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Budget Negotiators Reach Agreement

Friday, May 2, 1997

OnLine

Congressional Republican leaders and the White House announced an agreement May 2 to balance the federal budget by 2002. The agreement provides room for capital gains tax relief and a child tax credit, and increases the estate tax exemption.

The budget agreement includes a net tax cut of about $85 billion, which assumes about $50 billion in tax increases and about $135 billion in gross tax cuts over the first five years. Over 10 years, the gross tax cuts would be approximately $250 billion.

The agreement does not tell the tax-writing committees how money should be raised or spent, but it does mandate expanded individual retirement accounts and education tax incentives, as well as the child tax credit, a capital gains tax cut, and estate tax relief.

Clinton, GOP leaders pleased

President Clinton praised the effort to balance the budget and to ensure that important government programs will be fully funded. The accord also should be praised because it provides "tax relief for the American people," the President said in a press conference.

Clinton emphasized that the language in the accord ensures the budget will be brought into balance by the year 2002, and that the budget will stay balanced in the following years. The accord takes steps to ensure the budget "will not run the risk of an explosion in the deficit" after 2002, he said.

The accord includes provisions to ensure that House Ways and Means Committee Chairman Bill Archer, R-Texas, and Senate Finance Committee Chairman William Roth, R-Del., will take these concerns into account when writing the details.

Senate Majority Leader Trent Lott, R-Miss., also lauded the accord. "We will reduce the deficit by reducing spending, not by raising taxes," he said.

Even House Minority Leader Dick Gephardt, D-Mo., who earlier raised concerns about the deal, said he is "pleased by the positive progress" that the negotiators made in the last few days.

House Speaker Newt Gingrich, R-Ga., praised the child tax credit and other provisions in the deal geared toward families by quoting a USA Today headline based on comments made by Clint Stretch, director of tax legislative affairs at . The headline in the story stated, "Proposal ‘like extra cash’ for families." "That’s not our headline, that’s not a politician’s headline," said Gingrich, proudly holding up the paper for the cameras. "We believe these tax reductions will help the American people and that individual families will be better off," Gingrich added.

Revenue-raising component

The revenue-raising component of the package assumes that levies funding the Federal Aviation Administration, which raise $30 billion over five years, will be extended. Legislators could extend the 10% ticket tax, which will expire Sept. 30, or they could replace it with another type of aviation levy that raises the needed revenue.

The details of any tax increases assumed by the accord -- the $30 billion from aviation taxes plus the balance from other revenue-raising measures -- will have to be worked out later this year by the tax-writing committees.

Revenue-raising provisions such as curtailing tax-free spin-offs using Section 355 and short-against-the-box transactions have widespread support. Other provisions, such as replacing the export sales rule with an activity-based rule, requiring average cost basis, and extending the Federal Unemployment Tax Act tax, face widespread opposition.

To raise the needed revenue, legislators may be forced to include many of the President’s revenue-raising proposals to make sure the budget is balanced by 2002, regardless of the political rhetoric stating that many are unacceptable.

Legislators also will want to provide a political balance to the accord. Cuts in the capital gains tax, reforms to the estate tax, and other provisions perceived as benefiting the rich cannot be packaged with tax increases and spending cuts that seem targeted to the poor, if the bill is going to gain widespread support in Congress.

Revenue losers

The deal would make room for estate tax reform that could increase the estate tax exemption from $600,000 to as much as $1.2 million.

A capital gains tax cut for individuals also is included in the package. Indexing the underlying basis of capital assets for inflation probably will not be provided for because of the impact it will have on the budget over the long-term.

Similarly, the agreement calls for an expansion of IRAs, but probably only in a scaled back form. Legislators probably will not be able to include a back-ended proposal as suggested by the GOP because it would be too expensive.

The process

The accord must be agreed to by both Houses of Congress in the form of a budget resolution, which leaders want passed in the House and Senate by Memorial Day.

Passage of the budget resolution is not guaranteed simply because congressional leaders support the plan. Before announcing the agreement, both Democratic and Republican negotiators polled their respective caucuses to determine if the rank-and-file members support the agreement.

If the budget resolution passes, Congress then must pass a budget reconciliation bill that will implement the broad goals of the budget resolution. The House Ways and Means Committee and the Senate Finance Committee will be responsible for changing the Internal Revenue Code to carry out the changes assumed by the budget resolution.

Effective dates

The negotiators could follow several tracks. Under one scenario under discussion, they would do a single reconciliation bill following a fast-track procedure. This could mean that the tax-writing committees would craft legislation as early as June.

Earlier, negotiators were looking at breaking the reconciliation process into several parts, rather than drafting a single bill. Congress first would implement the spending portion of the budget in one bill and the revenue portion of the budget in another, under this option.

If this two-reconciliation-bill plan were followed, the date of first committee action by the tax-writing committees most likely would occur during the summer, or possibly be pushed back to the fall. Under this scenario, the budget resolution would be passed in the spring, and then the tax committees would act sometime in June or July, or put off action until after the August recess.

The committees will face competing pressures to act on a tax bill. Pressuring them to act later, rather than sooner, on the tax component will be the need to work first on the spending portions of the budget under their jurisdiction.

Pressuring the committees to act sooner on the tax component will be the desire to lock in the effective date on revenue-raising provisions pegged to the date of first committee action. The sooner the committee acts, the more revenue will be raised.