By Richard Cowan and Donna Smith
WASHINGTON (Reuters) - The Republican brand, built on a rock-solid "no new tax" pledge to voters, is showing a few cracks as internal party divisions erupt in the face of rapidly escalating U.S. government debt.
Republicans have hopes of capturing control of the White House and both chambers of Congress in November 2012 elections, and tax policy looms as a central issue.
But in these early days of the campaign, Republicans have been debating an unlikely opponent: themselves.
The most immediate battle finds rank-and-file members fighting over whether to follow party leaders and back an extension of President Barack Obama's payroll tax cut, which would put more money in the pockets of millions of Americans.
But the internal debate affects tax policies far larger than the payroll tax cut.
"There is kind of a revisitation by the party in terms of where they are on tax policy," said Dean Zerbe, a former tax counsel for Republicans on the Senate Finance Committee and now managing director of alliantgroup, a tax consulting firm.
BEYOND THE PAYROLL TAX ISSUE
Republicans are pushing for a major overhaul of U.S. tax law, which is riddled with loopholes and special interest breaks. The last such review was done in 1986 by then-President Ronald Reagan, an idol to conservatives.
They argue a streamlined tax code would help boost the economy and create jobs. But with U.S. debt now topping $15 trillion, some are starting to entertain an idea they vehemently rejected in the past: devoting some of the revenue generated by closing loopholes to deficit reduction and not just lowering income tax rates.
"There is a debate internally about what the appropriate level of tax burden is," said Alex Brill, an American Enterprise Institute tax expert and former chief economist for the House of Representatives Ways and Means Committee.
For years, Republicans have bristled at any notion that tax cuts needed to be offset by revenue increases elsewhere in the code. Lower taxes, they argued, would generate enough economic growth to pay for themselves.
Lately there are doubts. The huge debt has led to a fundamental change in thinking, said conservative Republican Senator Saxby Chambliss.
"As to whether or not we're going to have to pay for any tax cuts, I think we're going to have to pay for everything," Chambliss told Reuters. "These are very difficult times. If you don't pay for it, you're adding to the deficit."
'YOU'RE ON YOUR OWN, KID'
During deficit-reduction negotiations in November, which ultimately failed in a "super committee" of Congress, Senator Patrick Toomey opened the door to Republicans accepting new revenue for deficit reduction. He floated a plan to limit certain special interest tax breaks in return for lowering the top tax rate to 28 percent from 35 percent.
Democrats rejected it saying it would raise too little revenue from taxes and provide a net tax cut for the rich while raising taxes for the middle class. And for other reasons, so did many Republicans including Grover Norquist, president of Americans for Tax Reform, a group that advocates a single low, national income tax. ATR asks candidates for office to sign a pledge to "oppose and vote against tax increases."
Norquist has been a powerful force within the Republican Party in recent years, and almost all congressional Republicans have signed the so-called "Taxpayer Protection Pledge." Some now seem willing to take a step back, at their peril.
"The people who brought it up, all they did was open the door to thinking about tax increases," Norquist said during a Reuters Insider TV interview last month of ideas such as Toomey's. "The good news is the rest of the Republican Party said, 'you're on your own, kid.'"
Recent polls show public backing for tax increases to bring down the deficit - if they are twinned with spending cuts. But supporting higher taxes of any kind is dangerous for Republican lawmakers, who could draw primary challenges in 2012 from Tea Party movement conservatives.
Many conservatives argue that President George H.W. Bush lost his re-election bid in 1992 because he broke his "no new taxes" campaign pledge.
One lawmaker's expendable tax perk is another's essential service, as Republican House Speaker John Boehner was reminded in November when he proposed ending a corporate jet tax break as part of deficit reduction package.
"I mentioned to the Speaker: 'quit picking on us. In Wichita (Kansas) we've come through a rough time,'" veteran Senator Pat Roberts told Reuters. The Kansan was referring to aircraft makers in his home state that could feel the impact of ending the jet tax break, which would save an estimated $3 billion over 10 years -- a relatively small savings given deficits of around $1 trillion a year.
Obama appears to have seized a political advantage with his demands for a balanced approach to deficit reduction that includes spending cuts as well as tax increases.
After years of Republicans painting Democrats as wanting to tax and spend the country into bankruptcy, the president has turned the tables somewhat with polls showing support for his call to increase taxes on the very rich to help shrink the debt.
As Obama pushes to extend a temporary payroll tax cut for wage earners, Republicans find themselves in the awkward position of debating whether to block a tax cut.
Many Republicans argue that the payroll tax cut has done little to stimulate the economy and over the long-term could weaken the Social Security retirement fund that the tax supports. But Republican leaders - fearing the party will be accused of protecting tax cuts for the rich, but not workers - said they will push for the extension as long as the cost is covered by spending cuts.
Not all Republicans are happy with that decision, arguing another one-year extension will do nothing for long-term U.S. economic growth.
"I just think they're wrong," Republican Representative Jeff Flake said of his own leaders in the House and their drive to extend the payroll tax cut.
(Editing by Vicki Allen)