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Online Home | Site Search | Tax News & Views |History May Give Clues to Prospects for 1998 Tax-Law ChangesMonday, March 9, 1998 OnLine Using the last several years as a guide, one could conclude that Congress and President Clinton may decide to pass modest tax law changes this year as they did in 1996, but they are up against a tight legislative calendar and might run out of time. No scenario can be completely ruled out this year, but it is increasingly unlikely that 1998 will turn out to resemble 1997, when a major tax cut was passed. At this early stage in the process, those interested in tax policy still are asking themselves such basic questions as: How much time will be spent in 1998 on legislative activities, and can the anticipated budget surplus be used to pay for tax cuts? Republican lawmakers know they want tax cuts, but have not determined how to pay for their long wish list of proposals that includes marriage penalty relief, individual alternative minimum tax relief, and reducing the holding period for preferred capital gains rates from 18 months to 12 months. President Clinton and congressional Democrats, in the same way, know what they want -- more spending on initiatives for children, a minimum wage hike, and to apply any budget surplus to Social Security. Both sides also want to pass Internal Revenue Service restructuring, technical corrections, and extensions of the research and development tax credit and other expiring provisions. To help House Republicans develop a strategy, House Speaker Newt Gingrich, R-Ga., formed a budget working group, made up of himself, Majority Leader Dick Armey, R-Texas; House Budget Committee Chairman John Kasich, R-Ohio; House Ways and Means Committee Chairman Bill Archer, R-Texas, and House Transportation and Infrastructure Committee Chairman Bud Shuster, R-Pa. The group should have a blueprint hammered out by the end of March, Gingrich said. Archer and other GOP lawmakers warned those looking for a big tax cut this year to lower their expectations. Though he supports tax cuts, Archer places a balanced budget as a higher priority. "I intend to be conservative in my approach and I will resist the temptation to overcompromise. Yes, there is room to pay down the debt and cut taxes, but no, we must never let the budget be tipped out of balance again," he said. Senate Republicans are putting together a budget that would apply any budget surplus to Medicare and would provide a $30 billion tax cut that would be offset by entitlement cuts and by business tax increases. |
Possible tune-up If all the factors come together, this year might turn out to be like 1996, which was a tune-up for the 1997 tax act. In 1996, Congress passed a modest tax cut after Democrats cornered Republicans into accepting an increase in the minimum wage. If lawmakers in 1998 believe, as they did in 1996, that they need to pass some bill just to show constituents that they have accomplished something a small tax cut could result. Again, the catalyst for such a change might be some economic threat; a small budget surplus, in the $10 billion to $20 billion range; or some other unforeseen event. Under this scenario, Congress probably would have to pass a tax cut in a stand-alone bill that is completed outside the budget reconciliation process that was relied upon for so many years as the vehicle for tax cuts. It is easier to throw a roadblock in the path of an ordinary bill, than a budget reconciliation bill, which contains legislation that is vital to the functioning of the government. Members generally do not want to stake their political fortunes on blocking a reconciliation bill, which usually also contains some popular proposals. The budget rules make passing a reconciliation bill more of a "greased" process, than the rules for passing ordinary bills. An ordinary, stand-alone bill can be killed in the Senate by debating it to death, but in the debate on a reconciliation bill the Senate is limited automatically. Low-level confrontation No crystal ball is completely accurate, so if no bill emerges this year the inaction will probably result from a scenario that is similar to the situation in 1995 when President Clinton and GOP congressional leaders went their separate ways and did not pass tax cuts. This year is unlikely to be as confrontational as 1995, but in both years Clinton and congressional Republicans fundamentally disagreed about how to proceed on fiscal policy issues. In 1995, Republicans believed they had a mandate to cut taxes significantly, but Clinton disagreed. Congress then passed large capital gains and other tax cuts, which Clinton vetoed, charging that the GOP bill only helped the rich. This year is different from 1995, though, because both parties seem to want to avoid a major political drama this year, so policymakers will not go as far down the partisan path as in 1995. If confrontational political rhetoric prevails in 1998, the bill probably will only be in a relatively scaled-down form. Even if the GOP-controlled Congress does not send the President a bill he feels he must veto, 1998 still is an election year and both parties will want to establish distinct identities in the minds of voters. Major compromises will undermine the electoral positions that the parties want to stake out with voters, so a budget and tax deal only will occur if the parties believe inaction will do more harm than good. A major political breakthrough also may be difficult because Congress has so little time to complete its work before the Oct. 9 target adjournment date. There are only 36 legislative working days between when Clinton submitted his budget to Congress and the April 15 deadline for Congress to adopt a fiscal 1999 budget outline. There also are only 82 legislative days from when Congress returns to Washington after its Easter recess to the target adjournment date. Not only is there a short schedule this year, but Congress already is behind the curve in preparing a fiscal 1999 budget, so its tendency will be toward condensing rather than expanding its agenda. Normally, Congress passes the non-binding budget resolution sometime in late April or early May, but this year it is not expected to pass a resolution until late May or sometime in June. No major breakthrough Even if the problems of 1995 can be avoided, this year does not appear as if it will be similar to last year when a major tax cut in the $100 billion range was enacted. There is one major distinction to remember when looking to 1997 to predict the 1998 legislative outlook. During this year, unlike last, the two parties have not laid the groundwork for a major compromise. Both parties face two major problems, one internal one, and the other external. The internal problem stems from the fact that Republicans, and to a lesser extent the Democrats, are not sure what their position would be, if they were to negotiate. This problem also contributed to the delay in the passage of a budget resolution. Some Republicans want to cut taxes and to shrink the government, others want to spend money on transportation projects, and others still want to focus on reducing the national debt or shoring up Social Security. Before they can try to reach a compromise with President Clinton, Republicans must agree within their own party about what they want and how to get it. To a lesser degree, the fractions within the GOP also can be observed among Democrats. Clinton and congressional Democrats want to spend more money on either social programs or on fixing Social Security, which will go bankrupt early in the next century unless action is taken. The even bigger external problem is that if the Democrats and Republicans were to negotiate, they might spend months trying to figure out what problem they are trying to solve. In 1997, the goal was to balance the budget, but now that the budget is balanced, the questions becomes: What is the next goal? It is possible that a goal could be imposed on Washington, if a substantial shift in the current economic or political situation forced Congress and the President to try to cram a major tax cut into the remaining legislative calendar. Congress and the President might enact a major tax cut, for instance, if some foreign policy issue produced an extreme sudden downturn in the U.S. economy and Washington believed a fiscal policy stimulus, such as a tax cut, was needed to spark the economy and prevent a worldwide recession. This scenario seems relatively implausible at present. In another scenario, if tax revenues continue to flow into the U.S. Treasury at a recordbreaking pace, congressional Republicans try to embarrass President Clinton into approving a major tax cut. After April 15 when the government has cashed its checks, if Congress discovers a budget surplus for fiscal 1998 in the $50 to $75 billion range, the administration may want to make a deal to cut taxes. This too seems implausible as the non-partisan Congressional Budget Office March 3 announced the fiscal year 1998 surplus will come in at about $8 billion, far less than what would prompt a huge cry for a major tax cut. To use the budget surplus to cut taxes, Congress and the President would have to agree to a change in the budget law, or they would have to find a loophole in the law. The so-called pay-as-you-go rules currently require tax cuts to be offset by either spending cuts or by tax increases. The budget surplus cannot be used as a revenue offset unless two-thirds of the House and 60 Senators agreed to waive the current rules. Crossroads Tax and fiscal policy have reached a crossroads in 1998. The deficit problem has been solved at least so for the short-term and the biggest fiscal policy problem for policymakers seems to be that they do not know what the next problem is. The environment in which there is a budget surplus -- not a budget deficit -- is unknown to most lawmakers because there hasn't been a similar situation in over 30 years. A modest tax bill with less than $50 billion in tax cuts probably will
be the result of this year’s legislative agenda, but time constraints may foil that
prognosis. A larger bill though not impossible probably would only occur, if a cataclysmic
economic event forced hands in the Capitol. |
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