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News & Views |Tax Week in ReviewMonday, April 9, 2001 Deloitte & Touche OnLine Bush's Tax Cut 'Victory' in the Senate Could Be a Loss for Business and the Wealthy President George W. Bush quickly claimed victory April 6, minutes after the Senate approved 65-35 a budget plan that allows for approximately $1.2 trillion in tax cuts over the next 10 years. The plan also makes room for an $85 billion tax cut retroactive to the current year, but left unspecified the mechanism for providing that reduction to taxpayers. "The result [of today's Senate action] will be the largest tax relief in decades," Bush predicted. But the president's claim of victory comes despite the fact that the Senate shaved 27 percent off of his proposed $1.6 trillion tax cut. "If this is a victory [for the president], there ought to be more of them," said Senate Minority Leader Tom Daschle, D-S.D. The House budget resolution, which was passed on March 28, would fully fund the president's tax relief package. The House and Senate will now have to work out their differences in a conference committee, which is expected some time in May. Senate Smackdown -- After savoring a month-long string of legislative victories in the House, the Bush administration this week had to choke down a double dose of disappointment from the Senate. On April 4, senators voted 53-47 to amend the GOP budget resolution to chop about $450 billion from the president's tax plan. The same day, Republicans James Jeffords of Vermont and Lincoln Chafee of Rhode Island broke ranks with party leadership to support a $1.25 trillion tax cut compromise offered by Sen. John Breaux, D-La., and other moderates. Those two defections threatened to leave the GOP at least a vote short of what they would need to pass a budget. The only Democrat to cross over and support the president's plan was Sen. Zell Miller of Georgia. But even with Miller's support, Republicans still would have needed one more vote to position themselves so that the vice president could break a tie. In the second blow to the White House, Senate Democrats amended the GOP budget proposal to reduce the president's $1.6 trillion tax cut by about $450 billion. (Half of the $450 billion was earmarked for debt reduction and half for education spending.) Unexpectedly, Republican Sen. Arlen Specter of Pennsylvania joined Jeffords and Chafee to support the Democratic amendment. Business and the Wealthy Caught in a Squeeze -- In all likelihood, any tax cut enacted this year will fall somewhere between the $1.2 trillion called for in the Senate budget resolution and the $1.6 trillion in the House resolution. These new parameters bode poorly for business tax cut prospects, since even large parts of the president's individual tax cut plan now appear to be in jeopardy. If Congress and the administration cannot agree on issues such as the individual alternative minimum tax, estate tax relief, or rate cuts, for example, the question may turn from how much businesses will get in tax relief next year to whether they get any at all. If individual tax relief is fully addressed this year, businesses may still find a challenge getting to the front of the line next year on issues such as the permanent extension of the research and development (R&D) tax credit, corporate alternative minimum tax reform, and changes to the tax code's depreciation system. Two key congressional taxwriters hinted at this prospect earlier in the week. House Ways and Means Committee Chair Bill Thomas, R-Calif., told the Tax Executives Institute (TEI) on April 3 not to expect a permanent extension of the R&D credit this year. The day before, Senate Finance Committee Chairman Charles Grassley, R-Iowa, told TEI that his committee would be looking into corporate tax shelter abuses. (See related story below.) High net worth individuals may also feel the pinch. The House's $1.6 trillion tax package would have to be scaled back to fit within the Senate's budget number. Some senators have indicated that the provisions most likely to be modified are upper-bracket rate cuts and full repeal of the estate tax. Assistant Treasury Secretary for Tax Policy Mark Weinberger has offered the first indication of the new administration's approach to the tax shelter issue, telling the Tax Executives Institute on April 3 that Treasury would work to implement existing rules and make improvements to proposed regulations before seeking legislative remedies. The regulations will be reviewed to determine if the information being requested is over-inclusive, Weinberger said. Weinberger did not rule out the possibility of legislation to address specific abusive transactions. The Clinton Treasury Department had proposed several legislative measures to give the IRS more power to deal with abusive transactions. Congress did not act on any of these proposals because it has been skeptical about the need for legislative action and concerned about the impact of the legislative proposals on legitimate business transactions. Crackdown on Abuses -- Senate Finance Committee Chairman Charles Grassley, R-Iowa, told TEI on April 2 that there will be a crackdown on corporations that abuse the system and that the Finance Committee is studying ways to address tax shelter abuses without harming legitimate transactions. Tax shelter abuse "tears at the fabric and integrity of voluntary tax compliance, and we need to address it," Grassley said. At an April 5 Finance Committee hearing focusing on individual tax "schemes" such as offshore bank accounts and "pure" trusts, Grassley indicated that the committee will address the tax shelter issue later in the year.
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OTSA Update -- On the administrative front, IRS representative Jonathan Zelnick told the D.C. Bar Association Tax Section on March 27 that so far the Office of Tax Shelter Analysis (OTSA) has received about 50 disclosure statements from corporations that participated in listed transactions. These are transactions that the IRS publicly announced are tax-avoidance transactions to which the tax shelter registration, disclosure, and listing requirements apply. Zelnick also said that the OTSA has received about 2,900 confidential tax shelter registrations, most of which are related to confidential leasing transactions. Speaking at the TEI conference on April 1, OTSA's director David Harris said that he expects the number of disclosures to increase and that additional staff will be hired to handle the increased workload. Internet Tax Scams -- Moving away from what Grassley described as the "gray area" of tax shelters, lawmakers at an April 5 Senate Finance Committee hearing focused on the proliferation of Internet tax scams. Grassley labeled these schemes as "clearly outside the law." Recent reports have estimated the revenue loss attributable to corporate tax shelters to be as high as $10 billion a year, but Finance Committee member Frank Murkowski, R-Alaska, claimed the loss from fraudulent Internet activity could reach upwards of $300 billion a year. "We could afford a larger tax cut" as well as additional spending if Congress cracked down on the Internet schemes, remarked Finance Committee ranking Democrat Max Baucus of Montana. The panel of witnesses testifying before the committee -- which included attorneys, financial-service providers, and internet tax fraud "watchdogs" -- all expressed dismay over the government's apparent tardiness in responding to the proliferation of scams. When committee members pressed IRS Commissioner Charles Rossotti for details on how the Service planned to halt the scams, Rossotti said the agency would provide greater taxpayer education and pursue civil and criminal enforcement. The Service, he said, already has issued two alerts this year addressing specific forms of prevalent scams. Another tool the IRS would use, Rossotti said, is its new matching program for Forms K-1. But Grassley did not seem satisfied that the IRS efforts would be adequate. "Does the IRS need to be out there sooner and faster before taxpayers are fleeced?" he asked. Similarly, Baucus questioned the effectiveness of the matching program, arguing that "a lot won't get caught with K-1s." Rossotti said the matching program wasn't a solution, but just one technique to help identify taxpayers abusing the system. The commissioner acknowledged offshore trusts were "a major problem," with some experts saying these accounts held over $3 trillion in assets. House Approves GOP Bill To Eliminate Estate Tax While President Bush's $1.6 trillion tax cut package was taking its lumps in the Senate, it scored one more victory in the House as lawmakers on April 4 passed a 10-year, $185.5 billion bill to repeal federal estate, gift, and generation-skipping transfer taxes by 2011. The Death Tax Elimination Act of 2001 (H.R. 8) passed
by a comfortable margin of 274-154. Fifty-eight Democrats joined 215
Republicans and one Independent in approving the measure. Three
Republicans -- including Ways and Means Committee member Amo Houghton of
New York -- voted against the bill. How
It Works --
The House bill would gradually phase in the repeal of estate, gift, and
generation-skipping transfer taxes beginning in 2002. In 2002, the unified credit would be replaced with a unified
exemption; the 5 percent surtax, which phases out the benefit of the
graduated rates, and the rates in excess of 53 percent would be repealed.
Beginning in 2003, the estate, gift, and generation-skipping
transfer tax rates would be reduced each year until they are repealed in
2011. Following repeal, an heir's basis in inherited assets would equal the donor's basis in those assets at the time of death. A decedent's estate would, however, be allowed to increase the basis of assets transferred by up to a total of $1.3 million. The basis of property transferred to a surviving spouse could be increased by an additional $3 million. (Under current law, estates worth more than $675,000 are subject to the tax; the exemption threshold is set to rise to $1 million in 2006.) Democratic Alternative Fizzles -- The House defeated by a vote of 201-277 a 10-year, $39.2 billion Democratic alternative offered by Ways and Means Ranking member Charles Rangel of New York that would have hiked the estate tax exclusion to $2 million ($4 million for married couples), effective this year. Rangel urged lawmakers to support the Democratic plan, saying it would "bring about instant relief for almost all estates. Don't hold hostage all of the smaller estates only because you want to get everybody instant relief 10 years from now." Citing estimates by the Joint
Committee on Taxation, Rangel argued that the Republican bill would cost
$662 billion if it went into effect this year. "Now, I looked at the
president's $1.6 trillion tax cut and already they spent $958 billion for
rate reductions, and another $400 billion for marriage penalty and the
child credit. So, I wondered how they were going to fit a $662 billion . .
. estate tax repeal into the last wedge that only left $200 billion. And
by God they did it. The only thing is they're saying that their
legislation doesn't take effect for another 10 years." Only three Republicans crossed party lines to vote for Rangel's proposal, while 11 Democrats voted against it. Three-for-Three --
H.R. 8 was the third prong in the House GOP's three-pronged plan to push
through President Bush's $1.6 trillion tax cut package. On March 8, the
House passed H.R. 3, a 10-year, $958 billion bill that would lower
marginal income tax rates. Three weeks later, it passed H.R. 6, which
would gradually eliminate the marriage penalty for joint filers and double
the per-child tax credit to $1,000 at a cost of $399 billion over 10
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Hatch Proposes Permanent Subpart F Exemption for Active Financing Income Senate Finance Committee member Orrin Hatch, R-Utah, introduced a bipartisan bill (S. 676) on April 2 that would permanently extend the exclusion from subpart F for active financing income earned on business operations overseas. The exemption, which is set to expire on January 1, 2002, permits U.S. financial service firms conducting business abroad to defer U.S. tax on earnings from their foreign operations until those earnings are returned to the U.S parent company. According to Hatch, providing annual extensions to the provision hampers long-term planning for U.S.-based financial service firms, makes it more costly for growing overseas businesses to meet capital requirements, and limits their ability to compete internationally. "The permanent extension of this provision is particularly important in today's global marketplace," Hatch said in a floor statement. "Over the last few years the financial services industry has seen technological and global changes that have altered the very nature of the way these corporations do business, both here and abroad. The U.S. financial industry is a worldwide leader and plays a pivotal role in maintaining confidence in the international marketplace. It is essential that our tax laws adapt to the fast-paced and ever-changing business environment of today." At press time, other co-sponsors of the bill included Finance Committee ranking Democrat Max Baucus of Montana, as well as committee members John Breaux, D-La.; Frank Murkowski, R-Alaska; and Robert Torricelli, D-N.J. House Companion Bill -- In the House, meanwhile, Ways and Means Committee member Jim McCrery, R-La., introduced a similar bill (H.R. 1357) on April 3. Twenty-six other committee members have signed on as co-sponsors. The House Judiciary Committee on April 4 approved a joint resolution (H.J. Res. 41) proposing an amendment to the U.S. Constitution requiring that any bill, resolution, or other legislative measure to raise taxes be approved by a two-thirds majority of both the House and the Senate. An exception would apply to any measure that is determined at the time of adoption not to increase revenue by more than a "de minimis" amount. "We need this amendment to stop the 'tax and spend' mentality in Washington," according to committee member Steve Chabot, R-Ohio. "Without it, future Congresses could easily reverse all the good work this Congress has done and will do on rate cuts, the onerous death tax, and an estate tax repeal," Chabot said. Democrats, who derided the proposed amendment as "anti-democratic and unconstitutional," predicted that it would fail on the House floor. The legislation would need the support of two-thirds of the lawmakers in both houses before it could be sent to the states for possible ratification. Three-quarters of the states would then have to ratify the measure for it to be added to the Constitution. Prospects Bleak -- The full House will vote on the resolution the week of April 23, after Congress returns from the spring recess. Legislation similar to H.J. Res. 41 has been considered in the House in previous sessions but was defeated because it failed to garner required the two-thirds support. (During the 106th Congress, the measure was defeated on April 12, 2000, by a vote of 234-192.) A similar fate has been predicted for this year's resolution.
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