Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

STATE OF THE UNION - TAX SECTION

January 22, 2004

The President's State of the Union address included a number of tax proposals. These included:

-A deduction for high-deductible health insurance used with Health Savings Accounts;

-Making the already enacted tax cuts permanent. Almost all are slated to expire by 2011, including the repeal of the estate tax.

These proposals, and an expected proposal for "Lifetime Savings Accounts," seem unlikely to go anywhere before the elections. The budget deficits and election year realities will probably stop any action on these provisions, which are highly unpopular among congressional Democrats.

Congress seems likely to pass only relatively technical and non-controversial bills this year, and then only when it feels a lot of heat.

ET(I), COME HOME

Perhaps the hottest item on Congress' plate is the need to repeal the Extraterritorial Income Regime (ETI). The World Trade Organization has declared this tax benefit for exports an illegal export subsidy, and $4 billion in trade sanctions are set to kick in March 1 if the ETI regime isn't repealed.

Congress finished 2003 stalemated between a revenue-neutral Senate bill benefitting production activities of all taxpayers; and a revenue-losing House bill skewed towards C corporations and purchasers of capital assets. While the leaner Senate bill seems more likely to pass, House Ways and Means Chairman Thomas has been unwilling to budge; he also seems willing to play chicken with the European Union over the March 1 sanctions date. Tax Analysts reports:

Noting that the European Union has already set its deadline back once, from January 1 to March 1, Thomas said the concession "tends to make people believe you're going to draw another line in the sand."

EXPIRING PROVISIONS: LAZARUS TIME

The other hot problem for congressional taxwriters is the expiration of a number of important provisions, including:

-The reseach credit (expires 6/30/2004)
-The ability to deduct personal credits, like the child credit and the HOPE credit, against alternative minimum tax (expired 12/31/2003)
-The Work Opportunity Credit and Welfare to Work credits for new hires (expired 12/31/03)

Congress is likely to extend these provisions through at least 2004 - retroactively, if necessary.

PENSION FIX NEEDED

Finally, Congress needs to make a technical fix to the pension tax laws because of the Treasury's discontinuance of the 30-year bond.

FREE RIDERS AND CAMPAIGN POSITIONS

Other provisions seem unlikely to pass unless they can be included in one of the three "hot" bills. A package of pension reforms seems like a likely candidate for attachment. A bill of "technical corrections" without controversial provisions or significant revenue effects could also pass.

Otherwise, Congress is likely to mostly focus on election-year politics. The parties will fight over the President's health care and savings proposals to stake out their election year turf, but significant legislation will probably have to wait for the election returns.

      Bookmark: del.icio.us • Digg • reddit