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Anatomy of a compromise: the Revenue Reconciliation Act of 1993.

Before you invest a lot of time in planning strategies to educate your clients regarding the impact of the Revenue Reconciliation Act of 1993 and possible ways to reduce that impact, it is worth a few minutes to take a look back and see exactly how this bill came together.

While many would like to believe that a bill such as this is a grand painting that comes together exactly as the artist envisioned at inception, the truth is that almost every provision has undergone some change during the bill's evolution, with some provisions no longer recognizable by the end of the process. Analysis of the process provides a valuable tool for predicting future tax proposals, as items that just barely made it into the package may be subject to elimination down the road, while items that were left behind at the last minute might very well come back again in a future tax bill.

The two primary factors that combined to create the final package were the need for revenue to reduce the deficit and the incredibly close margin by which the package moved through Congress. Because President Clinton was elected on, among other things, a pledge to reduce the deficit, a failure to come up with a credible deficit reduction plan would have crippled his presidency. On the other hand, the very close margins in each chamber of Congress made every member's vote critical.

On its first trip through the Senate, Vice President Gore cast a tie-breaking vote to pass the package, so the administration knew that the loss of any senator who voted yes would have to be counterbalanced by the conversion of a senator who voted no. As it worked out in the final vote, if any member of either the House or Senate had switched from yes to no, the package would not have passed. This made every member of Congress of paramount importance to the president and gave every member a potential veto.

Energy Taxes

One provision that underwent dramatic change on its way through Congress was President Clinton's proposal for a broad-based energy tax based on the heat content of fuels as measured in British thermal units (Btu's). As originally proposed, this tax would have served two purposes for the Clinton administration: it would raise revenue to reduce the deficit and encourage conservation by making fuels more expensive. Under the president's proposal, the cost of a gallon of automotive gasoline would have risen 7.5 [cts] and the tax would have raised over $70 billion.

When the president's proposals were handed off to the House, changes began. Exceptions were carved out for certain industries that use raw energy in their production processes, such as aluminum refinement. The House also would apply the tax to incoming goods at the border in order to protect American producers from foreign competitors that did not have to pay such a tax at home. When the House finished with the Btu tax, the price of a gallon of automotive gasoline would have risen 7.6 [cts] and the revenue raised would still have exceeded $70 billion.

But in the Senate, the tax underwent a radical change. Senators from rural and oil states sitting on the tax-writing Senate Finance Committee opposed such a large increase in gasoline costs. Senator Max Baucus, a Montana Democrat, lobbied hard to soften the effect of the fuel price increase on residents of his state, who log significantly more miles than the average American driver. Senator David Boren, an Oklahoma Democrat, worked to protect the oil interests in his state. The combined efforts of these Senators led to a change from a broad-based energy tax to a specific tax on transportation fuels at only 4.3 [cts] per gallon. The Senate's proposal would raise approximately $24 billion for the president. It was this figure that would drive the negotiations from this point on.

As the bill went to conference, Washington insiders were convinced that the transportation fuels tax would have to increase to make up some of the difference lost with the removal of the Btu plan. However, the president could not afford to lose any votes in the Senate. To keep Senator Baucus' vote, the conference committee left the figure at 4.3 [cts] per gallon. With this sharply decreased revenue figure, members had to increase taxes in several other areas to reach deficit reduction goals. Enter the retroactivity controversy.

Individual Tax Rates

In his State of the Union address on February 17, President Clinton made it clear that personal income tax rates on higher income individuals would be going up. In fact, his proposal for a 36% marginal rate on individual taxable incomes over $115,000 and married taxable incomes over $140,000 has remained constant throughout the debate. While he campaigned on the idea of an additional surtax on incomes exceeding 1 million, that figure came down to a 10% surtax on taxable incomes over $250,000.

The real debate over personal tax rates focused on the effective date for the increases. The president wanted the full rate increase effective January 1, 1993, and the House agreed. Members of the Senate Finance Committee, led by Committee Chairman Daniel Patrick Moynihan (D-NY) and Senate Majority Leader George Mitchell (D-Me), claimed the retroactive increase would be unfair and suggested imposing half of the rate increases effective January 1, which would be roughly equivalent to imposing the full rate effective July 1.

When the bill went to conference, many members of Congress complained that retroactivity must be minimized. However, this proposition lost out. Senator Moynihan explained that the need for revenue--increased by the elimination of the Btu tax--simply outweighed the concerns about retroactivity.

The fight over retroactivity has not ended. In the wake of the Revenue Reconciliation Act, several bills have been introduced to remove the retroactive portion of the bill and to make retroactive tax increases unconstitutional. NSPA opposed retroactivity in the original plan and will continue to work with those members who are sensitive to this issue.

Social Security Taxability

One of President Clinton's main themes throughout the reconciliation process was that of "shared sacrifice," with all citizens contributing to deficit reduction. This was his main reasoning behind proposing an increase in the tax rate for Social Security benefits from the current 50% level to 85%, using the same thresholds and phase-in process found in current law.

The House agreed with the president, moving this proposal on to the Senate where it ran into some opposition. Senators proposed a higher threshold for 85% taxability. Under their plan, 50% taxability would still apply to Social Security received by individuals making over $25,000 and to married couples with taxable incomes over $32,000. The 85% tax rate would kick in for singles clearing $32,000 and for couples making over $40,000.

This change probably would have held through the process, except for a much-feared Senate defection. Oklahoma's Senator Boren declared on the Sunday before the final vote that he would not vote for the package.

With the previous one-vote margin in the Senate, officials knew they would have to win another Senator over. Enter Senator Dennis DeConini of Arizona, whose constituents include a large number of retirees. White House officials, hoping to change his earlier "no" vote to a "yes," proposed an increase in the 85% taxability threshold, which led to the final package numbers of $34,000 for individuals and $44,000 for married couples filing jointly. Senator DeConcini's eventual agreement to vote yes to the package put the president over the top.

Equipment Purchasing Incentives

Another casualty of the scramble for revenue was the proposed increase in [sections] 179 expensing of equipment purchases. Originally proposed as a small business investment tax credit by the president on February 17, the House removed the ITC in favor of increasing the deduction allowed under [sections] 179 from the current $10,000-a-year level to $25,000. The Senate Finance Committee, looking for revenue to replace that lost by the shift from the Btu tax, increased the [sections] 179 allowance to only $15,000. On the Senate floor, this was amended to $20,500. When the bill finally left the conference for a final vote by both chambers, the amount was changed again to a figure that was approved by both chambers--$17,500.

Corporate Rate Increases

One provision changed for the better by this process was the president's proposal to raise the top corporate income tax rate to 36% to correspond with the high income individual rate. House Ways and Means Committee Chairman Dan Rostenkowski, concerned by the increase, went to President Clinton with an idea: He offered to build a coalition of big businesses that would support the Clinton plan if the president would agree to a top corporate rate of only 35%. The president accepted the offer and the House tax-writing veteran built the coalition. As a result, the top corporate rate survived through both chambers at 35%.

A Wild Ride

Following the package over the last six months has been quite a rollercoaster ride. From here, NSPA moves into high gear, distributing information to bring our members up to speed on the final package before the tax season begins. As always, the Federal Affairs Department stands ready to serve all NSPA members, whether you have general questions about the new taxes or specific questions involving particular client situations.
COPYRIGHT 1993 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Lear, Jeffrey
Publication:The National Public Accountant
Date:Oct 1, 1993
Words:1567
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