ShareThisBy KATHLEEN PENDER
Wednesday, November 15, 2006
Cutting taxes has been a preoccupation of the Bush administration, with a significant tax bill coming almost every year. But many of the cuts implemented during his presidency are set to expire between now and 2010.
So, will a Democratic-led Congress try to hasten their demise, let them expire or make them permanent?
Most experts say we are not likely to see any major tax cuts, increases or reform as long as Bush is in the White House and the Democrats control Congress.
"We may see proposals, but we are not going to see the tax law change in any significant way for two years," says Dan Mitchell, a senior fellow with the conservative Heritage Foundation.
Jason Furman, senior fellow with the liberal Center on Budget and Policy Priorities, agrees.
"The toughest choice is what to do about the Bush tax cuts." That will be deferred until the next president and Congress comes in, he says.
"The Democrats will never make them permanent. Bush would never sign a repeal. And the Democrats aren't going to stick their necks out for something that will be vetoed."
That said, here are some tax issues you will be and won't be hearing about in the next two years:
Tax extenders: Before adjourning, Congress tried to extend for two more years a handful of popular tax deductions that expired at the end of 2005. These include a deduction up to $4,000 for college tuition paid by low- and middle-income families, a sales tax deduction in lieu of an income tax deduction, and a deduction for teachers who pay out-of-pocket classroom expenses. This extender package also included a few business tax breaks.
Although this package had bipartisan support, it died after being folded into contentious legislation that would have raised the minimum wage and essentially repeal estate taxes.
Most experts expect Congress will try again to extend these tax cuts late this year or early next.
Alternative minimum tax: The AMT imposes an extra tax on many higher-income people, especially those with many children and large state and local tax deductions. Every year, more taxpayers become subject to the AMT, mainly because the original exemption amount, similar to a standard deduction, was not indexed for inflation.
Fixing the problem "is something the Democrats have favored because a lot of Democrats come from high-AMT states," says University of California Berkeley economist Alan Auerbach.
The states with the highest percentage of people paying AMT include New York, California, New Jersey and Connecticut.
Rep. Charles Rangel, the New York Democrat who is expected to chair the House Ways and Means Committee, has been pushing for AMT reform. With a majority of Democrats, he may get further. But it's no slam dunk, considering the steep cost and Republican opposition.
"Some members of the Republican Party figure, if you choose to live in a high-tax state that chooses to have too much government services, that's your choice, we shouldn't subsidize it in Washington," Stretch says.
Estate tax: Repealing the estate tax has been one of Bush's top goals.
Although Democrats oppose outright repeal, they might support legislation that would raise the exemption _ the size of estates subject to the tax _ to prevent it from hitting upper-middle-income families.
The exemption has been gradually rising, to $2 million in 2006 through 2008 from $1.5 million the previous two years. In 2009, it will be $3.5 million.
In 2011, it reappears in its pre-2001 incarnation. Estates $1 million and up will be taxed at a top rate of 60 percent.
No one _ not even the Democrats _ wants that to happen.
"Mr. Rangel had a proposal to have a $3 million exemption per person. He's interested in a realistic estate tax, not the one we had back in 2000," Stretch says.
Bush, too, may be willing to compromise. "He may fear, after 2008, the chances for permanent repeal are pretty low," Auerbach says.
Dividends and capital gains: Today both are taxed at a maximum rate of 15 percent. After 2010, dividends will once again be taxed as ordinary income and long-term capital gains goes back to 20 percent.
Given how far apart Bush and the Democrats are on this issue, Congress is not likely to revisit it anytime soon.
"I think they put that discussion off until 2010," Stretch says.
Marginal rates: The centerpiece of the 2001 tax act was a phased-in cut in marginal tax rates. The 2003 act accelerated those cuts.
After 2010, tax rates shoot back to their 2000 levels. The lowest rate goes to 15 percent from 10 percent and the top rate jumps to 39.6 from 35 percent.
Democrats like the cuts at the low end, but probably not enough to make the ones at the high end permanent.
Mark Luscombe, principal tax analyst with CCH, a tax information service, says Congress and Bush "will avoid a fight on expiring tax cuts. I think Bush has given up on making them permanent."
Democrats might attempt to make other middle-class tax cuts permanent, such as the higher child credit, marriage penalty relief and a bigger earned income tax credit for married couples.
