It will likely be many weeks or even months before individuals know for sure what specific tax cuts are in store this year.
The budget agreement between congressional leaders and President Clinton gives the House and Senate tax-writing committees great latitude in drafting a tax-cut package.
The budget agreement sets only the overall size and scope of the tax-cut package: $135 billion in tax cuts over five years, to include capital gains tax cuts, estate tax relief, family tax credits, expanded individual retirement accounts, tax breaks for college expenses and $50 billion in offsetting tax increases. The rest of the details are left to the tax-writing committees to work out this summer.
Here is a question-and-answer discussion on what the final tax-cut package is likely to include.
Q–Does the budget accord guarantee that the tax plan will include Clinton’s proposed tax breaks for college expenses?
A–In some form. The budget accord specifies that “roughly” $35 billion of the $135 billion in tax cuts must be for tax relief “for post-secondary education, including a deduction and a tax credit.’
But there is reason to believe that the president’s educational proposals will undergo significant revision in the tax-writing committees. At a recent congressional hearing, the president’s college proposals were criticized by both Democratic and Republican tax-writers on the House Ways and Means Committee.
Democrats complained that the Clinton tax breaks would be of no help to lower-income individuals (because they don’t earn enough income to pay any tax and thus would receive no benefit from the tax breaks).
House Ways and Means Chairman Bill Archer (R-Texas) expressed reservations about Clinton’s proposal to provide a tax credit of $1,500 a year for the first two years of college because of privacy issues. Archer was concerned about the prospect that the IRS would be checking students’ grades and arrest records in order to enforce the provision.
That’s because students convicted of a drug-related felony wouldn’t be eligible for the credit. And students would need to have earned a grade point average of at least 2.75 on a 4.0 scale in their first year of college to claim the tax credit in the second year.
As an alternative to the credit, the Clinton plan would allow taxpayers to claim a deduction of up to $10,000 a year per family for college tuition and fees. Taxpayers would have the option of claiming either the credit or the deduction, but not both in the same year.
Q–What can be expected in terms of family tax relief?
A–The budget accord calls for a family tax credit of $500 per child. But the credit is likely to be considerably less generous than Republicans have previously proposed. Previous GOP plans called for the full $500 tax credit to be provided for each child under age 18 in families with incomes of up to $110,000. But the cost of that proposal exceeded $100 billion over five years. Having promised Clinton $35 billion for his education breaks, Republicans only have $100 billion for everything else. As a result, tax writers will have to sharply scale back the family credit. That will probably mean phasing in the $500 credit over a number of years. It could also mean lowering the age and income-eligibility cutoffs.
Q–What other Clinton proposals are mentioned by the GOP as being candidates for the tax-cut package?
A–The Republican leaders specifically mention five proposals from the administration’s 1998 budget plan that they will seek to include in the tax-cut plan: tax credits for employers that hire welfare recipients; tax incentives for cleaning up hazardous waste sites; an expansion of tax-favored enterprise zones; a change in the foreign tax rules to help U.S. software manufacturers; and tax incentives to spur economic development in Washington D.C.
Q–What kind of capital gains tax cut is likely?
A–Because capital gains tax relief has been a top priority of Republicans, tax writers will probably try to stick as closely as possible to their original goals. Republicans had been hoping to slash capital gains rates on investments held more than year by exempting 50 percent of gains from tax and taxing the other half at regular income tax rates. That would bring the top capital gains rate down from 28 percent to around 20 percent. But revenue constraints may not permit tax writers to lower the top rate quite that far.
Q–When Republicans drafted their “Contract With America” tax-cut plan in 1995, they partly financed the package by including deep cutbacks in the earned-income tax credit for lower-income workers. Will the working poor again be targeted?
A–No. Congressional Republican leaders have assured the president that neither the earned-income credit nor the low-income housing credit would be used to finance the tax cuts.
About $30 billion of the $50 billion that needs to be raised by tax writers will come from extending the soon-to-expire aviation excise taxes, including the 10 percent federal tax on domestic airline tickets and the $6 passenger fee for international departures.
Q–What kind of estate tax relief can be expected?
A–Probably a combination of two approaches. One approach would increase the general estate tax exemption, which now allows the first $600,000 in an estate to escape tax. Previous GOP proposals called for increasing the exemption to at least $750,000.
The second approach is to provide special relief for family-owned businesses. One previous GOP proposal called for the first $1 million of the business’ value to be excluded from the estate for tax purposes.
