|  Home   |  Site Search   |  Tax News & Views  |

Clinton Offers Net Tax Cut of About $20 Billion

See also: Where revenue will be raised in the new budget.

Thursday, February 6, 1997

OnLine

With little fanfare and no surprises, President Clinton Feb. 6 proposed $100 billion in tax cuts and $80 billion in tax hikes over the 1998 through 2002 period as part of his fiscal 1998 budget request, which would use many previously proposed initiatives to balance the budget by 2002.

The list of revenue-raising provisions designed to reduce so-called "corporate welfare" proposals and curtail business tax breaks, worth $34 billion, is virtually identical to the list proposed last year, except for the addition of those proposals offered during the summer of 1997 and the subtraction of enacted proposals.

Curtailing these tax breaks "would help balance the budget, increase the equity and efficiency of the tax system, and keep corporations focused on productivity and profits, rather than on tax minimization," the budget document explained.

About $30 billion worth of loophole closers remain from the President’s fiscal 1997 budget, including replacing the sales source rules with activity based rules, limiting net operating loss carry-backs and extending net operating loss carry-forwards, limiting the foreign tax credit carry-back period and extend carry-over periods, repealing the lower of cost or market inventory accounting method, and repealing the components of cost inventory accounting method.

Generally the initiatives are proposed to be effective on the date of enactment, but certain proposals, such as the repeal of the rule allowing tax-free conversions of large C corporations to S corporations, contain earlier effective dates.

Though the President’s plan will bring the budget into balance by the year 2002, most of the spending cuts come in the later years deferring most of the painful policy changes to years after Clinton has left office.

To ensure the deficit stays within anticipated parameters, the budget includes a trigger that would reduce the tax cuts by $22 billion and would cut spending to ensure the balanced budget goal is achieved.

GOP reaction

The budget was not declared dead on arrival on Capital Hill by GOP congressional leaders, but it was not welcomed either.

The "early indication" is that if Americans are looking for tax relief in the Clinton budget plan, "I have not really seen it," House Budget Committee Chairman John Kasich, R-Ohio, said on CNN.

The tax relief is not permanent and it is targeted according to the government’s priorities, not the individual citizen’s, Kasich said. "If we are going to have tax relief, why don’t we let them decide what to spend the money on?"

The budget proposal will not be enthusiastically received by the financial markets in the form of lower interest rates, Kasich said.

Budget’s main thrust

Similar to last year’s proposal the largest component will be a tax credit for dependent children worth $46.7 billion. The credit would provide a phased-in $500 tax credit for dependent children under age 13, according to a summary of the tax cuts prepared by the Treasury Department.

The proposal also will include tax credits for education expenses, costing $38.6 billion; an expansion of Individual Retirement Accounts, costing $5.5 billion; and tax incentives for cleaning up "Brownfields" and other economically depressed areas, costing $2.4 billion.

Targeted capital gains relief

Capital gains relief for homeowners also is part of the proposal. Unveiled during the presidential campaign, the capital gains relief would allow married couples to exclude up to $500,000 of capital gains from the sale of a principal residence for sales after Jan. 1, 1997. (Single filers could exclude $250,000.) The proposal would cost $1.5 billion over six years.

President Clinton last week criticized GOP capital gains proposals with retroactive effective dates, stating the purpose of a capital gains tax cut is to provide an incentive prospectively. A retroactive cut gives a windfall to those who already have acted.

Clinton also attempts to address cash-flow problems that may arise upon the death of a farmer or small business owner. The proposal, a repeat from last year, would increase to $2.5 million the amount of property eligible for a favorable interest rate of deferred estate tax. The plan reduces the benefit of that preferential rate by cutting the rate somewhat and eliminating the deduction of the interest payments. The proposal would cost $700 million. It also would eliminate the distinction for different forms of firm ownership contained in current estate tax rules.

Another campaign item included in the budget request will provide a welfare to work initiative that would cost $500 million.

New initiatives

The budget request also proposes restoring the wage credit to provide a more efficient and effective tax incentive for the economic development of Puerto Rico. The proposal would cost $417 million.

Other new items would provide tax relief to the District of Columbia and allow foreign sales corporation benefits for computer software licenses. The proposals would cost $260 billion and $560 million, respectively.

Software companies have for some time sought tax benefits traditionally given to foreign sales corporations, industry sources said. Under current law, when an exporter establishes a FSC, it saves 15% to 30% in federal taxes on profits derived from export sales. The FSC rules apply to the export of products manufactured, produced, or grown in the United States, excluding software.

The request also would extend for one year the research and development tax credit, rules on contributions of appreciated stock to private foundations, and other expiring provisions for one year at a total cost of $2.7 billion. This is the first time Clinton included extending expiring provision in the budget.

Extending the ticket tax

A significant chunk of the revenue -- $32 billion -- raised by the budget request comes from an extension of the airline ticket tax through 2002.

Wall Street denizens last year loudly criticized many of the corporate proposals aimed at shutting down certain investment techniques, including "short-against-the-box" trading, and tax-free Morris Trust transactions. Wall Street traders and others expressed concern that if the President used date-of-introduction effective dates it would freeze the financial markets.

The omission of effective dates is problematic because without delineating when the provisions will go into effect, the already difficult task of determining the amount of revenue to be gained becomes even more speculative.

Congressional Republicans may be forced to accept many of Clinton’s proposals due to the immense budget pressures surrounding another attempt at formulating a balanced budget, but Archer, in an open letter published in The Washington Post Jan. 26 said he would not accept provisions that unfairly hurt taxpayers.

Where revenue will be raised in the new budget -->>