Democrat Congress Heralds Shift In Tax Legislative Outlook

by Mike Godfrey, Tax-News.com, Washington

28 November 2006

With the Democrats winning control of both chambers of US Congress, accounting firm Grant Thornton predicts that the tax legislative outlook will shift to new priorities and concerns.

While Republican desires for lower taxes are not expected to be totally pushed aside, Mel Schwarz, a partner in Grant Thornton’s National Tax Office, believes that they are likely to be compromised to a certain extent by Democrat priorities such as providing health care and educational assistance through the tax code.

Particularly important will be whether the Democrats require that any tax cuts in one area be offset by tax increases in another area. Over the past six years, tax legislation has not been revenue-neutral, Schwarz noted.

"If the new Democratic majority in Congress insists that tax legislation generally be revenue neutral, thereby requiring a tax cut in one area to be offset by a tax increase in another, the legislative debate will change," he observed.

"Careful attention will have to be paid not only to the tax benefits being advanced by any future legislation, but also those areas that are targeted for revenue offset," he added.

In the House of Representatives, incoming Ways and Means Committee Chairman Charles Rangel (D - NY) has promised a new era of bi-partisanship, and indicated no desire to roll back President Bush's 2001 tax cuts. He is also particularly keen to start the ball rolling on renewing the R&D tax credit, tackling the alternative minimum tax and extending personal income tax cuts, but is less enthusiastic on the issue of extending investment tax cuts beyond the end of 2010, when they are due to expire.

Meanwhile, in the Senate, priorities in the Finance Committee are likely to show a shift in emphasis rather than a change in direction with Montana Democrat Max Baucus as committee chairman, says Schwarz. This could lead to more time dedicated to issues close to Baucus's heart such as the research credit and international taxation, and less on subjects pursued by outgoing chairman Charles Grassley, such as the treatment of tax-exempt entities.

However, the shift to a one-seat Democrat majority from a six-seat Republican majority in the wider Senate following the recent mid-term elections is likely to have a limited effect on tax policy as measures such as the attempt to repeal estate tax take 60 votes to pass, Schwarz concluded.

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