With the rising deficits and a series of tax reductions enacted in the first term of the Bush administration, many tax practitioners are starting to feel that the tax situation for their clients is never going to get much better than it is right now.
President George W. Bush has dedicated his second term to Social Security reform and fundamental tax reform, but he has said that tax reform should strive to be revenue neutral. Congress has, however, managed to craft a budget agreement this year that calls for additional tax cuts.
The agreement reached between the House and the Senate calls for $70 billion in tax cuts for the five-year period starting in fiscal 2006, of which $11 billion is allocated to FY 2006 itself.
Getting a budget agreement is significant in that revenue bills in accord with the budget agreement can pass the Senate with a simple majority and are not subject to the 60-vote requirement to defeat a filibuster. Seventy billion dollars is not a huge number in terms of the revenue costs of recent tax bills. The House had been pushing for a number in the $45 billion range, and Rep. William Thomas, R-Calif., chairman of the House Ways and Means Committee, has stated that he views the $70 billion number as a cap, not necessarily a number he is trying to reach.
The Senate, on the other hand, talked about $100 billion in tax cuts, with only the $70 billion subject to budget protection. Thus Senate leadership appears to be intent on taking full advantage of the $70 billion budget figure, and then some.
The $70 billion figure is actually much larger than it appears. Since Congress is dealing with a five-year budget projection this year, rather than a 10-year budget that had been the custom in recent years, more can be done with a given budget number. Only five years of the projected costs of tax cuts are required to offset the budget number, permitting larger cuts for a given budget number than might have been possible in the past. The president in his 2006 budget has called for provisions with a total five-year cost of $127.4 billion. The 10-year cost of those same provisions was estimated at $1.55 trillion.
What tax cuts are likely to be the beneficiaries of this $70 billion budget agreement?
There is a lot on the table: Making tax cuts permanent, extending other expiring provisions, estate tax repeal, energy tax breaks, tax breaks related to charitable giving, and various other proposals. The $70 billion number does not get us much beyond trying to extend or make permanent the tax cuts that have already been enacted.
* Extenders. A number of regularly expiring provisions are going to get the attention of Congress this year. Included in this are the research and experimentation credit. The president has proposed a permanent extension at a five-year cost of $28.5 billion.
Congress may modify this to a two-year extension to allow for additional priorities.
Extensions of other regularly expiring provisions in the president's budget have a five-year cost of less than $1 billion.
Extending the 15 percent rate on dividends and capital gains, as well as on the zero percent rate effective in 2008 for taxpayers in the 10 and 15 percent brackets, would have a five-year cost of $13.8 billion for dividends and $8.9 billion for capital gains. Since the present rates run through 2008, this could be postponed for this year if other priorities emerge that need the protection. The 10-year cost of these provisions is projected at $148 billion.
* Estate tax and GST repeal. Repeal of the estate and generation-skipping tax in the president's budget has a five-year cost of $9 billion.
Although the House has passed permanent repeal legislation, it is unclear whether permanent repeal can pass in the Senate. Rep. Thomas has mentioned that the House may compromise on something less than total repeal, which would also reduce the revenue cost. The 10-year projected cost of the House-passed legislation is $290 billion.
* Code Sec. 179 expensing. The $100,000 Code Sec. 179 expensing limit, and the $400,000 investment limitation, will revert to $25,000 and $200,000, respectively, in 2008. Extending these limits has a five-year cost of $10.3 billion and a 10-year cost of $19.1 billion.
At this point, if the above provisions were enacted in full, the $70 billion budget protection figure is pretty much exhausted.
* AMT relief. Although not included in the president's budget, Congress is probably going to address AMT relief, since the higher exemption amounts are scheduled to revert to much lower levels in 2006.
In the Working Families Tax Relief Act of 2004, the five-year cost of just a one-year extension of the higher exemption amounts was $22.6 billion. The five-year cost this year on another one-year extension would probably be a similar amount.
* Making other cuts permanent. Many other cuts enacted in the administration's first term, such as individual rate reductions, the increase in the child tax credit, and marriage penalty relief, now under current law, do not expire until 2011. The five-year cost of making these provisions permanent is negligible. However, the 10-year cost is a different story: It is estimated to be almost $800 billion.
* Energy legislation. On April 21, 2005, the House passed energy legislation that includes a variety of business and individual tax breaks. The tax breaks have a projected five-year cost of $4 billion.
* Other proposals. The 2006 budget includes a variety of health care proposals with a projected five-year cost of $45 billion. The president also included a package related to charitable giving with a projected five-year cost of $3.4 billion. A package of pension proposals in the budget comes with a five-year price tag of $7 billion.
* Revenue raisers. Some of the shortfall in the revenue numbers could be provided by offsetting revenue raisers. Among proposals before Congress are a further tightening of the tax shelter rules and a package of restrictions aimed at tax-exempt entities.
Some of the simplification proposals included in the budget are also revenue raisers. Even some of the proposals to revise and expand tax-favored savings vehicles for retirement and other purposes raise revenue over a five-year period, although they are revenue losers using 10-year projections.
The budget agreement on $70 billion in tax cuts over the next five years makes it fairly likely that we will see legislation from Congress this year to at least leave in place through 2006 the tax breaks that we have become accustomed to over the last couple of years.
To extend those provisions at least through the next five years would over-exhaust the $70 billion in budget protection, so the AMT exclusion extension will probably be limited to only one additional year, and the research credit, again, may not be made permanent, but only extended a couple of years.
It is possible that the Republicans will use budget protection to extend some less popular provisions, hoping that more popular extension provisions can pass without protection. A package of tax cuts could also be assembled that is paid for within the legislation from a group of revenue-raising provisions that are also under consideration.
Congress always manages to come up with a few surprises, but tax practitioners should be able to feel some comfort that many of the tax breaks being utilized by their clients in 2005 are also likely to be extended and be available in 2006.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a WoltersKluwer company.
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