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Bipartisan Members Oppose Export Sales and Other Proposals in Clinton Budget, Archer Says

Wednesday, March 12, 1997

Deloitte & Touche OnLine

There is bipartisan opposition to President Clinton’s proposed export sales rule, the Federal Unemployment Tax Act extension, and the average cost basis rule, House Ways and Means Committee Chairman Bill Archer, R-Texas, said March 12.

The proposals "threaten worker salaries by hiking the payroll tax, they raise taxes on 10 million middle-income investors, and they penalize companies that create export jobs," Archer told a Ways and Means Committee hearing on President Clinton’s revenue-raising provisions.

The Ways and Means Committee is prepared to take action on proposals to modernize the tax code, but not on proposals that increase taxes on working Americans, that threaten salaries, or cost "high paying, good export-related jobs," the chairman added.

Rep. Jon Christensen, R-Neb., also raised questions about the export source rule. Would the administration’s proposal to replace the current formula allowing companies to treat 50% of the income earned from overseas sales to foreign sources with an activity-based rule harm businesses, he asked.

Other members were more sympathetic to the administration’s proposal. Rep. Karen Thurman, D-Fla., said the proposal would harm the nation’s export businesses, but questioned whether it would be offset by other Clinton administration policies.

Other revenue raisers

Rep. Kenny Hulshof, R-Mo., questioned other components of the Clinton’s revenue-raising proposals. He asked whether there are any legitimate business reasons for allowing a tax-free spin-off of a business under Section 355.

Rep. Barbara Kennelly, D-Conn., asked whether the short-against-the-box proposal should be retroactive. The administration’s proposal generally is effective on the date of enactment, but some constructive sales entered into prior to that date are affected. Under Kennelly’s bill, H.R. 846, the date of first committee action is the date of enactment.

Support for some provisions

Committee ranking Democrat Charles Rangel, D-N.Y., defended the proposed revenue raisers. The proposals "may not be welfare," but they are tax "breaks," he told witnesses opposing the capital market proposals. "Anything that alleviates the pain is a cushion for you."

Rangel also questioned whether the time is right for tax cuts. If the choice is between balancing the budget or cutting taxes, the committee should realize that more people would benefit from balancing the budget, and revenue raisers similar to Clinton’s proposals must be part of that mix, he said.

The only witness appearing before the committee who supported any of Clinton’s revenue raiser’s was former Assistant Treasury Secretary for Tax Policy Fred Goldberg. Proposals to require registration of corporate tax shelters, and to tax short-against-the-box transactions and Morris trust transactions are worth pursuing, he said in response to a question from Archer.

Flat Tax Proposed: House Majority Leader Dick Armey, R-Texas, and Sen. Richard Shelby, R-Ala., introduced legislation calling for a flat 17% income tax rate.

The proposal, H.R. 1040, is nearly identical to the one introduced last year, an aide to Armey said after the press conference announcing the plan.

At the press conference Armey reiterated his commitment to a tax cut. "Congressional Republicans fully intend to fulfill the commitment we made to a balanced budget with tax relief," Armey said in response to a report in the Washington Times that the GOP may put off tax cuts until the budget is balanced.

Indexing vs. Exclusion On Capital Gains: A capital gains tax exclusion would offer greater benefit to higher income taxpayers than would indexing the basis of capital gains for inflation, the staff of the Joint Committee on Taxation said in a pamphlet released March 12.

"All else being equal, an exclusion might be expected to offer greater tax benefits to higher-income taxpayers (who invest in more risky assets) than would indexing," the pamphlet said.

Part of the reason that rich people would benefit more than poor people from an exclusion is that they tend to hold riskier investments that offer higher returns, the pamphlet said. The higher returns come from adjustments to asset value from inflation, and from the underlying investment. Indexing provides no tax benefit to the portion of the return from the underlying asset, thus richer people would benefit more from the exclusion, it said.

How a proposed tax law change affects rich and poor taxpayers is important because Congress and the President face pressure to distribute a tax bill’s benefits fairly among taxpayers of income levels.

D.C. Tax Plan: President Clinton March 11 unveiled a plan that would provide tax incentives for businesses that locate in the District of Columbia.