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Republican leaders in the House and Senate agree that tax cutting is at the top of their 2000 legislative agendas, but they differ on the pace to achieve it.
Whether taxpayers will actually get any tax relief this year also depends on the politics of the presidential election and what advantage each side believes it can gain from passing tax bills.
The 106th Congress reconvened on Jan. 24, and House Republicans said their first priority was to do away with the “marriage penalty” that some couples encounter when they pay taxes.
When married couples earn roughly the same salaries, the tax rates tend to cause them to pay more in taxes than they would if they were single filers. House Speaker Dennis Hastert, R-Ohio, says the new marriage-penalty bill will make the same changes that were defeated last session as part of the vetoed Financial Freedom Act. The act would have begun phasing in an increase in the married filers’ standard deduction in 2001 so that it would be double the single deduction amount by 2006.
More breaks promised
After that bill, according to Hastert, they will introduce bills to expand educational savings accounts and add business tax incentives promoting development in poor communities. Each measure would rely on projected budget surpluses for funding,
according to the Speaker’s aides.
Senate Majority Leader Trent Lott, R-Miss., agrees that tax legislation this year should be considered as separate bills. But he cautions that his legislative body will not act as quickly as the House, choosing to wait until larger budget questions are resolved.
Procedures in the Senate, Lott notes, mean that bills are more easily amended and often killed by filibusters, where opponents of legislation can prevent votes by controlling debate for days.
Financial Freedom fight to resume
In addition to the marriage-penalty action, taxpayers probably will see a return of more of the measures from the doomed Financial Freedom Act of 1999, the Republican’s ambitious $792 billion, 10-year tax bill that had a break for almost everyone. Its
key provisions appeal to both taxpayers and politicians, and are likely to be debated this year, either as part of another comprehensive tax bill or as separate pieces of legislation.
Congress may make changes to these tax provisions, but here is what the legislation would have done if it had passed last session:
- Reduction of all tax rates: Currently, there are five tax rates of 15, 28, 31, 36 and 39.6 percent. The Financial Freedom Act called for a phased-in reduction for all of them. The lowest level would have dropped to 14 percent in 2003, and the other four rates would each be reduced by one point in 2005.
- Capital gains more appealing: Capital gains already receive preferential tax treatment, but Congress proposed reducing tax rates in this area even more. The Financial Freedom Act would have reduced the two capital gains rates from 20 percent and 10 percent to 18 percent and 8 percent, respectively.
Increased IRA savings: There were several tax breaks to encourage more retirement savings.
Roth IRAs allow a taxpayer to save already taxed money and receive it and its earnings tax-free upon reaching retirement. Taxpayers can convert traditional IRAs, but only if they earn — married or single — $100,000 a year or less. The Financial Freedom bill would have doubled that limit to $200,000 for married-filing-jointly taxpayers.
The earnings limit for opening a new Roth account also would have increased. Beginning in 2003, it would have gone from $200,000 to $210,000 for joint filers, and from $100,000 to $110,000 for single taxpayers.
All IRA contributors — Roth and traditional — would have been allowed to sock away more. The bill would have increased the annual contribution limit from $2,000 to $3,000 from 2001 to 2003; gone up to $4,000 in 2004 and 2005; and reached $5,000 in 2006 through 2008.
More education money: Accounts known as Education IRAs allow taxpayers to save for a child’s education. The contributions are not deductible, but the earnings are not taxed until they are taken out to pay education costs.
Currently, education savings accounts have a $500 annual contribution limit, money must be contributed by the end of the year and it can only be used to pay for higher education expenses.
The vetoed tax bill would have increased that yearly amount to $2,000 and expanded acceptable education costs to include those in the kindergarten through high school years. It also would have allowed savers to make contributions up until April 15 of the following year, just like other IRA contributions.
- Estate enhancements: The act would have reduced taxes paid by large estates substantially through the next seven years, culminating in complete repeal of the estate tax in 2008.
- Eating out on the company: Currently, deductions for business meals are allowed at only half of the actual expenses. The Financial Freedom Act would have increased the deductible amount gradually each year until 60 percent of the expenses were allowed in 2007.
Health care taxes partially done
Health care legislation and its associated tax breaks received a lot of attention during the first session of Congress. However, disagreement between the House and Senate about how to resolve a controversial provision that would allow patients to sue
managed care plans prompted legislators to delay resolution of the issue until 2000.
The key tax components in the health care bill are:
- Expanded access to Medical Savings Accounts, which would allow you to set aside money tax-free for medical care while purchasing special, high-deductible insurance policies that cover only catastrophic illness expenses. This option would be available beginning in 2001.
- A shortened timetable for increased deductions of the cost of health insurance purchased by self-employed and uninsured individuals. All of the premiums paid for health care coverage would be deductible in 2001. Under current law you have to wait until 2003 for the full deductibility.
- A deduction for health insurance expenses and long-term care insurance expenses at the rate of 25 percent in 2002 through 2004; 35 percent in 2005; 65 percent in 2006; and 100 percent beginning in 2007.
- An additional personal exemption allowance for caretakers of elderly family members, beginning in 2001.
- The allowance of self-employed individuals and small businesses to form groups and buy health insurance under federal rather than state regulation.
Health care conference committee members were appointed just before Congress adjourned, so it is likely that health care will get attention early in the session.
Tax breaks tied to minimum wage
Congress tried to increase the minimum wage and give businesses additional tax breaks at the same time. The strategy didn’t work. The House passed its version of the bill, but the Senate didn’t get around to final consideration of its legislation before
Both the House and Senate versions would:
- Increase to 100 percent the deduction for self-employed health costs.
- Increase to $30,000 the amount a small-business owner may deduct in a year for equipment, rather than depreciating the equipment costs during several tax years.
- Provide a full range of pension-related provisions to increase expand pension coverage, enhance pension fairness to women and increase pension portability.
The House package also included:
- A reduction in the estate, gift and generation-skipping transfer taxes beginning in 2001.
- An increase from 50 percent to 60 percent in the deduction for business meals and entertainment, taken from the Financial Freedom Act.
- Modifications to the low-income housing tax credit.
- Tax incentives — such as a zero capital gains tax rate on certain investments, a special deduction for real estate revitalization expenses and special expensing for certain property — for 15 designated renewal communities.
- Extension of both the work opportunity and welfare-to-work tax credits until Dec. 31, 2001.
The Senate-passed minimum wage/bankruptcy/business tax package would provide:
- A new health insurance deduction for people who don’t have employer-provided coverage.
- An immediate 100 percent deduction for the self-employed.
- An increase in the business meal deduction from 50 percent to 80 percent.
- Higher 401(k) contribution limits.
The minimum wage is a popular election year issue, so expect Congress to take this up early this year. How many of the tax provisions survive, though, is unclear. And President Clinton has promised again to veto the Republican proposal.
Throughout the year, the tax debate is likely to be shaped by the president’s continuing veto threat, along with Congressional concerns about the long-term status of Social Security and Medicare and fears that economic growth might soon slow — along with the politics of the race for the White House.