What's the Tax Holdup?

0 Comments | Insight on the News, April 30, 2001 | by Sheila R. Cherry, | Jamie Dettmer

Capitol Hill's denizens hope accelerated tax relief can boost the nation's economy. But unless logistical and political obstacles are overcome, it all may be too little, too late.

What a difference a stockmarket crash makes. Everybody on Capitol Hill now is talking about the need for tax cuts and of getting extra cash to Americans as soon as possible to help boost the flagging economy. But who is worthy of tax relief, and how can they be given back some of their money in time to make a difference in consumer spending and the markets?

Getting immediate or even speedy relief is not as easy as it sounds. While politicians on both sides of the aisle agree that some kind of tax-cut/stimulus package is called for, there is little consensus about who should get what and when -- or how to get it to them.

Apart from divisions about the size of tax cuts, there also is dispute -- and little planning being done -- about whether there should be an immediate rebate check or if rate cuts should be allowed to work their way to taxpayers through reduced withholding. Another option would be to announce a temporary taxpayers' holiday.

With the clock ticking the drawback is that, whatever the means, no one is going to see any extra cash until the beginning of the second half of the year -- and skeptical accountants tell Insight it could take well into the fall, depending on the method used. Furthermore, some lawmakers are arguing for a rebate not just to people who pay income taxes, but also to workers below the income-tax threshold who make payments to the Federal Insurance Contributions Act (FICA).

Whatever the means, according to a Senate Finance Committee spokeswoman, there now is a tentative bipartisan consensus in the Senate for an immediate $60 billion tax-cut stimulus package, which "can happen at any time."

But that may be pie in the sky. While President George W. Bush has endorsed the idea of accelerated tax relief to help the economy, he has insisted that any stimulus package not go beyond his planned total of $1.6 trillion in tax cuts, which he wants phased in during the course of a decade. And, like the majority of Senate Republicans, he wants any accelerated tax relief passed at the same time as his overall tax-cut proposal -- which by itself may not have a majority in the Senate. The president's plan includes across-the-board rate reductions, marriage-penalty relief, an increase in the child tax credit, repeal or reduction of the estate tax and a broader charitable-giving deduction.

The Senate Finance Committee could begin working on the president's plan in May, a spokeswoman tells Insight. But so far nobody seems to know precisely how any of the tax cuts designed for this year could be channeled quickly enough to hard-pressed taxpayers.

In the meantime, Senate Democrats are making hay with a $60 billion, one-time, shot-in-the-arm package -- with money to go to Americans as if by magic through a rebate check. At first glance, simply mailing a check to 125 million taxpayers might seem simple. But there are many problems with the idea, say Republican critics and government accountants, especially if the rebate is based on income-tax returns.

First, 20 percent of individuals who received W-2 forms in the mail for 2000 have since moved, leaving the IRS with millions of address corrections to track. And many of last year's individual filers will have married, some joint filers will have divorced, and on and on. There even is concern that recipients will mistake unexpected rebate checks for junk mail and discard them.

Other practical questions arise, as well. Do you wait for a new taxpayer list on April 15, or base the rebate on last year's tax data? If the former, what do you do about the millions of taxpayers who file for extensions?

The conjectured turnaround time to implement a rebate is three months. So if the Democrats' plan were passed in May, recipients could not expect rebate checks until at least August -- hardly an immediate stimulus. And there is another snag. Would the IRS have the printing capacity to cope? That isn't certain. Some Democrats argue that other agencies could step in to take up the slack, including the departments of Defense and Veterans Affairs.

Asked about taxpayer privacy restrictions under Internal Revenue Code Section 6103, which prohibits the sharing of taxpayer information with other federal agencies, one staffer thought maybe IRS personnel with 6103 authority could oversee printing operations at cooperating agencies. Other Capitol Hill insiders say that in the absence of a very strong advisory from the Justice Department, this is at best whistling past the graveyard.

Earlier in the year, Senate Budget Committee Chairman Pete Domenici of New Mexico broached the idea of sending tax money back to taxpayers by rebate check but since has acknowledged this as a logistical black hole. He appears to have been persuaded that any such rebate would arrive too late to have the desired effect of stimulating the economy this year.