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Taxing Times on K Street as Hill Clock Ticks

With the legislative year truncated by the health care debate and midterm elections, lobbyists say sweeping updates to the federal tax code are on hold while they fight for smaller tweaks that must reach President Barack Obama’s desk by Jan. 1.

“It’s going to get worse each day we get closer to the election,” predicted Kenneth Kies, a Federal Policy Group tax lobbyist. “The partisanship will intensify.”

With the shortened calendar, Kies and other lobbyists are telling their clients that big-ticket tax proposals are unlikely to be finalized this year. Instead, all eyes downtown are trained on a jobs bill that awaits action by both chambers. It’s legislation that may include revenue measures such as a research and development tax incentive, always a key K Street priority.

A popular topic of downtown conference calls continues to be whether Obama and Democratic leaders will decide to revive the dormant estate tax, a controversial levy that has provided for one of the fiercest lobbying battles in recent decades.

“This is going to be a really ugly one,” Jade West, a government relations executive with the National Association of Wholesaler-Distributors, said of a possible estate tax fight.

West said Bush administration tax cuts, set to expire Dec. 31, will be a legislative slog. According to lobbyists, taxes are expected to rise for households making more than $250,000 a year, a move that will likely face stiff resistance from conservatives.

“If Democrats figure out a way to extend tax cuts on lower-income earners but let it go up on upper-income earners, it is at their peril,” West said. “They have to know that the Republicans are going to use it as a vote to increase taxes.”

West and other legislative handicappers say the R&D tax credit stands the best chance of any tax measure at final passage this year.

A year ago, tax lobbyist Marc Gerson would have pegged the controversial estate tax as a top issue for Members. But it was sidetracked by the White House’s No. 1 domestic priority — providing health insurance to 32 million Americans. However, it may re-emerge now that “Congress is starting to get its energy back,” he said.

“The agenda was so dominated by health care that [tax issues] weren’t really part of the focus,” Gerson added.

And with Members playing small ball on tax issues for the remainder of the year, lobbyists say likely skirmishes over a value-added tax or a bipartisan effort to streamline the income tax system will have to wait until at least 2011. Still, lobbyists — and Members — are laying the groundwork for those fights.

Sens. Judd Gregg (R-N.H.) and Ron Wyden (D-Ore.) this year introduced the Bipartisan Tax Fairness and Simplification Act, which Wyden says on his website will revise “the tangled web of exemptions, deductions, credits and other preferences that currently clutter the U.S. tax code.”

As for the VAT, Americans for Tax Reform’s Ryan Ellis said conservatives continue to assemble extensive dossiers opposing VAT proposals that may emerge next year. Like the “death tax” fights of yesteryear, Ellis said, referring to the estate tax, the VAT proposal has a potential messaging problem because of its popularity with European governments.

“It’s French for ‘big government,'” Ellis said. “The problem is that everyone refers to it as ‘a European-style VAT,’ so that’s a [public relations] problem coming right out of the gate.

“Another one is that this is not the first time this has come up,” Ellis continued. “We’ve been talking about a VAT for 20 years. We’ve got all the data and anything we need to show it’s a regressive tax, and in the European experience, it started really small and got really big.”

Kies is also prepping his clients for the next wave of tax showdowns. Despite its bipartisan billing, he predicted stiff resistance to the Gregg-Wyden bill, which will be one co-sponsor down when Gregg retires after this session. Kies said the bill resembles President Ronald Reagan’s historic 1986 tax cuts, which swapped out reduced deductions for lower rates that quickly rose back to previous levels.

“Don’t buy the snake oil twice or you’re the fool,” Kies said. “Unless there’s going to be some very tight procedural guarantee to keep rates down, I would caution anyone about engaging in a legislative process that would give up deductions. History will repeat itself.”

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