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A glance back, a look ahead.

A Glance Back, A Look Ahead

It is always a somewhat risky proposition to discuss here in this column the more fluid events occurring up on Capitol Hill. By the time these words reach their intended readers, things are all too often quite different from what has been herein reported.

Nevertheless, since this column is being penned on New Year's Eve, it seems appropriate to take a quick look back to 1990, along with a somewhat longer gaze forward toward our likely legislative battles in 1991.

Thanks to a nearly three-year effort by NSPA and other small business groups, Congress reformed the so-called "estate freeze" rules contained in IRC Section 2036(c). They called it a "repeal" because they repealed Section 2036(c). However, it was replaced with valuation abuse provisions placed elsewhere in the Code. It was a neat trick. Members of Congress could go home and tell local business groups that they repealed the estate freeze rules, and, technically, they did. Your tax dollars at work.

To be fair, the replacement language solved about 80% of small business' problems. Buy/sell agreements are once again permitted. To stem abuse, certain retained discretionary rights are now simply valued at zero when determining the worth of the interest transferred to the next generation. However, Section 2036(c) was inserted into the Code by some over-zealous congressional staffers who perceived abuses in this area. No hearings were ever held, and no evidence of abuse was ever entered into the Congressional Record.

NSPA also provided testimony before numerous congressional committees and subcommittees on subjects as diverse as tax simplification, the IRS accounts receivable inventory and the Treasury's "tax gap" (the difference between the amounts of tax voluntarily self-assessed and the amounts properly due).

Given the sometimes bizarre politics of deficit-driven tax policy, 1990 was a good year for NSPA legislatively. Most importantly, our success in extending Section 162(l) of the Internal Revenue Code -- the 25% deduction for the health insurance costs of self-employeds -- should not be underestimated. Although the extension we received was not permanent and expansion of this deduction to the full 100% remains a more distant goal, our efforts were pivotal in securing the limited relief small business still enjoys. Particularly, the efforts of the National Society's grassroots letter-writers went a long way toward achieving this victory. If you're not already a part of the network, it's not too late to get involved for '91. Your voice is desperately needed.

Section 162(l) provides a good opportunity to begin discussing the upcoming Congress, since our partial results leave us with some unfinished business for the new year. We'll be back again, pushing hard for permanence and, if the climate is right, expansion to a full 100% deductibility. Other, more highly visible, issues will also return to confront the nation's tax writers as the 102nd Congress convenes. Early indications were that President Bush would again push hard for some form of preferential treatment for capital gains. Congressional Democrats, too, will be back with proposals for a surtax on the "wealthy," whomever they are. The "fairness" argument played well at the polls this past November, so congressional leaders are sure to resurrect it.

The President's capital gains initiative may fall victim to the deficit reduction enforcement mechanisms included in the Omnibus Budget Reconciliation Act of 1990. The provisions, which generally will be a tremendous asset to the chief executive in his/her annual budget battle with the legislature, will likely prevent a capital gains differential from being enacted into law.

Here's how the new enforcement mechanism works: any new law that will cost the government money is deemed "revenue negative." Revenue negative laws cannot be passed without "revenue offsets" (i.e., new tax revenues). The goal for the next several years thus becomes "revenue neutrality" -- legislation which will not require additional government spending. The bill also gives the President the authority to "mini-sequester" specific spending items that exceed deficit reduction targets.

Although this all sounds like common sense to anyone who's ever been responsible for a household budget, this novel concept in Washington represents the first time a purported deficit reduction bill has included some real teeth. After it was passed, some congressional Democrats were actually surprised to learn how much fiscal control they ceded to the President and vowed to try and change the deal next year. President Bush, of course, has threatened to veto any attempt to undue this year's budget deal. If it sticks, it may actually produce some deficit reduction.

With the rosy economic assumptions of last year's deficit reduction calculations already disproved, Congress and the Administration will have to tread very lightly through all revenue-negative issues, including capital gains. Since capital gains has been estimated to cost some $20 billion over five years, it must be scored as a revenue loser. Thus, without a revenue offset, capital gains cannot pass.

The President now has two choices: he can either agree to drop capital gains if the Democrats drop the surtax on the wealthy, or he can suggest that both be passed, one offsetting the other. Early maneuvering by both the White House and Ways and Means Committee Chairman Dan Rostenkowski (D-IL) indicates the former is more likely.

Congress also will continue to discuss tax simplification, but it would insult your intelligence to talk about this as if it might happen. First of all, not enough members of Congress understand that they've created a monster. More importantly, the revenue neutrality conundrum explained above will likely hamstring any meaningful reform efforts.

One place where simplification may be taken seriously is in the area of pension reform. Some members of Congress, including NSPA's good friend and 1988 Man of the Year Senator David Pryor (D-AR), have come to realize that 10 years of congressional meddling have created a compliance system so overwhelming that small businesses are terminating their pension plans in droves. NSPA will actively pursue pension simplification should the opportunity arise.

Another important piece of carryover business vital to many NSPA members is a proposal to establish further regulation of the financial planning profession. While at first blush proposals to stem the most heinous practices of unscrupulous practitioners cannot be quarreled with, reform should not unnecessarily include those whose financial advice is only incidental to their primary professional activities. Depending on the direction in which the current proposal progresses, this could quickly turn into the National Society's most important legislative issue for 1991.

In closing, it should be noted that 1990 was also a very good year for NSPA's relationship with the IRS. The foundation has been laid for even better cooperation in 1991, but that, as they say, is "a whole 'nother" column.

Peter M. Berkery, Jr. Director of Congressional Relations/Tax Counsel
COPYRIGHT 1991 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:Capitol corridors; legislation regarding taxation
Author:Berkery, Peter M., Jr
Publication:The National Public Accountant
Article Type:column
Date:Feb 1, 1991
Words:1126
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