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America's growing budget deficit.

This is my last column as Tax Counsel for the National Society of Public Accountants. As I prepare to assume new responsibilities with The Research Institute of America, I naturally think back on the many fond memories of my professional experiences with NSPA. In this context, it occurred to me that an appropriate topic for this last column might treat what I consider to be the most important development in tax policy during my tenure with the Society: the revenue-offsetting provisions of the 1990 tax bill.

OBRA 90 did many significant things. It eliminated the "bubble" and replaced it with a new 31% top individual income tax rate. It created phase-outs for itemized deductions and personal exemptions. It split the social security wage base. The list goes on, but, without a doubt, the most far-reaching provision of OBRA 90 relates to the changes made to deal with the omnipresent Federal budget deficit.

Unlike previous efforts, OBRA 90 was a package deal; that is, it was intended to reduce the budget deficit over a five-year extended period. Accordingly, the law attempted to bind the spending habits of subsequent Congresses. It did this by imposing a requirement that any new legislation resulting in a net outflow to the Treasury must be offset by either new revenue sources or spending cuts in existing programs.

Reducing the budget deficit is a noble -- if not critical -- goal. So, these requirements probably sound like sensible approaches at first blush. However, two years into the process, it is now clear that America's tax policy is to be held hostage by its budget policy for the foreseeable future. This has produced anomalous and sometimes inappropriate consequences.

Consider the recent extension of unemployment benefits; a worthwhile endeavor in recessionary economies -- particularly in an election year -- but, unemployment benefits cost money. This means that, in order to enact such benefits, Congress (and the President) have to find a revenue offset. That is, they have to cut an existing government expenditure or raise revenues.

Spending cuts, for better or worse, are not politically feasible -- again, particularly in an election year; neither, it would seem, is revenue-raising. (Remember "read my lips?")

Or is it? Burning the midnight oil, Washington's sharpest minds have realized that there is more than one approach to raising revenues. In fact, while there may be only one direct approach -- tax hikes, there are hundreds of indirect ones. No one in Washington is going to talk about raising tax rates -- yet -- the best and the brightest have found another way to get the job done. By combing the Internal Revenue Code and finding dozens of relatively discrete ways to "tighten things up," revenue can be raised without the perception of raising taxes.

The examples are countless. The top estate tax rate is supposed to be lowered to 50% in a few years; by deferring the decrease, Congress and the President can raise revenues without actually "raising" taxes. The phase out of personal exemptions for high income taxpayers is likewise slated to expire shortly. It, too, has had its expiration kicked back a few years to pay for some legislators' pet project. This latter example is part of the funding mechanism for the latest extension of unemployment benefits.

Another gem: the unemployment extension was also funded in part by a change to the rules for lump-sum pension distributions. Starting in January, unless a beneficiary arranges a trustee-to-trustee transfer, lump sum distributions will be subject to a 20% withholding tax.

While this approach to dealing with the budget deficit may help keep things from getting worse, its impact on the nation's tax policy is questionable at best. Was there really a perception of abuse in the lump-sum distribution area? Probably not. But it did provide the revenue offsets necessary to do something not necessarily related to tax policy. This sort of ad hoc, piece-meal tinkering is really not in the best interests of creating a tax regime that is perceived of as fair or consistent.

Nor are unrelated revenue raisers the only danger in this area. Worthwhile tax policy objectives not infrequently have been thwarted because they are "revenue negative." Code Section 162(l) is a prime example. There is no logical tax policy justification for treating the health insurance premiums of America's entrepreneurs any differently than those of the nation's corporate giants. (There are a few who see potential for abuse here, but they are very much in the minority and very much wrong).

Nevertheless, extending Section 162(1) costs money; it is revenue negative. That means that either cuts in existing programs or "revenue offsets" must be proposed in order to pay for an extension.

So, each year for the past three years, Hill staffers have tinkered here, nibbled there, to purchase an additional extension of this important Code provision. And each year, NSPA and other small business interests must go up to Capitol Hill, hat in hand, to plead for yet another extension of a law that by all rights should already be permanent. These rituals will continue for the balance of the budget agreement.

It is painfully clear that something must be done about our nation's budget deficit, as well as its mounting debt. Distortions in tax policy need not be a part of that process, but it appears that they likely will be for the foreseeable future. That's bad for NSPA, bad for practitioners and bad for their taxpaying clients.

Peter M. Berkerey, Jr.

Director of Federal Affairs & Tax Counsel
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Title Annotation:Capitol Corridors
Author:Berkery, Peter M., Jr.
Publication:The National Public Accountant
Date:Sep 1, 1992
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