Impact of the recent elections on your federal taxes
The leadership of both congressional tax-writing committees has changed after the sweeping Democratic election victories. Charles Rangel will become the new chairman of the Committee on Ways and Means. Max Baucus will lead the Senate Committee on Finance.
Rep. Rangel has argued for the return of civility and bipartisanship. He intends to hold a retreat in January for the Democratic and Republican members of Ways and Means to establish legislative priorities. He has vowed to allow the public to view conference committee deliberations. He sees reform or repeal of the Alternative Minimum Tax (AMT) as an excellent “trust-building” exercise.
Sen. Baucus and the outgoing chairman of the Senate Finance committee, Charles Grassley, have a very collegial relationship. They attempt to jointly sponsor all significant legislation. Rangel, Baucus and Grassley have worked together on tax legislation for the past 25 years.
Trends to watch:
- Big federal deficits may cause Congress to adopt “pay-as-you-go” budget rules. Future tax cuts may need revenue offsets to become enacted by Congress.
- The congressional leadership will focus on compliance gaps to offset future tax benefits. Sen. Baucus has delayed the confirmation hearings of Treasury officials until the Administration delivers its overdue report on the compliance gap. Rangel, Dole and Grassley worked together on the 1984 tax compliance section of the Deficit Reduction Act. Future legislation is likely to include codification of the economic substance doctrine for tax shelter transactions, increased penalties, and stronger direction to the IRS for better enforcement.
- Rangel has stated that individual income tax and capital gains rates will remain unchanged through their expiration in 2010. Given the projected federal budget deficit, it is unlikely that marginal rates and capital gains rates will be lower in the future. Strategies to recognize dividend, capital gain and ordinary income may make sense during the next four years while rates remain low by historic standards.
- Congress will attempt to temporarily extend the expiring provisions during the lame duck session, including the research credit, tuition deductions, state sales tax deduction, the work opportunity credit and the welfare-to-work credit. There is bipartisan support for permanently fixing the AMT and extending the research credit. The projected revenue cost of these changes has stymied congressional action.
- Estate tax reform may be delayed until after the 2008 election, unless the Bush Administration signals some readiness to address the issue in a manner agreeable to the Democrats. Rangel supported a Democratic alternative last year authorizing a $3 million per person “exemption” from the estate tax.
- AMT reform is a significant issue. The automatic tax increases in 2011 may provide an impetus for Congress to address this issue. The larger economic picture may limit congressional options if tax receipts fall and rising interest rates increase the federal government’s borrowing costs.
- The Democrats added 20 new moderate Democrats in the House. These social and economic moderates swell the “Blue Dog” coalition to 50 members. This large block will have a moderating influence on the Democratic agenda.
Bottom line: Expect the Democrats to proceed cautiously. They have no interest in alienating the Independent voters that propelled them to victory. They are very wary of any actions that might hasten their return to minority status.
