Sunday, September 10, 2006

Tax Uncertainties: We Deserve Better

With fall elections looming ever larger on the horizon, congressional leaders will be weighing their options to make points with their constituents on accomplishments this past year. Incumbents have lots to be worried about, as those accomplishments seem rather thin this year, particularly when the matter of tax legislation is considered.

The so-called “trifecta” bill, HR 5970, which addressed the matter of minimum wage, estate tax reform, and extension of key tax benefits, had a little something for everyone to point to for constituencies back home. While majorities in the House and Senate approve of this legislation, the flimsy Senate rule allowing what amounts to a “silent filibuster” meant that 60 votes were needed to reach the issue. Falling mostly along party lines, only 57 votes could be mustered, leaving this issue for another day. (In the heartland, Senator Nelson sensibly fell in with the Republicans to bring this to a vote; other senators voted on party lines.) Senator Frist, who changed his vote at the last minute to preserve a prerogative to bring this up again, may do so before the fall, but this remains to be seen. As things stand, the effective blocking of this bill means important issues are left dangling. And voters may not like this one bit.

Other tax provisions also need to be addressed, which were not included in the “trifecta” bill. Some of these are very popular, and they have actually expired from the tax code. For example, school teachers who spent money on supplies for their students received a special dispensation for an “above-the-line” deduction for those supplies from 2002-2005, thus allowing them to use pretax dollars for these purchases. That has now expired. That is not a large tax item, but I would think it is politically popular. After all, teachers these days have to deal with bratty kids all day long, and some of them are still so dedicated that they dig into their own pockets to buy supplies for the classroom, or to help out the disadvantaged kids they know. That behavior ought to be encouraged, no?

Within the trifecta bill, there are other expired provisions to be addressed that also enjoy popular approval. Individual deductions included those for tuition and for state and local sales taxes in lieu of income taxes (a provision important to those living in states who have chosen to tax consumption more heavily than income).

On the business side, the research and development tax credit (See IRC § 41) has also expired at the end of 2005. This credit is an important part of tax incentives to assist U.S. business investment in new technology, which is important in the competitive race with other countries. If a business plans its future expenditures based in part on tax credits, then the environment of uncertainty is not helpful in the least. I would guess that something will be done before the time that tax returns are filed, but in this case the significant uncertainties surrounding that benefit means that some will not participate in the activity – and many who do will simply reap a windfall. This is a bad position for government to be in – if you want to induce positive behavior, then the incentive needs to be set out in advance.

There is more to discuss here, but suffice it to say that there are a lot of reasons to be dissatisfied with the current Congress. Unfortunately, many of them are the product of poor policy choices in designing tax legislation in the first place. The dominant motif for designing tax legislation during the first decade of the new millennium seems to involve careful trading based on time windows, rather than enacting permanent and lasting provisions that people can rely upon. This is bad policy, and it makes for bad politics. We deserve better.


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