WASHINGTON —
Congress is in the process of completing work on the tax reconciliation bill
called for in the fiscal year 2006 budget resolution. The budget allows tax and
entitlement legislation increasing the deficit by $75.6 billion between 2006 and
2010. Instead of choosing among competing priorities, identifying revenue
offsets or otherwise scaling back the cost of the tax cuts to comply with the
budget, Congress is considering gimmicks and legislative maneuvers to

WASHINGTON —
Congress is in the process of completing work on the tax reconciliation bill
called for in the fiscal year 2006 budget resolution. The budget allows tax and
entitlement legislation increasing the deficit by $75.6 billion between 2006 and
2010. Instead of choosing among competing priorities, identifying revenue
offsets or otherwise scaling back the cost of the tax cuts to comply with the
budget, Congress is considering gimmicks and legislative maneuvers to
circumvent budget limits and increase the deficit even more than the budget
already allows. Evading the limits in the budget resolution would make a bad
budget worse.

Two flagrant budgetary gimmicks are reportedly
being considered:

• The first would leave politically popular
  provisions such as extending relief from the Alternative Minimum Tax (AMT) out
  of the reconciliation bill and use the political pressure to enact these
  provisions to gain enough votes to bust the budget in a subsequent bill.
• The second would circumvent the Senate rule
  prohibiting budget reconciliation from increasing long-term deficits by
  “paying for” the costs of the tax cuts through 2015 by enacting a back-loaded
  tax cut which would increase revenues through 2015, while reducing revenues
  and increasing deficits permanently in years after 2015.

The tax cuts allowed under the budget resolution
more than wipe out all of the savings from the spending reconciliation bill
enacted last year. Given the nation’s troubled fiscal outlook, particularly over
the long-term, the only truly responsible course of action would be for Congress
to drop plans for debt-financed tax cuts and identify offsets for any tax cut
extensions. If Congress chooses to go ahead with tax cuts, it should at a
minimum comply with the modest budgetary limitations in place.

Relying on such blatant gimmicks to circumvent
budgetary limits for tax cuts would make a mockery of the budget process and
lead to further gimmicks for budget busting spending increases and tax cuts.
Concord Coalition board member Charlie Stenholm pointed out in testimony before
the House Budget Committee that the damage from using gimmicks to circumvent the
budgetary limits which apply to the tax reconciliation bill would go beyond the
impact of this particular piece of legislation:

The effectiveness of
budget enforcement rules depends on a commitment to following the spirit as well
as the letter of the rules. Using budgetary gimmicks such as this undermines the
credibility and the effectiveness of budget enforcement rules. Enacting a
provision that worsens the long-term fiscal outlook in the name of complying
with budget enforcement rules is a blatant gimmick that should be rejected by
anyone concerned about the integrity of the budget process and maintaining
fiscal discipline.[1]

Background On Potential Budgetary Gimmicks In Tax
Reconciliation Bill

Four budgetary limitations apply to the tax cuts
currently under consideration:

1. 
   Reconciliation instructions for up to $70 billion in revenue reductions
   between fiscal years 2006 and 2010. The tax bill would not receive
   reconciliation protections if the net revenue reduction exceeded $70 billion.
2. The $96 billion remaining from the allocation of $105.7 billion over five
   years for tax cuts in the fiscal year 2006 budget resolution. This includes
   the tax reconciliation bill and any additional tax cuts enacted outside of
   reconciliation.
3. A balance of $93 billion on the Senate paygo scorecard. Under the existing
   Senate pay-as-you-go rule, any tax or entitlement legislation increasing the
   deficit by more than the budget resolution allowed is subject to a 60-vote
   point of order.
4. Senate rules prohibiting reconciliation bills from increasing deficits
   beyond the budget resolution time period. The fiscal year 2006 budget
   resolution covered fiscal years 2006 through 2010.

A conference agreement, which included all of
the tax cuts under consideration in the conference committee, would violate all
four limits. As a result of different tax policies included in the House and
Senate tax bills, the total amount of tax cuts under consideration in the
reconciliation tax bill conference is approximately $115 billion over five years
and $30.2 billion in the second five years. Not only does this exceed the
revenue reconciliation instructions, it exceeds the total amount available for
tax cuts under the fiscal year 2006 budget resolution and would violate the
watered-down Senate paygo rule as well as the Senate rule prohibiting
reconciliation bills from increasing the deficit beyond the budget window.

Holding politically popular tax cuts hostage to break budget rules.
The biggest issue facing the tax reconciliation conference is the competing
demands to extend Alternative Minimum Tax (AMT) relief and the lower rate for
capital gains and dividends. There is not enough room within the $70 billion
available for reconciliation to include both the AMT relief passed by the Senate
($31 billion over five years), the lower rate for capital gains and dividends
passed by the House ($20.5 billion over five years) along with the provisions
included in both the House and Senate bills[2]
($28 billion over five years) into a conference report unless the conferees
accept some of the $19.3 billion in revenue offsets inlcuded in the Senate bill,
but House conferees have publicly rejected the Senate-passed offsets.

The competing demands for the room set aside in
the budget for tax cuts and the unwillingness to make choices or accept offsets
creates an incentive for gimmicks and mischief to approve more tax cuts than the
budget allows. The most likely strategy for budgetary evasion would be to bring
up a separate AMT fix bill after the Senate has already used up the tax cut
allocation in the filibuster-proof reconciliation bill and then use the
popularity of the AMT fix to obtain the 60 votes necessary for a budget act
waiver to allow tax cuts in excess of the budget resolution.

Leaving an AMT fix and other politically popular tax cuts out of
reconciliation and waiting to approve them after the reconciliation conference
report is enacted would make it possible to reach a conference agreement which
included an extension of the lower rates for capital gains and dividends without
breaking the budget. The task of busting the budget would be left to
legislation extending the politically popular AMT fix.

The strategy of approving AMT relief outside of budgetary limits was first
signaled last December when Senate Republicans objected to a request by Finance
Committee Ranking Member Max Baucus (D-MT) that the costs of the AMT fix be
counted toward the $70 billion allocated to tax cut reconciliation and be
included on the paygo scorecard. In response to this request, Senator Jon Kyl
(R-AZ) responded on behalf of the Republican leadership by saying “We would
object to his counting of that against the reconciliation number or the
so-called pay-go provision.”[3]

Senate Majority Leader Bill Frist (R-TN) suggested circumventing budget
limits by considering politically popular tax cuts outside of reconciliation in
a letter to Senate Republican conferees.[4]
Senator Frist encouraged the conferees to consider extending AMT relief and the
Research and Experimentation tax credit for two years. Enactment of legislation
extending these provisions for two years would reduce revenues by approximately
$85 billion over five years. Senator Frist went on to say, “it will be a
challenge to include a two year extension in the conference given the other
competing priorities. This is not to say that I would oppose including an
extension of some or all of these provisions in the conference agreement, but
rather to point out the virtue of possibly pursuing another course of action.”

The unstated “other course of action” for extending the AMT fix and R&E tax
credit almost certainly would be to consider them as separate legislation after
the reconciliation conference report is enacted and finding 60 votes to waive
the budget act. House Ways and Means Chairman Bill Thomas (R-CA) was more
explicit in the opening meeting of the conference committee, stating that the
revenue reconciliation conference report “should
not include anything that would pass the Senate by 60 votes.”[5]

Passage of a revenue reconciliation conference report reducing revenues by
$70 billion would leave $23 billion on the paygo scorecard for further tax cuts
or entitlement spending increases, less than the amount necessary for a one year
extension of AMT relief. However, these limits can be waived by sixty votes in
the Senate. Although it is unlikely that Senate leaders could get sixty votes
to waive the budget act for a tax bill reducing revenues by $100 billion or
more, a separate bill extending AMT relief and other politically popular tax
breaks brought up after the Senate has already approved $70 billion in tax cuts
almost certainly would receive enough support to waive the budget act.

By holding the AMT fix and possibly the R&E tax credit hostage until a
revenue reconciliation bill using up most of the tax cut allocation has been
approved, Congressional leaders will force Senators to support busting the
budget in order to approve AMT relief. Efforts to enforce budgetary limits
against these bills would almost certainly be futile. A vote for a tax
reconciliation conference report which does not include extension of AMT relief
or other politically popular tax cuts is a vote to endorse this budget busting
strategy. It may be clever legislative strategy, but it is not fiscally
responsible.

“Paying for” a tax cut with another tax cut? Senate rules prohibit
reconciliation bills from increasing long-term deficits.[6]
This rule reflects the fact that the special procedural protections granted to
reconciliation bills are intended to help Congress take actions that are
fiscally responsible but politically difficult, not politically popular actions
that are fiscally irresponsible. The revenue reconciliation conference report
would violate this rule if it included the House-passed provision extending the
lower rate for capital gains and dividends through 2010, which would reduce
revenues (and increase the deficit) by $30.2 billion beyond the budget window.

The revenue offsets included in the Senate-passed bill would raises nearly
$18 billion between 2011 and 2015. But instead of adopting those offsets and
identifying other legitimate offsets, conferees are reportedly considering a
budgetary gimmick which would “pay for” the costs of a short-term tax cut
through 2015 by enacting a back-loaded tax cut that would raise revenues in the
short term but reduce revenues — and increase the deficit ” over the long
term. The provision under consideration would remove the income limits on who
can convert traditional Individual Retirement Accounts (IRAs) to Roth IRAs in
order to encourage high-income households to convert their traditional IRAs to
Roth IRAs so they could take advantage of the long-term Roth IRA tax breaks.
This would lead to an increase in revenues over the 2011-2015 period, because
funds shifted from a traditional IRA to a Roth IRA are subject to taxes at the
time of conversion.

When a taxpayer converts a traditional IRA to a Roth IRA, he or she pays
taxes now on the amount in his or her traditional IRA that has not yet been
subject to tax, in exchange for being relieved from paying tax later on these
funds (and any earnings) when he or she withdraws them from the new Roth IRA in
retirement. Individuals will choose to make the conversion and pay taxes now
only if doing so will result in greater tax savings in the future.

None of this “offset” would represent new
revenues. Revenues would simply be accelerated from subsequent decades to the
2011-2015 period, making deficits even bigger after 2015. The provisions
would reduce revenues in years beyond 2015, because withdrawals in retirement
from the new Roth IRAs would be tax free. Over the long run, the proposal would
result in a net reduction in tax revenues.

The provision extending the lower rate for capital gains and dividends would
violate the Byrd Rule unless the parliamentarian determines that the revenues
from the IRA provision offset the cost of the capital gains and dividend tax cut
after 2010 based on estimates provided by the Senate Budget Committee. This
gimmick will only work if the Budget Committee does not provide estimates of the
revenue loss after 2015. If the Budget Committee provides estimates for the
costs of this provision after 2015 it will be clear that the net impact would be
to reduce revenues after 2010 and both this provision and the extension of the
lower rate capital gains and dividends would violate the Byrd Rule.

Adopting such a myopic approach will create an incentive for Congress to take
actions that make the long-term fiscal imbalances even worse. Using this
transparent gimmick to evade the Senate rule prohibiting reconciliation bills
from increasing long-term deficits by ignoring the costs of the IRA provision
after ten years would set a harmful precedent that would undermine the
effectiveness of budget procedures intended to promote long-term fiscal
responsibility.

The Senate rule adopted last year aimed at limiting increases in entitlement
costs in years outside the budget window requires the parliamentarian to
determine whether a provision would increase entitlement spending by more than
$5 billion in any of the four decades after 2016. If the Budget Committee is
unable or unwilling to provide estimates of the costs of legislation in the
first decade after 2016 the long term spending point of order will be
meaningless.

Share this page