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WHAT WE'RE THINKING
The following opinion pieces were written by researchers, fellows or scholars.
The research and views expressed in these opinion pieces are those of the individual(s),
and do not necessarily represent the views of the James A. Baker III Institute for Public Policy.
Monday, November 20, 2006
The 110TH Congress: A New Direction For Tax Policy?
John W. Diamond, Edward A. and Hermena Hancock Kelly Fellow in Tax Policy
The dramatic shift of power in the U.S. House of Representatives and the Senate will have major implications on the tax policy agenda during the next two years. The potential for large-scale rollbacks of previously enacted tax policies, however, is mitigated by the threat of presidential veto and the slim majority in the Senate. Moreover, the most contentious policies, the temporary tax cuts passed in 2001 and 2003, are not scheduled to expire until 2010 and thus will be a more pressing issue for the 111th Congress.
There are distinct differences in the political agendas of the two parties on a number of tax policy issues. Major differences are particularly apparent on issues such as making the 2001 and 2003 tax cuts permanent, including repeal of the estate and gift taxes, the taxation of oil and gas companies, the availability of Health Savings Accounts (HSAs), and various tax breaks that are beneficial to middle- and upper-income taxpayers. Under the new regime in the House, new legislation is likely to propose eliminating billions of dollars in subsidies for oil and gas companies (as well as some sort of windfall profits tax if gasoline prices return to $3.00 per gallon or more), increasing the income tax rate on upper income taxpayers, and reducing the availability of HSAs and other tax breaks for higher-income taxpayers. The 110th Congress is very unlikely to permanently extend the 2001 and 2003 tax cuts, repeal estate and gift taxes, or move forward on tax reform, such as the proposals put forth by the President’s Advisory Panel on Fundamental Tax Reform.
A number of issues, however, are supported by members of both parties. For example, a number of tax breaks that expired in 2005 may be extended, such as deductions for state and local sales taxes, deductions for teacher classroom expenses, deductions for college tuition and expenses, employment tax credits for low income workers, and credits for research and development. However, if these issues are not extended in the post-election session of the 109th Congress, it could be difficult to extend all of these provisions in the 110th Congress. This is especially true if “pay as you go” rules are reinstated under the 110th Congress, because extending these provisions would require increasing revenues from other sources.
The balance of power in the Senate and the Republicans’ control of the White House imply that tax policy legislation will have to be bipartisan to be enacted. The most important issue will be reforming or patching the Alternative Minimum Tax (AMT). The AMT is projected to affect millions of middle- and high-income taxpayers during the next few years. However, permanent reform of the AMT is very costly in terms of revenue and would increase the budget deficit substantially. This implies that a continued approach of temporary extensions, such as an increase in the amount of income that is exempt under the AMT, is likely to continue under the 110th Congress.
In addition, the change in the balance of power in Congress will impact Social Security and Medicare reform. On issues related to Social Security, the Congress, as controlled by the Democrats, will oppose any attempt by the current administration to fully or partially privatize Social Security. At the same time, the Democrats are likely to try to reform the Medicare Prescription Drug Benefit by closing the gap in coverage known as the “doughnut hole,” waving the late enrollment penalty and allowing the government to negotiate drug prices with pharmaceutical companies. The first of these three priorities will be costly, and thus paying for this reform will be problematic.
The 110th Congress and the last two years of the Bush administration are likely to be gridlocked unless true bipartisanship is adopted in the policy-making process.
There are distinct differences in the political agendas of the two parties on a number of tax policy issues. Major differences are particularly apparent on issues such as making the 2001 and 2003 tax cuts permanent, including repeal of the estate and gift taxes, the taxation of oil and gas companies, the availability of Health Savings Accounts (HSAs), and various tax breaks that are beneficial to middle- and upper-income taxpayers. Under the new regime in the House, new legislation is likely to propose eliminating billions of dollars in subsidies for oil and gas companies (as well as some sort of windfall profits tax if gasoline prices return to $3.00 per gallon or more), increasing the income tax rate on upper income taxpayers, and reducing the availability of HSAs and other tax breaks for higher-income taxpayers. The 110th Congress is very unlikely to permanently extend the 2001 and 2003 tax cuts, repeal estate and gift taxes, or move forward on tax reform, such as the proposals put forth by the President’s Advisory Panel on Fundamental Tax Reform.
A number of issues, however, are supported by members of both parties. For example, a number of tax breaks that expired in 2005 may be extended, such as deductions for state and local sales taxes, deductions for teacher classroom expenses, deductions for college tuition and expenses, employment tax credits for low income workers, and credits for research and development. However, if these issues are not extended in the post-election session of the 109th Congress, it could be difficult to extend all of these provisions in the 110th Congress. This is especially true if “pay as you go” rules are reinstated under the 110th Congress, because extending these provisions would require increasing revenues from other sources.
The balance of power in the Senate and the Republicans’ control of the White House imply that tax policy legislation will have to be bipartisan to be enacted. The most important issue will be reforming or patching the Alternative Minimum Tax (AMT). The AMT is projected to affect millions of middle- and high-income taxpayers during the next few years. However, permanent reform of the AMT is very costly in terms of revenue and would increase the budget deficit substantially. This implies that a continued approach of temporary extensions, such as an increase in the amount of income that is exempt under the AMT, is likely to continue under the 110th Congress.
In addition, the change in the balance of power in Congress will impact Social Security and Medicare reform. On issues related to Social Security, the Congress, as controlled by the Democrats, will oppose any attempt by the current administration to fully or partially privatize Social Security. At the same time, the Democrats are likely to try to reform the Medicare Prescription Drug Benefit by closing the gap in coverage known as the “doughnut hole,” waving the late enrollment penalty and allowing the government to negotiate drug prices with pharmaceutical companies. The first of these three priorities will be costly, and thus paying for this reform will be problematic.
The 110th Congress and the last two years of the Bush administration are likely to be gridlocked unless true bipartisanship is adopted in the policy-making process.
