Budget and Tax Reconciliation, July, 1997

Major Policy Issues To Be Resolved in Budget Reconciliation

Federal Budget and Taxation Committee Issues

For more information contact Chris Zimmerman at (202) 624-8668 or Gerri Madrid at (202) 624-8670.

NCSL Policy Related Issues	NCSL Position	S. 949	H.R. 2014	Administration Plan
Tax Administration
Reciprocal Refunds Offsets H.B. 2014; Title IX; Subtitle F; Sec. 963	Support the House provision. There is currently no reciprocal authority for states to participate in the federal refund offset program. Permitting federal refunds to be offset for state income tax debts would further cooperative efforts in joint federal/state tax administration and possibly increase state receipts by as much as $150 million to $200 million annually.	No provision.	Provides for the notification of reduction and collection of past-due, legally enforceable state tax obligations by the federal government through reduction in the amount of overpayment payable to a taxpayer. Also provides for notification of states of such person's name, taxpayer ID number, address, and the amount collected.	Treasury and IRS have endorsed.
Pensions
Extension of Nondiscrimination Rule S. 949; Title XIII; Sec. 1308 H.B. 2014; Title IX; Subtitle B; Sec. 912	Support both provisions.	Same as House provision; permanent moratorium on application of nondiscrimination rules to governmental plans.	Extends and makes permanent the moratorium on application of certain nondiscrimination rules to state and local governments relating to qualified pension, profit-sharing, and stock bonus plans.	No provision.
Portability of Permissive Service Credit H.B. 2014; Title IX; Subtitle B; Sec. 914	Support the House provision.	No provision.	Liberalizes pension portability in public sector by excluding contributions to purchase permissive service credit into account when determining annual additions.
Tax Exempt Financing
$150 Million Volume Cap S. 949; Title II; Subtitle B; Sec. 222 H.B. 2014; Title II; Subtitle C; Sec. 222	Support the Senate provision. Efforts to control the use of tax-exempt financing should not impinge on the ability of governments to obtain financing for governmental purposes. Therefore, the tax-exempt status of bonds for traditional government needs, such as roads and public buildings should be unrestricted. NCSL opposes efforts that undermine the ability of states and local governments to meet financing needs.	Repeals $150 million volume cap on 501(c)(3) bonds for new capital expenditures. Cost $0.3 billion over five, $0.4 billion over ten years.	Raises $150 million volume cap on 501(c)(3) bonds by $10 million per year until it reaches $200 million. Cost $0.1 billion over five years, $0.4 billion over ten.	Same as Senate. Repeals $150 million volume cap on 501(c)(3) bonds for new capital expenditures. Cost $0.3 billion over five, $0.4 billion over ten years.
Prorata Disallowance or 2% De minimis Rule H.B. 2014; Title X; Subtitle A; Sec. 1003	Oppose the House provision. By decreasing corporate demand for tax-exempt bonds the Senate provision would raise borrowing costs for state and local governments.	No provision.	Extends to non-financial corporations the current law provision that disallows deduction of interest allocable to tax-exempt bonds.	Supports a similar provision to the House bill.
Transportation
4.3 cent Federal Gas Tax Transfer to the Highway Trust Fund S. 949; Title VII; Subtitle A; Sec. 704	Support the Senate provision. NCSL supports the dedication of all transportation tax and user fee receipts to transportation trust fund accounts. Further, NCSL supports the full appropriation of all transportation tax and user fee receipts annually.	Transfers 3.8 cents of the 4.3 cents transportation fuels excise tax dedicated to deficit reduction to the Highway Trust Fund through 4/15/01, transfers 4.3 cents thereafter. No Revenue Effect.	No provision.	Oppose the Senate position.
4.3 cent Federal Aviation Fuel Tax Transfer to the Airport and Airway Trust Fund H.B. 2014; Title X; Subtitle E; Sec. 1041	Support the House provision. NCSL supports the dedication of all transportation tax and user fee receipts to transportation trust fund accounts.	No provision.	Effective 9/30/97, transfers 4.3 cents/gal tax on aviation fuel now going to the general fund to the Airport and Airway Trust Fund. No Revenue Effect.	No provision.
Airport Ticket Tax S. 949; Title VIII; Subtitle E; Sec. 841 H.B. 2014; Title X; Subtitle E; Sec. 1041	No position.	Extends current taxes (tickets, air cargo, noncommercial fuel) through 9/30/07. Imposes 10% tax on payments to airlines for air travel under credit card and similar programs. Reduces passenger ticket tax rate to 7.5% for rural flight segments. Raises $30.9 billion over five years, $71.0 billion over ten.	Extends domestic air passenger ticket tax but reduces rate to 7.5%; imposes an additional fee of $2.00 per flight segment ($2.00 fee grows by $.25 cents each year to $3.00, then indexed); imposes 7.5% tax on payments to airlines for air travel under credit card and similar programs. Raises $25.7 billion over five years, $61.9 billion over ten	No provision.
Labor
FUTA (Federal Unemployment Tax Act) S. 949; Title VIII; Subtitle H; Sec. 881	No position.	Extends the temporary surtax of 0.2 percent (added to the permanent 0.6 percent FUTA tax rate levied on the first $7,000 employers pay an employee), scheduled to expire at the end of 1998 through 2007. Increases the limit from 0.25 percent to 0.50 percent of covered wages on the FUA in the Unemployment Trust Fund. The surtax is expected to raise $6.4 billion over five years, $6.7 billion over ten.	No provision.	Support Senate provisions.
Workman's Compensation S. 949; Title VII; Subtitle F; Sec. 761 H.B. 2014; Title IX; Subtitle E; Sec. 953	No position.	Similar to House provision.	Effective 12/31/97 amends tax -exempt status for certain State worker's compensation act companies.	No provision.

Other Tax Issues

National Issues NCSL Position S. 949 H.R. 2014 President's Plan

Child Credit

$500 Child Tax Credit

S. 949; Title I; Subtitle A; Sec. 101
H.B. 2014; Title I; Sec. 101-102
No position. Non-refundable $500-per-child under 17 ($250 pro-rated per child under 13 for 1997; extended to under 18 after 2002). Parents of children 13-16 would deposit credit into tax-deferred education savings account or prepaid tuition plan. Taxpayers count ½ of any EIC they are entitled to when computing eligibility for the child credit. Phaseout for singles begins at $75,000; $110,000 for married couples. Phaseout thresholds not indexed. Cost $83.5 billion over five years, $172.9 billion over ten. Non-refundable $400-per-child credit for children under 17; $500 per child starting in 1999. Phaseout for singles begins at $75,000; married couples at $110,000. Taxpayers receive child credit after receiving any EIC they are entitled to. Cost $70.4 billion over five years, $149.8 billion over ten years. $500-per-child tax credit for children under 17 (under 19 in 2003). Credit indexed after 1999. Refundable against employees' share of payroll taxes, stacked before the EIC. Phaseout begins at $60,000 married through 2000, $80,000 married thereafter. Recipients of the credit could contribute it plus an additional $500 per year to a Kidsave account. Cost $70.2 billion over 5 years; $176.1 billion over ten years.

Tobacco Tax

Cigarette Tax.

S. 949; Title VIII; Subtitle E; Sec. 846
NCSL's historic position is to oppose increases in federal excise taxes. Increases the tobacco excise tax an equivalent of $.20 cents per pack, to a total of 44 cents. Raises $14.8 billion over five years, $29.9 billion over ten. No provision. Supports tax if dedicated entirely to expand health coverage for children, address children's development issues, and improve overall public health.

Education

HOPE Tax Credit (Higher Education Tax Incentive)

S. 949; Title II; Subtitle A; Sec. 201
H.B. 2014; Title II; Subtitle A; Sec. 201
No position. Hope Scholarship credit for 50% of $3,000 spent for two years of qualified tuition and book expenses (75% of up to $2,000 of community college expenses). Requires HS or equivalent diploma to claim HOPE credit. Phaseout for singles begins at $40,000 and $80,000 for married couples. Cost $20.4 billion over five years, $45.3 billion over ten. Hope Scholarship credit for 50% of first $3,000 spent for two years of qualified tuition and book expenses. Phaseout for singles begins at $40,000, $80,000 for married couples. Cost $22.3 billion over five years; $49.6 billion over ten. Hope Scholarship tax credit for 100 percent of $1,000 in higher education expenses (qualified tuition and books) in the first year and 50% of the next $1,000. After 2002, 100% for the first $1,500 and 50% for the next $1,000. 20% tuition credit for third and fourth years on the first $5,000 spent through 2000, and a 20% credit on the first $10,000 spent after 2000. Phaseout for married couples at $80,000. Cost $34.5 billion over five years, $95.1 billion over ten.

$10,000 Deduction

H.B. 2014; Title II; Subtitle A; Sec. 202
No position. No provision. Creates private prepaid tuition program similar to existing state programs, annual contribution limit of $5,000. Deduction up to $10,000 a year ($40,000 per student limit) for expenses paid out of state or private tuition programs. Cost $7.6 billion over five years, $23.9 billion over ten. Dropped provision.

Education IRAs (Penalty Free Withdrawal)

S. 949; Title II; Subtitle A; Sec. 203, 211-213
H.B. 2014; Title II; Subtitle A; Sec. 203
No position. Penalty-free IRA withdrawals for undergraduate and graduate education expenses as well as for elementary and secondary expenses. Allow penalty-free withdrawals from qualified state tuition programs. Cost $2.3 billion over five years, $6.4 billion over ten years. Allow penalty-free IRA withdrawals for undergraduate, post-secondary vocational, and graduate education expenses. Cost $0.8 billion over five years, $1.2 billion over ten years. Tax-free (withdrawals and earnings); penalty-free IRA withdrawals for higher education expenses. Money banked in Kidsave accounts from child tax credit plus additional $500 could be used for child's education. Cost $1.3 billion over five years; $6.0 billion over ten (cost includes withdrawal for first-time home purchase).

Student Loan Interest Deduction

S. 949; Title II; Subtitle A; Sec. 202
No position. Tax deduction up to $2,500 a year, for five years, for interest on student loans; phaseout for singles begins at $40,000; $80,000 for married couples. Deduction amounts are indexed, income limits indexed beginning in 2003. Cost $1.1 billion over five years, $3.3 over ten years. No provision. Tax deduction up to $2,500 a year, for five years, for interest on student loans, phaseout begins at $65,000 married, $45,000 single. Expand income exclusion for student loan forgiveness to include nonprofit tax-exempt charitable or educational institutions, and to loans forgiven under the Direct Loan Program's income-contingent repayment program. Cost $1.8 billion over five years, $4.4 billion over ten.

Investment & Savings

Estate Tax

S. 949; Title IV; Subtitle A; Sec. 401
H.B. 2014; Title V; Subtitle A; Sec. 501
No position. Increases unified estate and gift tax credit (current law $600,000) to $625,000 in 1998, $640,000 in 1999, $660,000 in 2000, $675,000 in 2001, $725,000 in 2002, $750,000 in 2003, $800,000 in 2004, $900,000 in 2005 and $1 million in 2006 and thereafter. Cost $3.1 billion over five, $25.3 billion over ten years. Increases unified estate and gift tax credit to $650,000 in 1998, $750,000 in 1999, $765,000 in 2000, $775,000 in 2001 through 2004, $800,000 in 2005, $825,000 in 2006 and $1 million in 2007. Index other provisions beginning in 1999. Cost $7.5 billion over five years, $27.0 billion over ten. No provision.

Alternative Minimum Tax

S. 949; Title I; Subtitle B; Sec. 102
H.B. 2014; Title IV; Subtitle F; Sec. 401-404

No position. Increase individual AMT exemption by $600 married, $450 single for 2001 and 2002, $950 joint, $700 single for 2003 and thereafter. Cost $0.4 billion over five years, $14.8 billion over ten. Increases exemption by $1,000 married; $750 single every other year from 1999 through 2007; indexed thereafter. Exempt small corporations from AMT; repeals AMT depreciation adjustment; reverses IRS position on installment sales by farmers. Cost $14.5 billion over five years, $39.2 over ten. Critical of House AMT provisions.

Capital Gains

S. 949; Title III; Subtitle B; Sec. 311-314
H.B. 2014; Title III; Subtitle B; Sec. 311-313
No position. Top rate on capital gains from sale of investments would drop from 28% to 20% (10% for 15% bracket; 28% for collectibles, securities maintained). 1250 recapture at 34%, symmetric AMT treatment. Same home-sale exemption as Administration plan. Extends present law small business corporate stock rules to corporate investors, repeals the excluded gains from AMT, increases size of eligible business to $100 million, repeals pre-issue limitation, allows qualified tax-free rollover. Cost $4.0 billion over five years; $26.4 over ten. Same rate reduction as Senate. Top rate on capital gains from sale of investments would drop from 28% to 20% (10% for 15% bracket; 28% for collectibles, sec. 1250 recapture at 26%, symmetric AMT treatment. Same home-sale exemption as Administration plan.
Indexing starting in 2001, 3 year post-2000 holding requirement, with mark-to-market option. Corporate gains at 32% rate for 1998, 31% for 1999, and 30% thereafter with 8-year holding period. Allow ordinary losses to offset capital gains of corporations. Raises $1.0 billion over five, costs $36.5 billion over ten.
Taxpayers could exclude from capital gains tax 30% of profits on investments held for more than one year. Exemption up to $500,000 of gains from a home sale for married couples and $250,000 for singles. Increases the existing exclusion for equity investments in small businesses held at least five years to a 75% exclusion for up to $20 million in gains and doubles the eligibility limits on firm size to $100 million. Cost $8.6 billion over five; $19.2 billion over ten.

Individual Retirement Accounts (IRAs)

S. 949; Title III; Subtitle A; Sec. 301-304
H.B. 2014; Title III; Subtitle A; Sec. 301
No position. Penalty-free withdrawals from certain IRAs for first home purchases and long-term unemployment. Expand deductible IRAs-increase income limits (from current law $25,000 single, $40,000 married) by $10,000 married in 98, 00, 02 and 04, and by $5,000 single in 98, 00, 02, and by $10,000 in 04. Eliminates active spousal participant rules-Homemakers allowed $2,000 IRA contribution regardless of spouse participation in pension plan. Cost $3.3 billion over five years, $23.9 billion over ten. "American Dream" IRAs open to taxpayers regardless of income level allow tax-free withdrawals after retirement or before retirement for first home purchase. Contributions up to $2,000 per each spouse in addition to any contributions that can be made to a current law deductible IRA. $2,000 indexed in 1999. Penalty-free early withdrawals (if held for 5 years) for first home purchase. Penalty free rollovers from deductible IRAs permitted. Cost $33 million over five years, $13.0 billion over ten years. Penalty-free IRA withdrawals for first home purchases. Money from Kidsave Accounts could be used for first-time home purchase or retirement. Account's earnings and withdrawals are tax-free.

Welfare Reform

Work Opportunity Tax Credit

S. 949; Title V; Sec. 503
H.B. 2014; Title VI; Sec. 603
No position.

Generally, NCSL is supportive of tax credits.
Extends modified WOTC for 22 months. Modifies eligibility definition of target groups to include AFDC recipients who have received benefits for any 9-month period during the 18-month period ending on the hiring date and to SSI recipients. The bill also reduces the minimum employment period to 120 hours and modifies the credit percentage to 25% for the first 400 hours and 40% thereafter. Extends and modifies for one year the WOTC- Reduces the minimum employment period to 120 hours; modifies the credit percentage to 25% for the first 400 hours and 40% thereafter; extends credit to AFDC recipients who have received the benefits for any 9-month period during the 18-month period ending on the hiring date; also allows the credit against the AMT. Extends WOTC through 9/30/98.

Welfare-to-Work Incentives

H.B. 2014; Title VII; Sec. 801
No position. No provision. Provides to employers a credit on the first $20,000 of eligible wages paid to qualified long-term family assistance recipients during the first 2 years of employment. In year one, credit is 35 percent of the first $10,000; 50 percent of the first $10,000 in the second year. Maximum credit is $8,500 per employee. New 50% credit made available on the first $10,000 in annual wages of certain long-term family assistance recipients for two years of employment.

Sources: Bureau of National Affairs, Inc. Text Supplement: Senate Finance Committee Report (SRept 105-33) on Revenue Reconciliation Act of 1997 (S. 949) Approved by Committee June 19, 1997. Vol. 97, No. 122. June 25, 1997.
Committee on the Budget House of Representatives, Revenue Reconciliation Act of 1997, H.R. 2014, 105^th Cong., 1^st sess, June 24, 1997.
Democratic Policy Committee. "S. 949 the Revenue Reconciliation Act of 1997." DPC Legislative Bulletin: June 25, 1997.
The Majority Staffs, House and Senate Committees on the Budget. July 1, 1997. Major Policy Issues to be Resolved in Reconciliation.
Washington Post. July 1, 1997. "Comparing the Three Tax Plans."

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