March 2001

Let’s Talk Taxes
Journal Columnist Says Relief Is in the Air

Spurred on by a “taxaphobia” that appears to have reached a fever pitch this year, President Bush sent Congress his long-awaited 10-year $1.6 trillion tax plan in mid-February. While the cards are now on the table, the final form that the proposed tax legislation takes is anyone’s educated guess considering that the plan calls for the biggest reduction in federal taxes since 1981 and the narrow party split in the House and Senate. However, despite the wide-open quality of the Bush proposal, taxpayers, CPAs, and finance professionals can probably count on some form of action in at least six key tax areas, said Wall Street Journal senior tax columnist Tom Herman.

Speaking to an audience of approximately 100 people attending a Jan. 31 New York State Society of CPAs’ Committee on Cooperation with Bankers and Other Creditors breakfast meeting at the Yale Club in Manhattan, Herman said these areas include across-the-board income tax rate cuts, increases in child tax credits, marriage penalty relief, estate tax repeal or relief, charitable giving incentives, and retirement savings incentives.

While Republicans will push hard for major relief in all six of these areas, Herman said final legislation would probably be watered-down versions of the original proposals.

Referring to the stances both Congressional parties will take regarding the estate tax, the “Ask Dow Jones” columnist and regular guest of NBC and CNBC News said, “At this stage in negotiations, you stake out extreme positions and then you come together later.”

Though Republican leaders like Bush and House Majority leader Dick Armey (R—Texas) are calling for complete repeal of the estate tax, Herman expects a compromise will be reached over the controversial tax. The likely solution will raise the current $675,000 exclusion to one that is somewhere north of $2.5 million, as well as raise the $10,000 a year gifting limit. Herman, who graduated from Yale College in 1968 and says he is a classmate of President Bush, believes this compromise would eliminate a large majority of taxpayers who are currently affected by the tax, requiring only the very wealthy to file estate tax returns.

As the estate tax issue comes to a head, Herman predicts the nonprofit lobby that represents colleges, charities, hospitals, and other entities that greatly rely on bequests will have its say. With that in mind, a PricewaterhouseCoopers study found that abolishing the estate tax would decrease charitable giving through bequests by $3 billion per year.

The estate tax, however, is not the only item that could affect charitable giving, as Bush is calling for a measure that would allow donors who do not itemize to take charitable deductions. If the measure passes, Herman said the real story would become how the Internal Revenue Service enforces charitable giving as the new rules could open up the doors to “massive, rampant fraud.”

“It was an excellent talk. The attendees were paying great attention to Tom and he gave us some great insight in terms of what the new administration may present in the way of changes,” said committee member Gerald Whitehorn of Frendel, Brown and Weissman.

According to Herman, one of these changes will probably involve retirement savings incentives an issue that he classified as a “very good bet” with strong support in both the House and Senate. Reform possibilities include raising Individual Retirement Account contributions to $5,000 a year from the current $2,000 and 401K retirement contributions to $15,000 a year from the current $10,500, he said.

Receiving much less bipartisan support, however, is marriage penalty relief. Bush’s plan seeks to lower marginal tax rates and permit the lower earning spouse to deduct 10 percent– up to $3,000- of the first $30,000 of income. But, Herman said there has been some support in Congress regarding a proposal to give taxpayers the choice of filing as single or married despite their actual status.

Other “wildcard” tax issues include Alternative Minimum Tax reform, capital gains tax relief, stealth taxes, and research and development credits for companies, Herman said.

“People compete to blast the AMT … It is not doing what is was supposed to do. Now it is hitting rapidly growing numbers of middle income people and they are screaming to Congress,” Herman said of the tax.

As a caveat to what the future holds, Herman said control of the Senate, which currently rests with the Republican party by a single vote, could suddenly flip-flop depending on the health of two Senators —79-year-old Jesse Helms (R—N.C.) and 98-year-old Strom Thurmond (R—S.C.)—both of whom represent states with Democratic governors. As the different tax bills are discussed, the Senate GOP will no doubt be cognizant of the delicate thread by which they hang their majority, Herman said.

“The idea of the committee is to foster relationships between CPAs and bankers in the New York City area,” said Steven M. Rosenberg, chair of the Committee on Cooperation with Bankers and Other Creditors. “We try to have events that bring them together.”