Reid sidelined, but ‘cliff’ deal keeps deductions for Nevadans

After the last-minute New Year's deal to sidestep the country's "fiscal cliff" for two more months, one question confronting Washington watchers is what the final maneuvering may tell us about the political clout of Senate Majority Leader Harry Reid.

Those who had hoped to see massive reform of profligate federal spending and simplification of the tax code will reject talk of "victory" for either side. The outcome was simply too petty and partial to justify celebration.

Nevada's senior senator, along with President Barack Obama, took a hard line throughout December's talks with the Republican House. Those tough stances won Democrats more of what they wanted - tax hikes on "the rich" - while handing Republicans less of what they wanted - spending cuts. ("I respectfully decline to support a measure that raises $41 in revenue for every dollar in spending cuts," said Republican Rep. Mark Amodei, the only Nevadan to vote against the deal. "This is not a balanced approach.")

But in the end, it wasn't Sen. Reid who closed the deal for Democrats. It was Vice President Joe Biden. According to various reports, Senate Minority Leader Mitch McConnell, R-Ky., reached out to Mr. Biden because Sen. Reid showed no urgency in dragged-out negotiations, ultimately declaring he would make no further counter­offers. Politico and the Huffington Post reported Sen. Reid tossed a list of concession ideas from the Obama administration into a burning fireplace.

Mr. Biden eagerly stepped in as the lead Democratic negotiator. Aides told The Wall Street Journal that Mr. Biden and Sen. McConnell talked 15 times in less than two days.

Sen. Reid was not happy about being sidelined, an action that amounted to a no confidence vote in his leadership at a critical moment for the country. Will Sen. McConnell place additional calls to Mr. Biden in 2013 if Sen. Reid retains his inflexibility? And will Mr. Biden, eager to prove he has more to offer Washington than gaffes and laughs, take those calls?

Don't expect a kinder, gentler Sen. Reid in 2013.

Meantime, the New Year's compromise retains a smorgas­bord of deductions and allowances that are individually popular, while they combine to perpetuate a tax code that has become virtually impenetrable.

The provision that allows Nevadans to deduct their state and local sales tax payments on their federal income taxes was retained - temporarily, again for two more years, through 2013.

While that's better than having the deduction expire, the whole scheme is absurd. The sales tax deduction is an attempt to be fair to Americans who live in states that don't have an income tax. Those who pay both sales and income taxes at the state level can choose which levy to deduct.

But why have such complexity in the first place? Why not get rid of all deductions for taxes paid to state and local jurisdictions - property and DMV taxes, too - and instead reduce everyone's effective federal tax rate by 7 percentage points, or whatever? Yes, such a step would penalize those who live in states that levy high sales and income tax rates. But that's a problem voters can solve when they re-elect or evict their state lawmakers. Why should Americans who support smaller government in low-tax states subsidize the taxpayers of New York and California?

The compromise bill also extends through this year a provision that prevents upside-down homeowners from being taxed on mortgage debt forgiven in a foreclosure or short sale; prevents an expiration of extended unemployment benefits for an estimated 2 million jobless; and blocks - for now - a 27 percent cut in fees for doctors who treat Medicare patients. Each of these provisions will offer substantial, immediate benefits to Nevadans - at a substantial cost to future taxpayers.

The "fiscal cliff" compromise also blocks for two months some $24 billion in across-the-board federal spending cuts. This is good, supposedly, because even modest cuts in federal spending would hurt the overall economy.

But that's absurd. Virtually all government spending has to be funded either through inflationary printing of new money - which devalues the dollar and is thus a hidden tax on savings or investment - or else by taxation or borrowing, which inevitably suck up capital that could otherwise be used to create more permanent jobs and infrastructure in the private sector.

Go to any community that feared recession when a little-used nearby military base was closed. In most cases, private entrepreneurs have moved in, creating more vibrant and lucrative products, services and jobs.

If more government taxing and spending is the key to prosperity, why not raise tax rates to 100 percent to fund the new departments of Feeding Us, Clothing Us, and Doing Every­thing Else For Us, at which point our national prosperity would be too vast to measure?

Russia tried that. How did it work out?