We normally would not expect to see any serious changes in the tax law during a presidential year. There has never been a year in American history like 2000, though, where there is an embarrassment of revenues flowing into the U.S. Treasury and the President’s wife is running for the U.S. Senate. The reason for our fresh optimism is that H.R. 8 has been approved by the House Ways&Means Committee by a 24-11 vote. By all accounts, it easily will pass the House on Friday with almost unanimous Republican support and at least 50 votes on the Democratic side. The legislation would phase out the 55% federal gift & estate tax over a 10-year period, which in and of itself would provide a memorable legacy for Ways&Means Chairman Bill Archer [R-TX] -- if it passes the Senate and is signed into law by President Clinton. The Clinton “if” sounds like a big one, given the fact he has said he would veto any change in what Republicans now refer to as the “death tax.” Archer, though, has rewritten the bill the President said he would veto. It now includes elimination of the step-up in cost basis on capital gains at death when the estate tax is finally gone in 2010. This wrinkle has attracted Democratic support, which should broaden when word spreads through the small business and farm communities that heirs of all estates of $4.3 million or less would not even have to pay the 20% capgains tax when the assets are sold against the original purchase price. By 2010, the capgains tax should not be more than 10%, I think, and may be gone altogether.
Vice President Al Gore has not taken a position on the legislation, but both he and Hillary Clinton will have to confront the issue. It would seem politically prudent for them to advise the President that it looks like a good deal. Rep. Charlie Rangel [D-NY], the ranking Democrat on Ways&Means, voted against the bill in committee, but he also would like to hike the estate exemption to $4 million. The black and Hispanic lobbies are attracted to the concept and Rep. Bill Jefferson [D-LA], a Ways&Means protégé of Rangel and an influential member of the Congressional Black Caucus on tax matters, is one of the three Democrats who supported the Archer version in committee. The fact that the package is inexpensive, when scored by Joint Tax, makes it all the more likely this will be one of the several single-shot tax changes that will make it all the way into law. The “cost” in the first five years is only $20 billion and only $100 billion over ten years, largely because the phase-in period is slow on the front end. The numbers are getting so big, as the $9 trillion economy continues its expansion, that the Congressional Budget Office erred by almost $100 billion in estimating this year’s budget surplus.
It still is too early to handicap the other tax measures the GOP will try to push into law this year. The leadership has yet to decide on whether to have one or two reconciliation bills, or any at all in accordance with the budget resolution adopted earlier this year. Senate Majority Leader Trent Lott [R-MS] has elimination of the marriage-tax penalty as his highest priority, but assures me he is dead serious about working with Sen. Bob Torricelli [D-NJ] in shortening the holding period on capital gains to three months from twelve. Senator Bill Roth [R-DE] has as his highest priority the doubling of the annual amount a family can stick in a Roth IRA to $5000. And there is broad bipartisan support for elimination of the 3% telephone tax. There may be resistance from Treasury on most of the changes, for at least tactical reasons. But the vote tomorrow on the Archer plan should provide solid evidence of the growing itch on Capitol Hill to cut taxes.