June 2001

Task Force Examines New Tax Legislation

NEW YORK—A Society task force reserved judgment on a $1.35 trillion tax relief act passed in Congress last month and recently signed by President Bush, despite grave concerns the legislation will make long-term financial planning extremely difficult.

The New York State Society of CPAs’ Federal Tax Policy Task Force met late last month to discuss the ramifications of the Economic Growth and Tax Relief Reconciliation Act of 2001. Members said the legislation took positive steps on lowering income tax rates and providing education benefits, but were wary of “timetraps” of provisions slated to be phased in or out over the next decade, making the act susceptible to the exigencies of the future political landscape.

“A whole series of dramatic law changes are scheduled to occur over the next 10 years. They are politically unlikely to occur and economically unsound,” said task force co-chair David A. Lifson of Hays & Co. in New York City. “For the first time that I can recall we are virtually certain that the tax laws on the books must change before they can take effect.”

The task force decided at its May 31 meeting to hold off on an official position paper until it received feedback from various Society committees. The group, however, will focus on how the legislation affects New York state CPAs and residents. Members said the tenuous status of the repeal of the estate tax would hinder long-term financial planning for their clients and the alternative minimum tax (AMT) would continue to vex state residents.

While taxpayers will pay fewer taxes under the new law, Lifson added that the legislation left several problems currently half solved or scheduled to be solved in the future. In addition to the AMT, the co-chair says the marriage tax is not fully repaired despite an increased standard deduction for couples. Business relief provisions, including extension of the research and development credit, are conspicuous by their absence, he said.

Among the act’s modifications to the federal tax code is a provision to phase out the federal estate tax by the year 2010. Task force members said this gradual phase out put the repeal in a precarious position, dependent on the economy, politics and mood of the nation.

Task force member Janice M. Johnson of American Express Tax and Business Services, Inc., in New York City, said many people working in tax believe complete repeal is unlikely, but the average American sees things differently.

“There is still a great need for planning,” Johnson said. “(But) the ability to convince clients that estate planning is necessary is going to be difficult because they believe the estate tax is being repealed.”

Johnson advises CPAs to set up meetings with their clients to discuss the potential outcomes of the estate tax. She said many practitioners believe the end result will be a lower estate tax rate, probably equal to the maximum 45 percent rate eventually reached before repeal. Further ultimate reform will likely include an increased unified credit amount of either $2 million or maybe even the $3.5 million per person slated to take effect in 2009. If repeal does not take place, the sunset provisions of the new act will bring back the estate tax (at the current rates of up to 55 percent) in 2011, she said.

Stephen P. Valenti, a task force member from Plainview, added that New York residents will see problems popping up before the estate tax rates are repealed. The phasing out of state tax credit rates from 2002 to 2004 will impact New York, Valenti said.

“We just made radical changes to the state tax law,” Valenti said. “(The Tax Reconciliation Act) may result in states reevaluating state and local taxes and other methods of taxes because they have to have a certain revenue. The problem is if they limit (estate tax credit rates), it affects what the states do and you have to work that through.”

During the task force meeting, however, Valenti characterized AMT as the most important issue facing New York state residents in this legislation.

“We have to acknowledge that this will pervade all high-income states,” Valenti said. “Income-wise what we have to remember is we have a problem defining what a ‘middle income’ is. A large number of people will be susceptible to the AMT over the next 10 years.”

“I think that most everyone agrees AMT needs a fix and this alternative tax system has outlived its usefulness and is much too complicated,” said Jeffrey R. Hoops of Ernst & Young LLP, in New York City. “Right now the bad result of the AMT is that many tax payers are paying more than they would under the regular system.”

The Tax Relief Act, however, only raises the AMT exemption by $2,000 for individuals and $4,000 for couples.

While members pointed to what they saw as flaws in the legislation, the task force acknowledged the advantage of some changes.

“I hope this is a first step in a trend in tax reduction and reform,” Hoops said.

Lifson added that the open-ended nature of the tax legislation could help foster public discussion and provide the country with direction in terms of future tax priorities.

Like Lifson, other members said they were encouraged by the education incentives, including modifications to the education Individual Retirement Account, an overall reduction of tax rates, and the phasing out of restrictions on personal exemptions and deductions.

But it’s the phasing out and sunset provisions that rankle some members.