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REPUBLICAN SENATE: WHAT DO THEY MEAN BY THAT?

November 07, 2002

For the first time since Jim Jeffords made what now appears to be the 21st century's most shortsighted party-switch, the Republicans control the Presidency and both houses of Congress. We will ignore side issues like war and peace and our national future to discuss what's really important: tax policy.

The change to a Republican Senate won't immediately lead to a massive change in the tax structure. As a practical matter, 60 votes are needed to pass tax laws under Senate rules. Drastic tax cuts, repeal of the corporate income tax, or the enactment of a national sales tax do not seem to be in the cards in the next two years.

ESTATE TAX DIES, TAX CUTS LIVE. Still, the Republican Senate matters. Even with the 60-vote hurdle, the estate tax is probably really, positively, dead. It had been scheduled to rise Zombie-like after a one-year interment, but now it will not resurrect as scheduled on January 1, 2011. The 2001 estate tax repeal had significant Democratic support, and they will work with the additional Republicans elected this week to cross the 60-vote hurdle. The other 2001 tax cuts slated to disappear after 2010, including the reduction of the top individual rate to 35%, also are likely to be made permanent.

A few specific tax rule changes can now be anticipated. A new "above-the-line" charitable deduction for non-itemizers might be enacted yet this year. Significant reform of the international tax rules can be expected early next year, triggered by the World Trade Organization's ruling against the Extraterritorial Income Exclusion provisions. There might even be an increase in the current $3,000 limit for annual capital loss deductions for individuals.

REFORMS AHEAD? The biggest questions still open are whether we will see the overdue reform of the Individual Alternative Minimum Tax (AMT) system, and whether the double taxation of corporate dividends will be eased. As we have discussed, the AMT will, unless changed, devour the broad voting and campaign-contributing classes in a few years. These changes will "cost" the government a lot of money, so they will have to be done in a way to get the 60 votes required for revenue-losers by Senate rules.

Prior to the election, Republican leaders hinted that they planned to consider allowing corporations to deduct dividends paid. This would also be a 60-vote issue, so the bruised Senate Democrats will need to cooperate. That just might not be in the cards.

LAYING THE GROUNDWORK FOR MAJOR REFORM? With the change in control of the Congressional agenda, we may even see a discussion about the real problems of our tax system - its staggering complexity, high rates, and the perception of growing evasion. OK, we like complexity and high rates -- we're tax professionals, after all -- but it's hard to keep a straight face while making a public policy argument for complexity. There is a (slim) chance that the Republicans could use tax reform as their big issue for the next two years. One can even dream that both parties will come together for a 1986-style tax code housecleaning.

A SURE BET: Going out on a limb, we will predict that Senator Jeffords will a.) not chair the Senate Finance Committee, and b.) will be assigned a new Senatorial parking space somewhere near Arlington National Cemetery.

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