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Friday, June 13, 1997
Deloitte & Touche OnLine
The tax bill approved Friday by the House Ways and Means Committee promises approximately an $85 billion reduction in taxes on savings and investment. It does this by promising to increase pressure on federal spending after the turn of the century. In the near term (through 2002), most of the tax cuts come from a $500 per child tax credit for middle-income families and modifications of education incentives sought by the President.
President Clinton and congressional Democrats are expected to continue to oppose the bill on the grounds that too much of the benefit from the cuts go to the wealthiest Americans.
The child credit is less generous than it appears in that many families who qualify for the earned income tax credit will not receive the full benefit of the child credit, and because for those who claim the dependent care credit, the child credit will be reduced by $0.50 for every dollar they receive of the dependent credit after the first five years.
Together, the child credit and the education incentives in the legislation would offer $102 billion of tax relief through 2002. Through the year 2007, they account for $225 billion in cuts.
The rest of proposal’s tax relief comes in the form of new savings incentives, alternative minimum tax relief, and estate tax relief. In the near term, these changes produce $25 billion in tax cuts, but after 2002 they grow in size so that the total cost of these items through 2002 is $117 billion.
Capital Gains: The bill does not provide a 50% exclusion as Republicans have pushed for in the past. Instead the plan provides a capital gains tax regime with a 10% alternative rate for 15% income tax bracket taxpayers and a 20% alternative rate for individuals in the 28% and higher brackets. The proposal includes a $500,000 exclusion of gain on residences for married couples filing jointly ($250,000 for singles).
Corporations would be allowed a 30% alternative capital gains rate phased in (32% in 1998, 31% in 1999, and 30% thereafter) for assets held for more than five years.
The bill also provides for indexing of basis in capital assets starting in 2001. Capital gains on real estate that has been depreciated would be subject to recapture at a 26% rate. The administration strongly opposes the indexing proposals and realtors have objected to the recapture provision.
The capital gains provisions generally are effective for sales on or after May 7, 1997.
Alternative Minimum Tax: The alternative minimum tax for corporations would be phased out completely by 2006. The proposal would increase the exemption amount under the individual AMT by $1,000 every other year through 2007, and index it for inflation thereafter. The AMT income exemption amount for married persons filing a joint return currently is $45,000 ($33,750 for single taxpayers).
Similar to the capital gains changes, the AMT relief proposal came under fire from the administration because of its long-term revenue effect.
Extension of Expiring Tax Provisions: The measure would extend the research and experimentation tax credit and the deduction for stock contributions to private foundations through the end of 1998. The exclusion for employer-provided educational assistance for undergraduates would be extended through the end of 1997. The orphan drug tax credit would be extended permanently.
Other Miscellaneous Business Items: The plan expands the safe harbor provisions for businesses that designate certain workers as independent contractors.
The package also seeks to help small business owners who work out of their homes by providing a new definition of "principal place of business" for purposes of receiving the home office deduction. The proposal also repeals the 14-day rule on the rental of vacation homes.
Estate Tax Relief: The estate tax unified credit would be increased from $600,000 to $1 million and be fully phased in by 2007, instead of going into effect in 2014 as under Archer’s original proposal. Increasing the credit is a top political agenda item of small business interest groups.
The measure also would stretch out the time period for paying estate taxes, which would make it easier for family farmers or small business owners to pass on their businesses without beneficiaries having to sell the assets to pay taxes.
Two-Day Mark Up
The Ways and Means Committee completed its work over two grueling days of partisan, but not contentious, debate. A Democratic substitute providing more education and middle-income tax relief and less aide to businesses was defeated, as were numerous Democratic amendments that would have altered the structure of the child credit to make it more progressive, removed various pro-business provisions from the bill, and other items.
One politically contentious battle was fought late on June 12 when members with Indian gambling casinos in their districts successfully minimized proposed tax hikes affecting Indian gambling.
Over strong objections from Archer, the panel agreed 22 to 16 to pass an amendment that would replace the proposal to raise revenue by subjecting Indian tribal organizations to the unrelated business income tax with proceeds from an increase of the tax on international air arrivals and departures. The amendment was offered by Rep. J.D. Hayworth, R-Ariz.
Archer won the battle over efforts to reinstate the ethanol tax credit by replacing the lost revenue by altering the alternative minimum tax. The panel defeated Rep Jim Nussle’s, R-Iowa, amendment 21 to 17. Unlike most of the votes during the debate, the vote on ethanol credit did not fall on party lines, but on regional lines.
Approved Amendments: Other amendments adopted during the final hours are as follows:
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