August 1999

Congress and President Wrangle Over Tax Cut

By James A. Woehlke, CPA

Congress approved a $792 billion tax cut bill on August 5 and plans to submit legislation to President Clinton in September after its summer recess.

The president has promised to veto the bill, The Taxpayer Refund and Relief Act of 1999, which the House of Representatives approved by 221-206 and the Senate passed by 50-49.

The bill cuts tax rates across the board by 1 percent, reducing the lowest rate to 14 percent from 15 percent, and the top rate to 38.6 percent from 39.6 percent. The bottom rate reduction will be phased in between 2000 and 2003 and the other rates' reductions beginning in 2005.

The rate reductions, which expire in 2008, will occur only if interest payments on the national debt do not increase. The bill's other tax cuts sunset in 2009, including provisions that:

* Provide marriage penalty relief, including doubling the standard deduction for married individuals filing jointly (phased in over 10 years), and additional breaks for low-income married taxpayers who receive the earned-income credit;

* Increase the low-income housing tax credit;

* Expand the dependent-care tax credit (phased in over 10 years);

* Raise the Roth IRA conversion limit to $200,000; the Education IRA contribution to $2,000 from $500; and deductions for all other IRAs to $5,000 from $2,000; and

* Cut capital gains rates to 18 percent (8 percent for low income taxpayers) from the current 20 percent (10 percent for low income taxpayers), retroactive to January 1, 1999.

Give Back Now or Save for the Future?

The tax cut battle pits opposing worldviews. The president, who favored a more modest $250 billion plan, has expressed concern that a large tax cut will jeopardize the government's ability to reduce its more than $5 trillion debt and help stabilize Social Security and Medicare.

"At the very time the nation will be confronting the demographic challenge of the baby boom, the Republican plan will blow a $3 trillion hole in the federal budget," President Clinton said in his July 17 radio address, "threatening our ability to secure Social Security and Medicare for the next generation and risking return to the era of deficits with high interest rates and economic stagnation."

The congressional majority, on the other hand, feels that the projected budget surplus results from an excess in tax collections and that the government should return it to the people who paid it rather than use the funds as an excuse for additional spending.

"We have trillions of dollars in surplus," Assistant Republican Senate Leader Don Nickles said. "Let's give a quarter of it back to the American people."

The New York congressional delegation voted for the legislation on party lines with Republicans supporting the bill and Democrats opposing it. From conversations with lawmakers, however, it appears that views in the middle also exist.

"I support tax cuts. When the company has a good year you pay a dividend to the shareholders," New York Republican Congressman and Ways and Means Committee member Amo Houghton told The Trusted Professional. "Having said that, I and other moderate Republicans have reservations about the size of the package--$792 billion over ten years. A surplus of almost a trillion dollars is projected over the next ten years--and most of it in the last five--not including Social Security. But it is just that--a projection."

Negotiations to Continue

The White House recently indicated that after the veto, it will remain open to discuss a tax cut package that meets its criteria.

"Any compromise the president will agree to is probably quite a bit less than the Republican bill," Rep. Houghton said. "So, we'll have to wait and see how this plays out when we return from the August break."