The 1998 Tax Provisions:
Internet Tax Freeze, Expiring Provisions, Technical Corrections, and Other Tax Provisions

A Tax News and Views Special Report

Introduction

1. Extension of Expiring Provisions

2. Revenue Offsets

3. Other Provisions

4. Internet Tax Moratorium

5. Tax Technical Corrections

INTRODUCTION

Congressional leaders passed and sent to the President October 21 an omnibus appropriations bill (H.R. 4328) that includes a $9.2 billion, 9-year tax package that extends several expiring tax provisions, most notably the research and experimentation tax credit, through June of next year. Other tax provisions that were extended through June 30, 1999, include the following:

• The Work Opportunity Tax Credit;
• The Welfare-to-Work Tax Credit;
• The Generalized System of Preferences; and
• The Trade Adjustment Assistance Program.

The legislation also includes a permanent extension of a provision allowing a fair market value deduction of appreciated stock to private foundations; a one-year modified extension of the exemption from subpart F for active financing income; an acceleration from 2007 to 2003 of a provision allowing the self-employed to deduct 100 percent of their health insurance costs; alternative minimum tax relief for individuals with non-refundable tax credits; and several tax provisions targeted at farmers.

To pay for the tax package, the legislation includes four revenue-offset provisions that--

• Change the tax treatment of certain deductible liquidating distributions of regulated investment companies (RICs) and real estate investment trusts (REITS);
• Restrict special net operating loss carryback rules for specified liability losses;
• Clarify and expand the IRS math error procedures; and
• Add vaccines against rotavirus gastroenteritis to the list of taxable vaccines.

A mere shadow of the $80 billion House-passed tax-cut proposal that Congress was contemplating just a few weeks ago, the extenders bill was added to the omnibus spending bill (H.R. 4328) that will fund much of the federal government through fiscal 1999. Administration officials have indicated President Clinton will sign the legislation.

The President and congressional Democrats forcefully opposed the larger House tax cut that was partly funded with the projected federal budget surplus, arguing that those funds should be set aside and used to shore up the Social Security trust funds. Republicans successfully pressured the President to give in on his insistence that the legislation include an expansion of the amount of school construction bonds that can be issued by almost $2 billion. Republicans objected, primarily because the federal government pays the interest on these "qualified zone academy bonds" through an income tax credit.

Also included in the omnibus spending bill is legislation implementing a 3-year moratorium on state and local taxes on Internet access and on multiple or discriminatory taxes on e-commerce. The legislation also establishes a 19-member commission to study how electronic commerce should be taxed, if at all.