Democrats offer new tax trigger as means to overhaul code

Democrats on the congressional “super committee” have offered Republicans a way around the impasse over tax hikes by proposing that both sides work next year to raise revenue by revamping the tax code -- or face $650 billion in forced new tax revenues.

The Democratic proposal was aired earlier this week but reemerged Wednesday as both sides work to break the deadlock and the committee struggles to meet its Thanksgiving deadline to slash $1.5 trillion from federal deficits over the next decade.

The two sides have largely agreed to a broad outline of spending reductions, including to Medicare and other domestic programs, but Democrats will agree to such cuts only if Republicans compromise by putting new tax revenues on the table.

Republicans have so far resisted new taxes, but signaled an opening this week as they proposed closing some tax loopholes, but only if income tax rates for wealthy Americans and others were permanently lowered.

Under the new proposal, Democrats are offering a more than $2-trillion deficit-reduction package that would be evenly split between spending cuts and new revenues, according to a document of the offer being circulated.

An immediate $350-billion down payment of new revenues would come from various sources, but the committee would punt most of the decisions on new tax increases to next year.

During that time, legislation would be forged with the goals of reducing corporate tax rates while freezing high-income households at their current 35% income tax bracket.

The punt comes with a fail-safe: If Congress fails to pass the new tax legislation, an automatic $650 billion in new taxes over the decade would be triggered on Jan. 1, 2013.

Those taxes would come from limiting itemized deductions taken by wealthier households as well as a new “deficit reduction charge” imposed on those who owe taxes. The trigger would also guarantee that entitlement programs would not be cut until the new taxes were in place.

Republicans swiftly rejected the proposal as an effort by Democrats to provide political cover after having abruptly ended talks earlier in the week. Democrats had rejected the GOP offer to swap loopholes for lower income tax rates as a giveaway to the rich and said Republicans needed to pursue a more balanced approach, but Republicans said they were still waiting for a counteroffer from Democrats.

Republicans have also rejected the level of taxes Democrats are seeking as a nonstarter. The Democratic proposals have sought an estimated $1 trillion in new revenues, far higher than what the GOP has begun to put on the table. The Republican proposal this week would have generated $250 billion in new taxes, but Democrats said most of that would have been lost to the tax breaks. The GOP believes that lowering tax rates will spur economic growth, which will generate additional revenue.

This latest proposal to push tax reform into next year is not entirely new. Both sides have acknowledged the difficulty of achieving a tax overhaul in the short life of the super committee, which by law has until Nov. 23 to approve a proposal. Democrats proposed a similar trigger in their initial offer.

Both sides continue to talk, separately, behind closed doors.

lmascaro@tribune.com