Tax Week in Review

Monday, April 3, 2000

OnLine

• Senate Budget Committee Passes Tax Cut & Spending Framework
• Roth, Breaux Seek Repeal of Telephone Excise Tax
• E-Commerce Commission Issues Recommendations to Congress
• Greenspan: Don’t Use Income Tax Revenues to Fix Social Security
• Senate to Take Up Temporary Gas Tax Repeal
• House Repeals Social Security Earnings Limit
  

Tax Cut and Spending Resolution Clears Senate Budget Committee: The Senate Budget Committee March 30 passed by 12-10 a FY2001 budget proposal that allows for tax cuts of at least $150 billion over five years. Tax cuts for FY2001 would total $13.2 billion. The proposal also includes a provision to make available for tax cuts or debt reduction any extra on-budget surplus funds that the Congressional Budget Office may project in its mid-session review. The CBO is expected to raise its surplus forecast by $25 billion to $40 billion this summer, meaning the Senate tax cut could be as high as $190 billion.

The Senate’s budget proposal provides for just one reconciliation measure -- versus four in the House -- which would have to be reported no later than September 22. Reconciliation provides protections against a filibuster in the Senate.

The Senate Budget Committee plan assumes that legislation will be enacted to provide marriage penalty tax relief, as well as tax relief for education, health care, and small businesses -- all within the $150 billion tax cut framework. The committee bill also states that the $150 billion cut can accommodate -- but does not require -- the repeal of the 4.3 cents per gallon gasoline tax as early as July 1, 2000. The gas tax measure is being pushed by Senate Majority Leader Trent Lott, R-Miss. (For related coverage, see next story.)

But making all that happen could be a tricky proposition. On the same day the Budget Committee passed its tax cut plan, the Senate Finance Committee voted 11-8 to approve a marriage penalty relief bill at a cost of $70 billion over five years ($247 billion over 10 years). If the full Senate approves the bill -- a vote is expected before April 15 -- the cost could quickly eat up a significant chunk of the $150 billion available for tax relief. A House version of the bill, which was approved February 10, carries a five-year price tag of $51 billion ($182 billion over 10 years). The administration, which has pushed for targeted marriage penalty relief, regards both bills as veto bait because of their size and broad approach.

Roth, Breaux Seek Repeal of Telephone Excise Tax: Senate Finance Committee Chairman William Roth, R-Del., and Finance Committee member John B. Breaux, D-La., introduced legislation (S. 2330) on March 30 to repeal the 3 percent excise tax on telecommunications services, including telephone service for consumers.

Because phone service is now intertwined with data services and Internet access, the excise tax has become outmoded and complex, Roth said. "We run the risk of distorting the market by favoring certain technologies. There are already numerous exceptions and carve-outs to the phone tax," he said.

Keeping the telecommunications tax also runs the risk of hurting the fastest-growing sectors of the economy, according to Roth. "The technological changes in America have increased productivity and revolutionized our economy. As members of Congress, we need to make sure that our tax policies do not stifle that economic expansion," he said.

House Ways and Means Committee members Rob Portman, R-Ohio, and Robert Matsui, D-Calif., introduced a similar bill (H.R. 3916) on March 14. The House bill would phase in the repeal over three years; the Senate bill would repeal the tax outright.

According to President Clinton’s FY2001 budget proposal, the tax generated $2 billion in 1984 and $5.2 billion in 1999. It is expected to grow to $7 billion by 2005. Unlike the gasoline tax and other excise taxes, the revenues go into the government’s general fund.

The Advisory Commission on Electronic Commerce has also recommended this tax be repealed. (See next story.)

Advisory Commission on Electronic Commerce Approves Report For Congress; Democrats Offer Alternative: The Advisory Commission on Electronic Commerce (ACEC) approved its report to Congress March 30 by a close vote of 10-8, showing mixed support for changes to state tax "nexus." The report, which failed to achieve its congressionally required two-thirds majority consensus on all but two of the issues it addressed, had no support from the three federal government officials on the 19-member commission.

The report includes recommendations to --

• Extend for five years the current moratorium barring multiple and discriminatory taxation of electronic commerce and prohibit taxation of sales of digitized goods and products;
  
• Make permanent the current moratorium on any transaction taxes on the sale of Internet access;
  
• Eliminate the current 3 percent federal excise tax on communications services; and,
  
• Permit a number of activities without triggering state sale and use taxes, including the solicitation of orders, the presence of intangible assets, the use of an Internet service provider, the use of a corporate affiliation, and the use of the Internet to create a Web site.

The ACEC vote took place two days after the House Democratic leadership came out with its own proposal on Internet taxation. House Minority Leader Richard Gephardt, D-Mo. , outlined a proposal to extend the current Internet tax moratorium until 2003, permanently ban taxes on Internet access, and permanently extend the research and development tax credit.

Meanwhile, Senate Finance Committee Chairman William Roth, R-Del., and Ranking Democrat Daniel Patrick Moynihan, D-N.Y., announced March 21 that they would hold hearings on the commission’s report later this year.

Congress established the commission in 1998 under the Internet Tax Freedom Act, to make recommendations on Internet taxation issues. The commission was required to report to Congress by April 21, 2000.

Greenspan: Don’t Use Income Tax Revenues to Shore Up Entitlements: Federal Reserve Chairman Alan Greenspan March 27 cautioned against using income tax revenues to help reform Social Security and Medicare. In testimony before the Senate Select Committee on Aging, Greenspan contended that "moving toward a system of general revenue finance raises the concern that the fiscal discipline of the current Social Security system could be reduced."

Social Security is currently funded through payroll taxes. "Once the link between payroll taxes and Social Security benefits is broken," Greenspan said, "the pressure to reform the Social Security system may ease, particularly in this environment of budget surpluses."

Greenspan told the committee that budget surpluses should instead be used to repay the federal debt, explaining that increased savings will drive investment and economic growth. But he also reiterated his longstanding view that tax cuts would be preferable to spending increases if Congress is unable to save surpluses.

Gas Tax Debate Gathers Speed in the Senate: As the Organization of Petroleum Exporting Countries on March 28 agreed to modest production increases to relieve gas prices at the urging of the U.S., Senate Republicans were pushing to temporarily suspend the 4.3 cents per gallon federal gasoline excise tax passed in 1993 -- and possibly to rescind temporarily all 18.4 cents of federal taxes embedded in gas prices, if average prices exceed $2 a gallon.

Although the temporary repeal faces tough opposition in both chambers, the Senate moved closer to debating the issue after Democrats decided to not block a motion to proceed by Majority Leader Trent Lott, R-Miss. Senate Minority Leader Tom Daschle, D-S.D., made it clear, however, that Democrats will oppose the repeal.

The debate has become highly politicized. Some Republicans are calling the 1993 increase the "Gore tax" because Vice President Al Gore cast the tie-breaking vote when the tax was imposed. Daschle has said he believes the opposition in the Senate is large enough to kill the plan, and that Democrats may simply let Republicans hold a losing vote on it.

For his part, President Clinton said March 29 that the bill has little chance of reaching his desk because of opposition in the House, where some Republicans, including Transportation and Infrastructure Committee Chairman Bud Shuster, R-Pa., worry that a repeal would hurt funding for the Highway Trust Fund.

House Votes to Repeal Social Security Earnings Limit: By a vote of 419-0, the House March 28 again approved legislation (H.R. 5) that would amend the Social Security Act to repeal the earnings test for working seniors. The Senate approved the bill March 22.

Under current law, an estimated 800,000 seniors aged 65 to 69 can only earn up to $17,000 without losing some of their Social Security benefits. Once their earnings reach $17,000, they lose $1 of Social Security benefits for every $3 of earnings over the limit. The bill would raise that limit to $25,000 in 2001, and $30,000 in 2002.

The measure will now be sent to President Clinton for his signature. White House staff told reporters before a March 29 press conference that the president has promised to sign the bill.

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