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THE 2006 ELECTION RESULTS: FEDERAL AND IOWA TAX POLICY IMPLICATIONS

November 08, 2006

What do the election results mean for tax policy? In Washington, maybe not so much. In Iowa, they could mean a lot.

FEDERAL IMPLICATIONS

Estate taxes. The loss of the House of Representatives, and maybe the senate, means that estate tax repeal efforts are truly on ice for at least two years. With the loss of so many seats, repeal proponents have lost a lot of leverage, and will probably have to live with a rate much higher than they would like if they hope to achieve an estate tax compromise. The gone today, here tomorrow state of the estate tax law still may be enough to get permanent estate tax reform enacted, but any reform will be on terms much more to the taste of the Democrats - rates at least as high as 35%, for example. And it's entirely possible that the Democrats will continue the history of majority overreach in this area and refuse any reduction in estate taxes. Then the wheel will turn again and they'll eventually have to fight again for the estate tax's continued existence.

15% Capital gains and dividends. The 15% capital gains rate appears safe at least through 2008. Likely incoming Ways and Means chairman Rangel has said as much, and even if he reneged, the Democrats are a long way from being able to override a presidential veto.

Comprehensive tax reform appears unlikely. It's hard to imagine Congressional Democrats working on such a difficult problem with the Bush administration.

IOWA IMPLICATIONS

Repeal of federal deductibility? The election may mean a lot more in Iowa. We now have solid Democratic control of the governors mansion and both statehouse chambers. They are ready to spend a lot on service programs and targeted tax credits. That means a tax increase, and this makes a repeal of deductibility of federal taxes more likely than it has ever been. Anybody with an unusually large federal tax liability in 2006 should seriously consider whether to pay it this year, when they can deduct it for sure, rather than waiting for April 2007.

Tax Credits! We're likely to see some new targeted tax credits for ethanol, biofuels, economic development, and so on, to go with the 20-odd ones we have already. They will be great for economic development - for the tax consulting industry. Taxing some businesses to lure and subsidize their competitors through tax credits is economic snake oil, but it's great for us snake ranchers.

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