Tax Stances Harden in Wake of Last Deal - The fiscal-cliff deal postponed until Friday the across-the-board cuts, known as the sequester, that would shave $85 billion from federal spending through Sept. 30

From The Wall Street Journal:

To understand why Republicans and Democrats remain far apart in averting automatic across-the-board spending cuts set for Friday, look no further than their last deal.

The agreement enacted Jan. 2 to avoid most of the so-called fiscal cliff's big revenue increases and spending cuts raised taxes by $620 billion over 10 years, mainly by letting temporary tax cuts expire.

Those tax increases have become bargaining chips taken off the table, which makes it more difficult for lawmakers to address other contentious fiscal issues, such as fresh spending cuts and an overhaul of the U.S. tax code.

The deal on the fiscal cliff "actually did hurt the chances of future reform because both sides feel they gave too much and don't want to give more going forward," said Roberton Williams, a fellow at the Tax Policy Center, a joint venture of the Brookings Institution and Urban Institute. The deal "will lead members of Congress to hold their positions even more strongly, leaving compromise even less likely than before."

The fiscal-cliff deal postponed until Friday the across-the-board cuts, known as the sequester, that would shave $85 billion from federal spending through Sept. 30.

President Barack Obama and congressional Democrats want to replace the sequester cuts with a combination of new tax revenue and additional, though more-targeted, spending reductions.

But most Republican lawmakers rule out raising taxes again. Democrats "just got the revenue package you wanted—now you are going to have cuts and no revenue," said Rep. Tom Cole (R., Okla.), a member of the House GOP leadership, referring to the January deal.

Democrats counter that recent tax increases are a fraction of the deficit reduction lawmakers adopted in the past couple of years. The rest—roughly $2 trillion over the coming decade—comes from spending cuts, Democrats say. "All we're saying is there should be a balanced plan to avert the sequester," said Drew Hammill, a spokesman for House Democratic Leader Nancy Pelosi of California.

Lawmakers' hopes of overhauling the tax system this year have also become more difficult to fulfill. Republicans and some Democrats want to lower tax rates and offset the revenue loss by curbing tax breaks, so that the overall plan doesn't affect the deficit. Mr. Obama in the past has suggested lowering rates and limiting deductions, but lately has emphasized the need to raise revenue to shrink the deficit.

But after promising to block any more tax increases, Republicans may have a harder time voting to limit or end tax breaks as part of any compromise. And after fighting to raise the top individual income-tax rates in January, Mr. Obama may be reluctant to lower rates.

By raising the top individual tax rate to 39.6% from 35%, the January deal also means Republicans would have to generate a lot more revenue to achieve their goal of lowering top rates to as little as 25% while not widening the deficit. "Clearly, politically the dynamics are harder now, because the individual rates have gone up," said Rep. Kevin Brady (R., Texas), a member of the House leadership.

The agreement over the fiscal-cliff included several limits on tax breaks that lawmakers could have used now to help offset the cost of reducing rates in a tax overhaul. Now, those effectively are off the table.

Still, House Ways and Means Chairman Dave Camp (R., Mich.) said Tuesday that he plans to introduce tax-overhaul legislation this year and will still aim to lower the top tax rates to 25%.

Some lawmakers say the deal over the fiscal cliff helped the effort for a tax overhaul by clarifying the fate of many temporary tax provisions, such as Bush-era tax rates, most of which were made permanent. Looming debates over the sequester and other budget issues also could spur a tax rewrite.