Stupid Tax Tricks

At first there was clarity and discipline behind the shaping of the nation's largest tax cut in 20 years. Lobbyists were kept at bay. Businesses were told to wait their turn because other cuts would be coming. This one, the Republicans promised, would focus on individual taxpayers and make good sense. It would simplify the filing process while promoting long-term economic growth through tax savings of some $1,600 a year for the average household.

Then it all went bad. Late last month, during three days of chaotic, last-minute, closed-door negotiations between House and Senate leaders, Washington demonstrated its immense talent for mucking things up. A tax package was rushed through Congress just in time for lawmakers to make the Memorial Day barbecues back home, and what should have been a taxpayer feast looks instead like a botched grilling. Most households will see less than $600 of savings this year, and as for simpler tax returns, well, that's just a laugh. A more confusing tax bill is hard to imagine.

The mess that the President is expected to sign this week is loaded with targeted tax breaks and maddening phase-ins and phase-outs--tax reductions that come and go like a spring afternoon. It contains some last-minute special-interest morsels, including one that may be a precursor to school vouchers. Most of the relief comes at the tail end of the 10-year plan--and the year after that, the whole thing disappears, restoring in 2011 the very same tax laws that were in force last April 15.

Is Bush to blame? Perhaps. But not alone. He may have turned on the Washington meat grinder, but both parties fed it foul flesh. And both sides were so hungry for a bill that neither paid close attention to what the bill was. "Nobody was down there on the Senate floor combing through the details," says a Democratic Senator's chief of staff. Most Senators and House members were clueless about the bill's fine print right up to the vote, even most members of the Senate Finance Committee and House Ways and Means Committee, the bodies charged with steering this kind of legislation.

On the House side, only the ranking Ways and Means members--Republican Representative Bill Thomas and Democrat Charles Rangel--were involved in late-hour haggling. Among the Senators, the conferees included Republicans Charles Grassley, Trent Lott and Don Nickles and Democrats Max Baucus, Tom Daschle, Jay Rockefeller and John Breaux. But for most of the final 48-hour marathon to complete the bill on the Thursday and Friday before Memorial Day, only Grassley, Thomas, Breaux and Baucus were actually in the room.

Rangel, who at one point during negotiations was asked to leave the room because the Republicans wanted to negotiate among themselves out of earshot of a Democrat, calls the bill "a fraud on the American people." He and others charge that the bill underestimates the true cost of the tax cuts by half a trillion dollars and that it is aimed squarely at the richest Americans.

Republicans, of course, take offense at the characterization. "That demagoguery and class-warfare rhetoric is pure nonsense," says Republican whip Nickles. "Low-income taxpayers get immediate relief retroactively. Some people are just throwing arrows and playing class warfare because they do it out of habit, not out of knowledge of the bill."

Yet the sponsors of the bill--those who know it best--are hard-pressed to explain it. Topping the list of odd features is the "sunset" provision that repeals the entire bill at the end of 2010. Budget rules require Congress to include a sunset clause in all major tax legislation, but this sunset arrives a year early--after 10 years instead of the 11 years covered by the current budget resolution. That year was shaved off to keep the total cost of the bill under $1.35 trillion. By repealing the legislation in the 10th year, Congress saved billions of dollars. Without the repeal and a few other tricks, the cost of the full 11-year plan would balloon to more than $1.8 trillion by the end of 2011, far exceeding anything the Democrats would vote for. And the cost in the second decade would reach as much as $4 trillion. Even some conservatives on Capitol Hill are dismayed by the apparent dishonesty of the early sunset. After both parties agreed to a smaller tax cut, the conference committee pulled a fast one.

These bigger numbers remain relevant because no future Congress wants to commit political suicide by allowing this tax cut to expire. Simply stated, all of Washington knows many of these provisions are in effect permanent. The Big Lie is that it costs only $1.35 trillion. Since the real cost is much greater, future Administrations--and Congresses--will have to deal with a political nightmare: the real possibility of deficit spending a decade from now as baby boomers begin to retire en masse and sap the Social Security and Medicare systems.

For individual Americans, the tax cuts play havoc with estate planning. Starting next year, when the estate-tax exemption rises to $1 million per person (instead of the current $675,000), rates will decline and taxpayers will be able to leave more to their heirs on a tax-free basis. But the estate tax doesn't disappear entirely until 2010--and a year later, unless Congress acts, the tax is restored to what it is today. This is absurdity of the highest order, making dying in 2010 so attractive for the rich--and dying in 2011 so unappealing--that wags say some millionaires will pull their own plugs early to shelter their wealth.