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Clinton Outlines Preferences for Tax Bill, Including 30% Capital Gains Tax Exclusion

Monday, June 30, 1997

Deloitte & Touche OnLine

President Clinton outlined June 30 his preferences for the shape of the final fiscal 1998 tax bill that will emerge later this summer after a House-Senate conference reaches agreement on the $85 billion in cuts called for by the budget agreement.

The House- and Senate-approved bills (H.R. 2014, S.949) "contain many good elements, but I do not believe they represent the best way to cut taxes, nor are they consistent with the balanced budget agreement," Clinton said.

Clinton favors a capital gains exclusion of 30%, which would allow taxpayers to exclude 30% of their capital gains from taxation, compared to proposals to lower the capital gains tax rate itself to 20% as mandated by the House and Senate bills. A 30% exclusion is "less likely to explode the deficit in the years to come than the plan of the congressional majority," the President said.

Under current law, capital gains are taxed at a maximum of rate of 28%. Clinton’s plan would give taxpayers in the highest marginal tax bracket a 27.7% on capital gains, only 0.3% lower than the current law tax, as shown in the table below, produced by Deloitte & Touche, LLP.

Clinton also provides new added incentives for investments in small businesses. The existing exclusion for equity investments in small businesses, held for more than five years, would be increased to 75% for up to $20 million in gains and the eligibility limits on firm size would be increased from $50 million to $100 million, according to a summary of the proposals prepared by the Treasury Department.

Other Concerns

Similar problems for the budget deficit would be created by other congressionally approved provisions, such as calling for indexing the basis in capital assets, the President said. The House approved an indexing provision and the Senate rejected one in a floor vote, so the issue will have to be sorted out in conference.

Clinton also highlighted Congress’s proposed backloaded individual retirement accounts and revisions to the alternative minimum tax as potentially blowing a hole in the deficit. "I’m worried about the weakening of the alternative minimum tax revisions to the point where people will be making a lot of money and not paying any taxes ever," he said.

The President also expressed support for tax incentives for brownfields and empowerment zones. Both were mentioned in the budget agreement, but were not included in the bills passed by Congress.

Clinton also signed on to the Senate’s proposal to increase the excise tax on cigarettes by 20 cents per pack. "Unlike the Senate version, however, I believe these revenues should be used entirely in ways that focus on the needs of children and health care," the President said.

Middle Class Relief

Clinton also went further than he has before on provisions aimed at helping the middle class. Congress’ proposals "do an inadequate job of opening the doors of college. They direct far too little relief to the middle class," he said.

Clinton, for instance, expanded his education package by proposing a new 20% tuition tax credit for third and fourth year college students. The child credit proposal also would be modified to apply to dependents under the age of 19, after 2002, instead of under the age of 13, as in his original proposal. The child credit proposal now would be partially refundable against payroll taxes, as well.

The fight between Congress and the President over who will gain the attention of middle-class voters is one of the most significant battle lines over which Congress and the President will clash over the next few weeks. Both sides will argue that they are doing what is best for average American families, and the side that wins this fight is more likely to get its version of business-related and other items included in the final bill.