February 2001

2001 Tax Legislation: It’s Coming, but Where’s It Going to End Up?

NYSSCPA Members Offer Insight

By Jay Dismukes

Unless both parties defy tradition and actually stick to their promises of bipartisanship, politics on the Hill should evoke visions of the Wild, Wild West this year. Given the slim margin between the Democrats and Republicans in Congress and a presidential election that will go down in the history books, the time is ripe for some old-fashioned gunslinging. In fact, the confirmation process of President George W. Bush’s Cabinet nominees may be a taste of things to come.

However, as unpredictable as 2001 looks to be, there is smart money in the nation’s capital. If ever there was a sure thing, then voluminous tax debates are it. After all, Bush rode a 10-year, $1.3 trillion proposed tax cut all the way to the White House. Forecasts of an economic slump appear to have hit their target, leading to greater consideration of tax cuts as well as another reduction of short-term interest rates as jumpstarting remedies. And marriage tax and estate tax relief are still unresolved, as both bills were vetoed by former President Bill Clinton last year.

While the broad issue of taxes clearly will be a major concern in Washington this year, the specifics, in terms of final results, are much less obvious. Trying to surmise the future of tax legislation, The Trusted Professional recently contacted David A. Lifson, John J. Kearney, and Ira D. Fox—all members of the New York State Society of CPAs—and asked them to look into their crystal balls. Based on their similar outlooks, all three practitioners were reading from the same set of tarot cards; however, each member weighed certain tax-related items and agendas differently, individually emphasizing particular aspects they believe will be important to consider as the year progresses.

“We are going to have a lot of debate about taxes because it was a core component of Bush’s agenda,” said Lifson, a partner at Hays & Company. “The debate seems to center around whether and how there will be a tax reduction, which could be influenced by the state of the economy.” In addition to the economy, Lifson noted that real and projected budget surpluses would influence the possibility for tax reductions, too.

Both Fox, a partner with Faber & Fox LLP, and Kearney, president of Israeloff Trattner & Company CPAs P.C., concur with Lifson, believing taxes may possess more potential for bipartisan consensus than other legislative items. The practitioners believe the estate tax and marriage tax will be among the key tax initiatives in Congress as there is some indication that both parties favor some degree of relief in these areas. Instead of the Republican-proposed complete repeal of the “death” tax, the CPAs foresee some form of compromise over the estate tax system, with Kearney suggesting a possible increase in exemptions.

“Elimination of the estate tax would only benefit the really wealthy, of whom there is a small percentage,” said Fox. “Getting rid of it [the estate tax] is not the nirvana that a lot of people think it is.... There are still lots of ways to dispose of assets.”

Fox also added that elimination of the estate tax could harm states, which depend heavily on the tax as a source of revenue.

Lifson offered a different view of the estate tax, saying that the number of people affected by it has grown increasingly large. If the Republican plan, which he said moves taxation of inherited wealth from a transferred tax system to the income tax system, goes through, Lifson predicts modest benefits for people paying the tax.

Some of the other tax items that the practitioners said could be addressed include a reduction in capital gains rates and income tax, changes to state and local sales taxes, IRA rules (allowing for greater contributions), AMT reform, and modification of tuition credits for families sending their kids to college.

With respect to these tax items, one of the looming questions is whether they will be sent through in a piecemeal fashion or will comprise Bush’s 10-year

$1.3 trillion tax cut plan. Asked to comment, Lifson said he is less concerned with how the bills are packaged as with what they contain. Kearney said he doubts Bush can get enough votes to get his plan passed, but Fox said the president certainly will try, wanting to win the nation’s support.

“Bush will try to push his plan through as one—it’s a political move. Even if it doesn’t go through, he can say he tried it,” said Fox, noting that the public is much less cognizant of individual tax bills going through Congress.

Of course, while members of Congress will agree to discuss taxes ad nauseam this year, the practitioners wonder how much will be accomplished once the members move past the rhetoric.

“I don’t think anything will happen this year,” Fox said. “With a 50/50 split [in the Senate] it is so difficult for these guys to agree on anything, as much as Bush might push it [tax cuts]. When push comes to shove, they [both parties] retreat back to their original positions. They have inherently different opinions as to how to approach this.”

Lifson echoed Fox’s concerns, saying that there will be significant disagreement over which tax bills should be passed.

Despite their skepticism, Fox, Lifson, and Kearney are hopeful that there will be some form of tax relief, pointing out that the public always favors tax cuts. But that being said, there appears to be some disagreement over which segment of the population would most benefit from proposed tax cuts. Further still, which segment of the population is most in need of tax cuts?

“Everybody wants lower taxes and has expectations for them.… The debate is about who should get them.… Delivering a tax cut to the less than wealthy doesn’t have much fiscal effect,” Lifson said. “(But it is) much harder to explain to the average person that a $5,000 tax cut for someone like Donald Trump might be good for him [the average person].”

Lifson added that it is too early to tell who would benefit from Bush’s tax program, which he said has been pitched as a tax rate improvement for all demographics. But he, like Fox, suspects tax cuts primarily would benefit the wealthy. Kearney said there is a possibility for all people to benefit depending on whether Congress reforms items like the AMT and tuition credits.

Besides putting more money in people’s pockets, there has been significant discussion, especially from the Bush camp, that tax cuts also are prudent for their ability to jumpstart the economy should it recede over the next several months. According to a Reuters story, Federal Reserve Chairman Alan Greenspan may have been wanting to head off a huge tax cut when he lowered interest rates by half a percentage point in early January. In the late 1990s, when the economy was stronger, Greenspan often said he did not favor a large tax cut for fear it would accelerate economic growth to an inflationary level, the story stated.

As an economic strategy, both Kearney and Fox said lowering interest rates is the best approach, with Fox noting that the tax cuts currently proposed are not as significant as those that passed under former President Ronald Reagan and would have only a short-term effect on the economy. When asked to give his thoughts on safeguarding the economy, Lifson said, “There is no silver bullet to issues as big as the economy. Invariably, the correct answer involves multiple actions, which hopefully are the right choices.”

For Lifson, one of those actions is going to involve taking a step back and reevaluating the manner in which the United States and much of the international community conduct their business affairs. Specifically, as our nation’s leaders wrestle with tax bills this year, they need to give greater consideration to technology and its growing impact on the workplace. Because physical presence is taking on less meaning, the tax system has to respond better to e-commerce to determine both who has the right to tax and who should be taxed.