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News & Views |Tax Week in ReviewMonday, March 26, 2001 Deloitte & Touche OnLine House Budget Committee OKs $1.6 Trillion Tax Cut as Ways & Means Clears Second Tax Bill The House Budget Committee March 21 approved on a 23-19 party-line vote a budget blueprint that provides for the full 10-year $1.6 trillion tax cut proposed by President George W. Bush. In addition, the resolution would extend tax provisions expiring in 2001 for one year. The full House is expected to take up the measure March 27. The budget resolution is a non-binding document agreed to by both the House and Senate that lays out Congress' budget priorities. But even before their budget blueprint was finalized, House lawmakers were busy pushing their tax relief agenda. The House Ways and Means Committee voted 23-16 on March 22 to approve the Marriage Penalty and Family Tax Relief Act of 2001 (H.R. 6), which would provide marriage penalty relief, expand the child tax credit, and modify the alternative minimum tax (AMT) at an estimated $399 billion over 10 years. That vote comes just two weeks after the full House approved the centerpiece of the Bush tax cut, a $958 billion reduction in marginal rates (H.R. 3). Marriage Penalty -- H.R. 6 differs from the president's marriage penalty measures in several respects. For one, it gives less tax relief to high-income taxpayers and more to low-income taxpayers. Among other points, the committee bill replaced the president's two-earner marriage penalty relief measure with one that also would help families with a nonworking spouse. The bill would increase the standard deduction for married couples filing jointly to twice that for individuals; expand married couples' regular 15 percent income tax bracket to twice an individual's; increase the child tax credit from $500 to $1,000 by 2006; and make the child credit fully exempt from the AMT. The plan would increase the Earned Income Credit (EIC) for low-income families to make more couples eligible and repeal existing provisions that offset the refundable child credit and the EIC by the amount of the AMT. Mortgaged to the Hilt? -- Between marriage penalty relief and marginal rate cuts, Republicans have allocated over $1.3 trillion to tax relief. That leaves just $263 billion -- or perhaps slightly more due to interaction between certain provisions -- for the president's other tax priorities, including repealing the estate tax ($267 billion), permanently extending the research and development credit ($50 billion), and allowing non-itemizers to deduct charitable contributions ($52 billion). Democrats hammered on that point during the March 22 markup of H.R. 6, repeatedly asking Assistant Treasury Secretary Mark Weinberger to say how the remaining $263 billion would be split among the remaining tax cuts in the president's budget outline. Congressional Republicans have even less room for their own legislation, including bills that would increase the amount taxpayers could contribute to tax-deferred retirement savings accounts ($52 billion) and repeal the telephone excise tax ($51 billion). It remains to be seen how they will juggle the president's as well as their own priorities into the remaining 16 percent of their tax cut. Given the existing constraints, Republicans may have to consider options such as scaling back a full repeal of the estate tax or only extending the research and development tax credit before it is set to expire on June 30, 2004, rather than making it permanent. Prospects for additional business tax breaks appear to be limited. Floor or Ceiling? -- The Budget Committee markup was essentially a microcosm of debate between congressional Republicans and Democrats seen in recent weeks. Republicans have effectively set a $1.6 trillion floor for tax relief while Democrats see it as a high, vaulted ceiling. Approval of the budget resolution has allowed Republicans to codify their views and dig in their heels for what promises to be a tough fight. The tax cuts will "help the economy" and aid "overburdened taxpayers," said Rob Portman, R-Ohio, a member of both the Budget and Ways and Means Committees. But Democrats, led by ranking member John Spratt of South Carolina, called the markup "premature" because Congress does "not have enough information on either Bush's spending or tax proposals," which the president is expected to release in greater detail on April 3. He noted that the staff of the Joint Committee on Taxation could not score some of the president's revenue proposals because not enough details were available. Committee Chairman Jim Nussle, R-Iowa, countered that "we have enough to go on" to write a budget resolution. Spratt argued that the Republican budget calls for too much tax relief, "does nothing for the solvency of Social Security and Medicare," and leaves "no room for other priorities." He instead called for a 10-year, $900 billion tax cut -- approximately $750
billion net of increased interest payments necessary to finance the
publicly held debt. Although
Republicans and Democrats have many common budget priorities, including
tax relief and the creation of a Medicare prescription drug benefit,
Spratt said, "today is the day we begin to diverge." |
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Closing by July 4? -- The budget resolution
calls for the Ways and Means Committee to report three or possibly four
tax reconciliation bills that would be due May 2, May 23, June 20, and
September 11. The first three
bills could contain the bulk of the president's tax proposals and be
combined with a Senate bill to adopt tax relief by July 4, the tentative
date Republican leaders have set for delivering a tax bill to the White
House. If this that does not
happen, however, Republicans would have another chance to enact tax relief
with a fourth bill in early fall. In addition to providing maximum
flexibility, the House strategy allows Republicans to showcase their tax
agenda by passing a different tax relief bill every few weeks. In the Senate, however, tax relief is expected to move
more slowly. The Senate is
unlikely to be able to move a tax bill in the absence of reconciliation
instructions provided for in the budget resolution.
Reconciliation bills are granted procedural safeguards in the
Senate, including protection from unlimited debate and extraneous
amendments. In the House, the Rules Committee can set the terms of debate,
so reconciliation is unnecessary. Senate Budget Committee Chairman Pete Domenici, R-N.M.,
reportedly has decided against a budget resolution markup because he
apparently does not have enough votes to bring a blueprint calling for
$1.6 trillion in tax relief through the panel.
A final decision is expected March 26. Republicans are instead
likely to bring a budget resolution directly to the floor, possibly as
early as April 2. Once the
Senate acts, the two chambers would need to resolve differences in
conference. This could,
however, take several weeks due to the intervening Easter recess. Although the House's blueprint provides for up to four tax reconciliation bills, the Senate's resolution is likely to make room for only two. Domenici intends for one of the bills to be used to move marginal rate reductions and a $60 billion rebate of this year's surplus; the other would be reserved for the rest of the tax proposals to be considered this year, including estate tax and marriage penalty relief. Structural Problems -- The budget outlook may be complicated this summer when the Congressional Budget Office (CBO) updates its budget projections. The recent economic slowdown could significantly affect receipts. On the other hand, an economic rebound could lead to larger surpluses than currently expected and could allow Republicans to go beyond the $1.6 trillion they are currently promising in tax relief. While reconciliation makes it easier for Congress to enact tax relief, it has one important pitfall. Beginning in 2012, all tax relief enacted this year under reconciliation could expire and tax provisions could revert to present law. A provision in budget law called the Byrd rule stipulates that tax provisions considered as part of a reconciliation bill are effective only for the years covered in the relevant budget window. This year, Congress is considering a budget resolution for the 10-year period 2002-2011. So, for example, if Congress phases out the estate tax using reconciliation, a future Congress in 2011 would have to vote to prevent the estate tax from resurfacing. Expect a Tax Bill Before Memorial Day, Nickles Says Senate Majority Whip Don Nickles, R-Okla., predicted March 21 that the Senate would finish the budget by April 6, pass the budget after the Easter recess, and pass a tax bill before the May 26 Memorial Day break. Nickles -- along with other members of the House and Senate taxwriting committees -- spoke in Washington at a tax, budget, and legislative seminar sponsored by Baker & Hostetler. Prospects for a second tax bill depend on "whether we decide to do the Bush package in whole or in part," Nickles said. "In all likelihood, we'll put it in one package under reconciliation. I would like to avoid reconciliation . . . but at the same time it does give assurances [that a tax bill will] be passed and that only relevant amendments will be offered. I could do it either way, it just depends on if the Democrats are willing to work with us or not. We ought to sit down and discuss the options, but they have to understand that we are going to pass a bill. By and large, the Dems want half the tax cut and twice the spending, and that just won't work," he said. Nickles also said he would like to see the Senate cut the capital gains rate cut to 15 percent (from 20 percent) and reduce income tax rates across-the-board. Proposals for business tax relief and international tax provisions, however, will have to wait, according to Nickles. "It will be a challenge to get to them at any time soon." Breaux: Not So Fast -- For his part, Senate Finance Committee member John Breaux, D-La., said he did not expect to see a tax bill come out of committee before June. Under his timetable, April and May would be taken up by negotiations, and a bill retroactive to January could be passed by the July 4 recess. Breaux also said that without changes the House rate reduction bill would fail on the Senate floor. Cardin Pushes Pension Reform -- House Ways and Means Committee member Ben Cardin, D-Md., promoted the pension reform bill (H.R. 10) that he and fellow committee member Rob Portman, R-Ohio, introduced on March 14. Cardin said H.R. 10 now has 259 co-sponsors and that they are working to get Chairman Bill Thomas, R-Calif., to bring up the bill as a stand-alone measure, if not as part of a larger tax bill. (For prior coverage, see Tax News & Views, Vol. 2, No. 19, Mar. 16, 2001.) "Pension reform is going to be part of something the president ultimately signs," he said. "We won't be able to pass Social Security reform this session, so this is a good place to start. [Senate Finance Committee Chairman Charles] Grassley and [ranking Democrat Max] Baucus are both very supportive of pension reform. If we can just get it on the floor of the House again, we will have another huge win like last year's 401 votes in favor." Small business tax provisions and a low income credit that the Senate added last year to its pension reform legislation are not in this bill, Cardin said, because they are too costly at this point. Cardin indicated, however, that there is still room for negotiation. Staff, Administration Weigh In -- William Hoagland, the majority staff director of the Senate Budget Committee, said that he envisioned a budget resolution with two reconciliation dates -- May 18 and some time in mid-July -- and that the combined 10-year cost of the two tax bills would not exceed $1.6 trillion. "The House appears to want five separate reconciliation bills, . . . but the Senate won't have time for that," Hoagland said. "I'll be happy if we get two." Assistant Treasury Secretary for Tax Policy Mark Weinberger said the primary business item now on the table is the permanent extension of the research and development credit and the small business provisions of the president's tax plan. "There's a lot of needed change on corporate tax issues as well, but the best way to deal with them now is through regulation," Weinberger said. "In the legislative process, after the president's priorities pass he would like to deal with a more complete tax relief plan, but he's not going to change his priorities that he campaigned on right away. They wouldn't fit within the $1.6 trillion figure." |
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IRS Oversight Board Meets on Agency's Budget The annual debate over funding for the Internal Revenue Service promises to be more complicated this year now that the IRS Oversight Board is operational. The Oversight Board, which held its first public meeting on March 20 to discuss the IRS strategic plan and the board's budget recommendation for FY 2002, was created by the IRS Restructuring and Reform Act of 1998 (RRA) to oversee the IRS in its administration of the tax laws. Its responsibilities include reviewing the agency's long-range plans and ensuring that the agency's budget request supports its goals. The RRA requires that the board submit a budget for the IRS to the Treasury Secretary, who forwards the budget -- without revision -- to the president. The president, in turn, submits the budget to Congress. Because the administration also will submit its own budget for the IRS, however, Congress will have two IRS budget proposals to consider. Business Community Support -- At the March 20 meeting, representatives from the IRS advisory councils, the business community, and tax practitioners commented on the importance of adequate funding for the IRS. David Lifson of the American Institute of Certified Public Accountants said that the board should fight for a "full and reasonable budget" for the Service and that it should pursue multi-year funding for the agency to ensure stability in funding for the future. Philip Mann of the American Bar Association agreed, citing the lack of multi-year funding and frequent complex changes to the tax law as the two external problems facing the agency. Budget Recommendations -- The board has recommended an IRS operating budget of $10.3 billion for FY 2002 -- about $500 million more than the $9.8 billion the agency requested, according to published reports. Oversight Board Chairman Larry Levitan acknowledges that the amount is also more than the Bush administration is expected to recommend to Congress. The reason for the higher budget is the board's concern about funding for the IRS's modernization program. That program is funded through an information technology investment account established in 1998. Funds are appropriated to the account and then released for specific projects. The board is concerned that the account will have a zero balance at the end of fiscal year 2001 and that this could cause projects to be stopped or unnecessarily slowed down. Therefore, the board has recommended putting $1 billion into the account, which is substantially more than the $450 million the IRS requested. A Losing Battle? -- Despite the support, the board will have a difficult time getting the budget approved. "I have been told that Congress will not fund [the IRS] beyond the administration's level," Levitan said. Nevertheless, Levitan and the other members of the board appear ready to take on what may be a losing battle. The administration is expected to submit its budget recommendation as well as the board's budget recommendation to Congress in April.
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