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Tax Week in ReviewTuesday, January 02, 2001 Deloitte & Touche OnLine
President Signs Installment Method Legislation: President Clinton on December 28 signed into law legislation to reinstate the rights of accrual basis taxpayers to use the installment method in asset sales. The Senate and the House passed the bill, H.R. 3594, on December 15, shortly before the 106th Congress adjourned. The bill had overwhelming support on both sides of the aisle. H.R. 3594 retroactively reverses the 1999 repeal of the right of accrual basis taxpayers to use the installment accounting method in asset sales. The reversal is retroactive to sales on or after December 17, 1999, the date that the repeal went into effect. Since the repeal was enacted, small businesses have had to pay all of their capital gains taxes on the sale of assets in the first year, rather than in pieces as the installment payments for the assets are received. Critics charged that the repeal seriously hurt the ability of small, often family-owned, businesses to dispose of their property. As a practical matter, with the passage of H.R. 3594, the repeal is treated as though it never happened. Although the bill had broad support, it had been caught in the political infighting between the White House and Congress. In particular, it was stalled in the Taxpayer Relief Act of 2000, which President Clinton threatened to veto because he believed the larger tax bill unfairly favored high-income individuals. After it became clear the larger bill would not pass, GOP leaders resubmitted the installment method measure as a stand-alone bill. Revised Surplus Numbers Bolster Bush Tax Cut Plans: The Office of Management and Budget (OMB) December 28 projected a $2.5 trillion non-Social Security surplus between 2002 and 2011, bolstering President-elect George W. Bush's claims that the nation can afford his proposed 10-year, $1.6 trillion tax cut. The agency's projections also appear to leave Bush and Congress with approximately $900 billion with which to further reduce taxes, increase spending, or add to Social Security surplus funds earmarked to repay the publicly held debt. In the same release, OMB forecast a $4.4 trillion unified budget surplus between 2001 and 2010. This figure represents an increase from the $4.2 trillion unified budget surplus and $1.9 trillion non-Social Security surplus the agency forecast last summer. At press time, updated OMB non-Social Security surplus estimates for the 2001-2010 budget window were unavailable. OMB v. CBO OMB's budget projections are more conservative than those made by the Congressional Budget Office (CBO), which last summer forecast a $4.6 trillion unified budget surplus and a $2.2 trillion non-Social Security surplus between 2001 and 2010. According to published press reports, this surplus might become larger when CBO releases revised budget projections, which are expected this January, because the agency is considering raising its forecast of economic growth. With this release, CBO will make its first projections concerning the 2002-2011 budget window. Congress will use this budget window to formulate a budget resolution -- its fiscal policy blueprint -- next spring. Tax Cut Ammo Taken together, the new OMB and CBO estimates give President-elect Bush more ammunition in his efforts to convince Congress that the country can afford his proposed tax cut package. Bush has said that anticipated budget surpluses should be returned to the taxpayer in the form of tax cuts -- not used to fund big government. CBO's projections, however, are likely to hold more sway in Congress than OMB's for several reasons. Because CBO's numbers are larger than OMB's, they appear to give politicians more room to cut taxes or increase spending. Congressional budget rules also mandate the use of CBO projections. It remains to be seen how much of the surplus the closely divided Congress decides to use on spending programs and tax cuts. The chances of enacting any tax cut, however, hinge crucially on the extent to which the Bush White House and Congress are willing to compromise and the assumption that projected budget surpluses materialize.
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