commission did in its proposal, the Senate group is likely to include major tax reform ideas.
But Mr. Warner said that he and his colleagues won't get specific about which tax expenditures to excise. He said the important thing is to inculcate the idea that if an expenditure is added back into the tax code, it must be paid for.
“What we would be doing is providing some guidance, but there will be other steps in the process,” Mr. Warner told reporters after his presentation. “As long as we count these in terms of costs, that makes it a more honest process.”
The debate over tax expenditures will continue long after the Chambliss-Warner group offers its bill. Mr. Chambliss said that the group will not dictate tax overhaul details to the Senate Finance Committee.
“It's their jurisdiction to write tax reform,” he told reporters.
As the tax-writing committees in the House and Senate wrestle with tax expenditures, they'll have to answer to retirement savings proponents such as Sam Gilbert, chief executive of United Plan Administrators Inc. Mr. Gilbert has organized retirement advocacy organizations to pose questions about employee benefits to presidential candidates in every election since 1984.
“We're talking about a policy that will disincentivize Americans from saving at a time when we need more of it,” he said. “It's the burden of any politician who proposes decreasing retirement savings [to explain] how to make that up in terms of total savings.”
In its proposal, the deficit commission gave some breathing room to retirement savings deferrals, capping them at $20,000 annually per person.
Currently, individuals can contribute up to $16,500 annually on a tax-deferred basis to a 401(k) plan and $5,000 to an IRA. Companies can augment the 401(k) contribution to a total of $49,000.
Bradford Campbell, an attorney at Schiff Hardin LLP, expects that retirement savings tax expenditures will take a hit after the dust settles on deficit reduction.
“We probably will see a reduction in the amount of deductions you can take,” Mr. Campbell, a former assistant Labor secretary for employee benefits, told a conference last week in Washington sponsored by The HartHartford Financial Services Group Inc. “It's unlikely they'll be eliminated. There will be substantial tax benefits, but they won't be as good as they have been.”
Even trimming the tax favorability of retirement savings can have a negative impact on persuading small businesses to set up plans.
“That's not an easy argument to make in this economic climate,” said John Diehl, senior vice president of strategic markets and wealth management at The Hartford.
Both the left and the right will question the present structure of retirement benefits, predicted William Sweetnam Jr., a principal at Groom Law Group and a former benefits tax counsel at the Treasury Department. Democrats will delve into whether retirement programs are helping low-income people, while Republicans may seek to consolidate the array of retirement savings incentives.
Even though retirement savings advocates face some obstacles, Mr. Campbell is confident that there will be widespread support on Capitol Hill.
“Even the biggest deficit hawk understands the value of tax incentives for retirement savings,” he said.
Mark Schoeff Jr. is a reporter at InvestmentNews, a sister publication of Pensions & Investments.