Senate Approves $792 Billion Tax Cut

Thursday, August 5, 1999

OnLine

The Senate August 5 approved 50 to 49 the conference agreement on the ten-year $792 billion tax-cut bill (H.R. 2448), thus paving the way for a promised veto by President Clinton. The House also passed the measure 221 to 206 earlier in the day.

Clinton is not expected to get the chance to veto the bill until September. Republican leaders want to hold the bill until the fall because they do not want to give Clinton the opportunity to veto the bill during the month-long recess when they will not be able to rebut his charges.

After the veto, the next step in the process is unclear. GOP lawmakers could try to win support for a moderate-sized tax cut of about $300 billion. They also could reserve the tax-cut issue for next year, and only pass a stripped-down bill that extends the research and development tax credit and other expiring provisions this year. They also could do nothing and let the $792 billion tax-cut stand as their message to voters.

Business Tax Hikes

The bill includes various tax increases on business. Even if the measure is rejected, it is important to remember that once a tax hike has been accepted by Congress, it likely will be used again to help pay for other legislation.

The tax increases included in the bill are as follows:

• Require information reporting on cancellation of indebtedness by non-bank financial institutions;
• Extend IRS user fees;
• Impose a limit on pre-funding of certain employee benefits;
• Increase from 10 percent to 15 percent the optional withholding rate for non-periodic payments from deferred compensation plans;
• Modify the estimated tax rules for closely held real estate investment trusts;
• Prevent conversion of ordinary income or short-term capital gains into income eligible for lower long-term capital gain rates;
• Allow employers to transfer excess defined benefit plan assets to a special account for health benefits of retirees;
• Repeal the installment method for most accrual-basis taxpayers;
• Limit the use of the non-accrual experience method of accounting to amounts to be received for the performance of qualified professional services;
• Deny a deduction and impose an excise tax with respect to charitable split dollar life insurance arrangements;
• Modify the treatment of closely held REITs;
• Modify the anti-abuse rules related to assumption of liabilities;
• Require consistent treatment and provide basis allocation rules for transfers of intangibles in certain non-recognition transactions;
• Reduce basis for assets of a corporation if stock in that corporation is distributed by a partnership to a corporate partner; and
• Prohibit the allocation of stock in an employee stock ownership plan of a subchapter S corporation.
  

The bill would increase the Section 179 expensing for small business to $30,000; accelerate the repeal of the Federal Unemployment Tax Act surtax; and increase the business meals deduction to 60 percent.

The international provisions include language to allocate interest expenses on a worldwide basis.

The exclusion for employer-provided educational assistance would be extended for undergraduate courses through 2003, and the research and development tax credit would be extended through June 30, 2004, with a one percentage point increase in the alternative research credit.

The exemption under subpart F for active financing would be extended through December 31, 2004, and the work opportunity tax credit and the welfare-to-work tax credit would be extended through December 31, 2001.

Capitol Gains Relief and Other Relief

Under the tax bill, the long-term capital gains tax rate would be cut from 20 percent to 18 percent and the section 1250 recapture rate would be cut to 23 percent from 25 percent. Assets purchased after December 31, 1999, would be indexed for inflation and beginning on January 1, 2000, taxpayers would have to mark assets to market, if they were purchased prior to 2000. All the capital gains provisions would sunset on December 31, 2008. No corporate capital gains tax relief would be provided by the bill.

An above-the-line deduction for health insurance expenses and for long-term care insurance would be provided by the bill. The deduction would equal 25 percent in 2002 through 2004, 35 percent for 2005, 65 percent for 2006, and 100 percent thereafter. The phase in of full deductibility for health insurance for the self- employed would be accelerated.

The estate tax would be repealed by 2009.

For individual retirement accounts, the annual contribution limits would be set at $3,000 for 2001 through 2003; $4,000 for 2004 and 2005; and $5,000 for 2006 through 2008. Thereafter, the limits would revert to $2,000, the current cap.

The measure includes an across-the-board tax cut that reduces all tax rates by one percentage point by 2005, and it also eliminates the marriage penalty by making the standard deduction for married couples twice that of single taxpayers.

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