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House Tax Panel Approves Tax Bill

Friday, June 13, 1997

Deloitte & Touche OnLine

The House Ways and Means Committee early June 13 approved 22 to 16 the tax portions of the fiscal 1998 budget reconciliation bill after making more than a few minor changes to the original proposal from committee Chairman Bill Archer, R-Texas.

The bill provides a net $85 billion tax cut over fiscal 1997 through 2002 and uses the budget agreement between the President and Congress as a guide. The legislation provides capital gains relief, expands individual retirement accounts, establishes a new $500 child credit, provides estate tax relief, and creates new education-related tax incentives.

No substantive changes were made to any of these proposals during the committee’s action. The approved version does contain less alternative minimum tax relief, and more estate tax relief, than the bill Archer unveiled June 9, but these changes were announced by Archer June 11 before the committee began work. He inserted these modifications largely in response to criticism from Republican leaders. The final committee bill closely adheres to Archer’s original proposal in most other respects.

The committee’s recommendations now will be sent to the House Budget Committee, which will fold them into broader budget reconciliation legislation, so called because it conforms existing law (or reconciles it) with the mandates of the annual budget resolution.

That panel, which is not permitted to change the legislation in any way, will send the entire package to the House floor for further action. It is expected this year that the budget legislation actually will be considered in two separate packages.

Senate Finance Committee Is Next

Before the full House acts, however, the Senate Finance Committee is expected to meet the week of June 16 to consider its version of the tax bill. Unlike the House package, the Senate version is expected to be the product of bipartisan negotiations between committee Republicans and Democrats.

Clues about what the Finance Committee and its chairman, Sen. Bill Roth, R-Del., might do when it meets were revealed in a discussion draft of the tax cuts the panel is considering. The draft obtained by Deloitte & Touche, LLP, does not address tax increases.

The proposal the Finance Committee is considering and the bill the Ways and Means Committee just approved take similar, but not identical, roads to reach their destination of cutting taxes by a net $85 billion.

Capital Gains

A key difference in the Senate version is that it contains corporate capital gains relief for corporations by expanding the current law’s 50% exclusion for small business stock owned at least five years by extending it to corporate investors. The current per issuer limits and AMT preference would be repealed and a rollover feature added.

As in the Archer bill, individuals would be subject to a maximum capital gains tax rate of 20%, which would be the maximum also under the individual alternative minimum tax. Depreciation deductions would be recaptured at 26% and collectibles will remain subject to the current law 28% maximum capital gains tax rate. Those taxpayers in the 15% tax bracket would be subject to a maximum top rate of 10%. This is a cutback from the congressional Republican’s initial proposal of a 50% exclusion from income for capital gains which, for those in the 15% bracket, would have produced a 7.5% maximum capital gains rate.

The Roth proposal also includes the proposed $500,000 exclusion of gain on residences for married couples filing jointly ($250,000 for singles) contained in the House bill. This proposal also appeared in President Clinton’s fiscal 1998 budget proposal.

The Finance Committee version expands current law deductible IRAs and adds a more restricted version of the after-tax IRAs proposed in the House bill.

The Ways and Means Committee version also contains more alternative minimum tax relief than the Finance Committee version.

Next: An Overview of the Bill -->