Tax Break

Tax-free retirement accounts will be hard to touch in tax reform

April 17, 2012

House Ways and Means Committee Chair Dave Camp (R-MI), Washington February 15, 2012. REUTERS/ Gary Cameron

The latest in a series of congressional tax committee meetings ahead of the Next Great Tax Code Reform revealed one thing Tuesday: trying to squeeze revenue out of tax-free retirement accounts will be a tough sell.

“Tax Reform” as it is known, generally refers to a process that includes lowering tax rates for most everybody, but takes away special breaks to pay for that. The result, it is hoped, is efficiency and simplicity.

A consensus has been building in Washington – rhetorically at least – that a revamp of the tax code is vital to clean it up and remove endless special breaks. The last re-write took place in 1986.

One of the biggest so-called tax expenditures – or spending through the tax code – is the tax-favored status of saving for retirement in entities like 401ks or individual retirement accounts.

Some reformers say every tax expenditure should be “on the table” for trimming to bring in revenue to slash rates.

Rep. Sandy Levin, the ranking Democrat on the House of Representatives Ways and Means committee, isn’t one of them. He thinks retirement savings should be off-limits, and set off a volley of debate at a Tuesday hearing that quickly showed broad support for that idea.

The tax favored status of saving for retirement “should not be repealed to pay for tax reform,” Levin said at a hearing Tuesday on the topic.

Rep. Dave Camp, the Republican chairman of the panel quickly replied that “I don’t think anyone is proposing eliminating,” the tax benefits of saving for retirement.

Levin shot back, citing a page in the Simpson-Bowles deficit cutting plan, which proposes starting with a clean slate with no tax benefits and adding from there. Simpson-Bowles was the presidential commission set up to come up with a plan on debt reduction, whose proposals failed to garner enough votes to trigger congressional action.

Camp, one of the 18 members on Simpson-Bowles said: “That’s one reason I voted against Simpson-Bowles.”

(For more on Simpson-Bowles: http://www.fiscalcommission.gov/news/moment-truth-report-national-commission-fiscal-responsibility-and-reform)

So there you have it. Bi-partisanship!

It is more complicated, of course, and five experts testified to the panel on ways to make the process simpler for employees, especially those not educated in the markets. All defended the concept of the tax benefit, estimated to cost of the government $300 billion over a five year period by the congressional Joint Committee on Taxation.

One Republican witness said JCT estimates of the true cost are not fair, because this tax expenditure is just a deferral of taxes paid – not a complete exemption like some others.

“Every dollar that is excluded from income this year will be included in income in a future year,” said Judy Miller, speaker for the American Society of Pension Professionals and Actuaries, which says it focuses on issues faced by small and medium-sized employers. “Unfortunately, that is not reflected in the cash basis measurement of the retirement savings “tax expenditure.”

In terms of tax reform, Levin and some other Democrats decry another Simpson-Bowles idea, which would cap tax preferred contributions to the lesser of $20,000, or 20 percent of income.

The Employee Benefits Research Institution poured cold water on the 20-20 idea, which a witness said would also impact low-income earners.
Note: Camp is a Republican who controls the committee and who picked all but one of the witnesses.

There was fairly wide support among the witnesses for a proposal by Democratic Rep. Richard Neal to ‘automatically enroll’ workers in plans as a default, to increase plan participation.

Even the arch-conservative Heritage Foundation expert, David John, backs that idea.

“It is not every day that legislation from a Massachusetts Democrat is endorsed by the Heritage Foundation,” Neal said. “But I can’t get one Republican to sign on to this proposal.”

The Democrats’ witness, Randy Hardock, a former Treasury official in the Clinton Administration, summed up the challenge of getting people to plan for events decades ahead of time.

“There are folks that I call squirrels, who will save no matter what, like my mother. And then there is most everyone else,” he said.

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