Banking on cuts for just rewards

0 Comments | Insight on the News, April 7, 1997 | by Susan Crabtree

Leaders on both sides have been vigorously debating and, aside from death and taxes, something else seems certain this year: Capitol Hill soon will stop hiking and skirt acting on capital-gains reductions.

In a letter to a friend in 1789, Benjamin Franklin wrote that "in this world nothing is certain but death and taxes." But with a balanced-budget amendment to the Constitution killed by Senate Democrats and no clear GOP agenda in sight, capital-gains tax relief may be Congress' last-gasp opportunity to avoid a "do nothing" label. At the opening of the Senate Finance Committee hearing on capital gains in mid-March, Chairman William Roth, a Delaware Republican, repudiated the words of his House colleague, Majority Whip Tom DeLay of Texas, about postponing comprehensive tax cuts. "My answer is: Read my lips, no delay The American people deserve a tax cut now."

In 1913, before the graduated income tax and with the country alarmed about speculators, Congress voted to tax the net gain on the value of every asset when it is sold, including stocks, homes, office equipment or any other asset. But 84 years later a controversy surrounds the tax which some believe has become an unfair burden in the quest for the American Dream.

Bill Sprague is one American who would benefit from a capital-gains tax cut. For Sprague, investment is not a high-stakes speculation in the stock market, it's 40 years of steady toil on his 3,000-acre corn, soybean, beef and hog farm in Union Country, Ky As a member of the board of the American Farm Bureau, he speaks for 4.7 million families when he says it's fundamentally wrong to tax income twice from capital assets. "I don't know any farmers who have bought farmland, buildings, equipment or livestock with untaxed dollars," he told a Senate Agriculture, Nutrition and Forestry subcommittee.

Sprague has found receptive ears in Congress. While debate continues about whether comprehensive tax reform will occur this year, many members on both sides of the aisle agree that some form of capital-gains reduction almost is certain. "There is significant bipartisan support for broad-based capital-gains relief," House Ways and Means Chairman Bill Archer tells Insight. "I'm still somewhat optimistic that before this year's out a capital-gains rate reduction will not only pass but be signed into law."

The senior member from Texas, Archer says the conservative "Blue Dog" Democrats in the House have told him they support the idea of a capital-gains tax cut but first want to focus on balancing the budget. Archer says even Treasury Secretary Robert Rubin is willing to talk about a reduction in capital gains, although it is not an administration priority. The conservative Texan cautions that it may be a long process before Congress passes tax relief this year and predicts that any consensus will depend on which form the capital-gains tax cut takes.

During the last three months, senators and congressmen have been adding to the number of capital-gains relief bills. Many Republicans, including freshman New Jersey Rep. Mike Pappas, would like to abolish the capital-gains tax, but most support cutting it in half. Building on a capital-gains tax-cut provision in a 1995 congressional budget proposal, Republican Sens. Orrin Hatch of Utah and Charles Grassley of Iowa and Democratic Sens. Joseph Lieberman of Connecticut and John Breaux of Louisiana have refined their proposals.

Like many Republican bills including Roth's American Family Tax Relief Act, the Hatch proposal would provide individuals with a 50 percent capital-gains reduction and also would give corporations a maximum capital-gains rate of 25 percent, as well as providing enhanced incentives for investments in newly issued stock of small corporations.

Middle-income investors are taxed at 28 percent on their capital assets, while the wealthiest individuals are taxed at 39.6 percent. The Hatch bill would repeal the present law, making the highest effective rate 19.8 percent, with middle-income investors paying 14 percent. According to Hatch, under his bill a couple with $30,000 in taxable income who sell a capital asset would pay only a 7.5 percent tax on the gain, and the proposal would slash the taxes retired seniors pay when they sell the assets they have accumulated for income during retirement.

In a change of political climate on this issue, Democratic leaders are weighing in with their own fine-tuning proposals. President Clinton would like to increase the capital-gains tax exemption on the sale of a home from a onetime $125,000 for homeowners 55 or older to an exemption of as much as $500,000 with no age minimum and no limit on the number of times a homeowner can use it.

John Talisman, tax legislative counsel at the Treasury, says this bill would cost the Treasury just under $2 billion. But the president also has proposed a change in how capital gains are assessed. Investors would use the "average-cost" accounting method when calculating their investment taxes instead of two other methods Treasury officials say taxpayers have used to their advantage. According to Talisman, the proposed revision is a needed correction that will raise an estimated $3 billion for the Treasury, affecting 10 million investors.