Four More Years: Looking at Fundamental Tax Reform
If anyone thinks that President Clinton's re-election will end the debate over fundamental tax reform, they're sadly mistaken.
By Mark Battersby
12/1/1996
In the heat of the campaign, Clinton proposed
a number of tax breaks. His proposed capital-gains tax cut for
homeowners would lessen the government's tax revenue by about
$3 billion over six years, according to the Joint Committee on
Taxation (JCT), and allowing taxpayers penalty-free withdrawals
from individual retirement accounts for the purchase of a new
home would cost the government about $800 million in lost tax
revenue over six years.
But because those totals were based on assumptions
that may not be true or may be incomplete, House Ways and Means
Committee Chair Bill Archer, R-Texas, claimed that the sum of
tax proposals offered by Clinton in 1996 would increase taxes
by $64 million over the next 10 years. In other words, according
to Archer, Clinton "did not offer a tax cut for the American
people; he instead has offered another tax increase."
Archer has outlined his own tax agenda for
1997, one that might impact more directly on body shops. Obviously,
if Clinton's opponent had been elected, Congress would have found
it easier to pass capital-gains cuts, which remain on the agenda
for the coming year. Beyond capital gains and a $500 child credit,
Archer is pledging his continuing commitment to oppose any tax
increases, including Medicare payroll-tax hikes or income-tax
hikes.
Archer has also said that he remains committed
to eliminating income tax. He originally planned to hold hearings
on tax reform throughout 1996 and begin a markup of a new tax
system in 1997, but that schedule, he says, is no longer feasible.
And while President Clinton has said he and the Treasury Department
will continue to explore the various tax-reform plans, keep in
mind that politicians have been debating the federal income tax
for more than 100 years - before there even was such a tax system.
One hundred years ago, William Jennings Bryan and William McKinley
were debating a federal income tax during the first presidential
campaign after the Supreme Court held that the income-tax system
was unconstitutional.
And while neither presidential candidate in
1996 included a tax- system overhaul in his platform, the debate
over whether to replace the income tax with an entirely new system
continues. Experts feel that none of the proposed alternatives
will be sufficient or achieve many of the goals of their proponents.
It is doubtful, for example, whether or not the flat tax would
raise enough revenue. Likewise, the Nunn-Domenici USA tax is complex
and vulnerable to gaming and avoidance, and any tax doing away
with the Internal Revenue Service (IRS) or some similar administrative
agency is "patently absurd," according to a number of
tax experts.
Note: Although it's not being done away with,
the IRS is downsizing. In 1995, the IRS announced that it was
reducing its number of regions from seven to four and its number
of districts from 63 to 33. Similar support functions, such as
telephone-operations sites, were also reduced because technology
allows the IRS to handle calls more efficiently. That reorganization,
which involved eliminating nearly 2,000 positions in the national
office and in the field, was to be completed by October 1. However,
the National Treasury Employees Union succeeded in getting a provision
in the omnibus spending package passed in September that delays
completion of the reorganization until after March 1, 1997.
What's New
Even as the debate over new tax systems, the
abolishment of the IRS and future tax breaks rages, there are
already quite a few new tax rules in the pipeline that will kick
in during 1997.
- First-year expensing - Starting in 1997, the cap on the first-year-expensing
deduction increases each year: in 1997 to $18,000, in 1998 to
$18,500, and in 2003 and later years to $25,000.
- Health insurance for the self-employed - The deduction increases
to 40 percent of annual premium costs in 1997, and it gradually
increases to 70 percent in 2005 before leveling out at an 80 percent
deduction in 2006 and later years. Health-insurance premiums for
both medical and dental may be included, as well as long-term-care
insurance premiums for contracts issued after 1996.
- Independent contractor safe haven - If a business establishes
a prima facie case that it was reasonable not to treat a worker
as an employee under the safe-haven rule, the burden of proof
shifts to the IRS. Naturally, the body shop owner or manager must
fully cooperate with reasonable IRS requests for information relative
to the treatment of workers as independent contractors.
- Business credits - A Work Opportunity Credit becomes effective
for wages paid to employees who began work on or after October
1, 1996, and before October 1, 1997. The credit percentage is
35 percent of up to $6,000 of each worker's first-year wages,
for a maximum credit of $2,100. For summer youth employees, the
maximum credit is 35 percent of up to $3,000 of wages paid during
a 90-day period for a maximum credit of $1,050.
- S corporations - Among the many changes, mostly minor, that
have been made to the S-corporation rules are an increase in the
shareholder cap to 75. The maximum number of shareholders of an
S corporation will be increased from 35 to 75 for tax years beginning
after December 31, 1996.
- Probably of even more interest to many shop owners is the
repeal of partnership-like audit rules for S corporations. In
tax years beginning after December 31, 1996, S corporations and
their shareholders will no longer be subject to the audit rules
that are applied to partners and partnerships.
- More taxpayer rights - Today, as part of the latest "taxpayer
rights" bill, private delivery services have been put on
par with the U.S. Postal Service - if the IRS designates the company
as qualifying. Taxpayers may rely on the postmark of designated
private courier companies for the purpose of proving a timely
mailing of documents after July 30, 1996.
For proceedings starting after July 30, 1996, in an action for
attorney's fees and litigation costs, the burden of proof shifts
to the IRS to prove that its position was substantially justified
once the taxpayer prevails in any dispute.
Also, the recoverable hourly rate for attorney's fees is increased
from $75 to $110 per hour for the prevailing taxpayer.
Read My Lips
Most shop owners are far too sophisticated to salivate when they
hear terms such as "tax cuts" or "tax simplification."
Steve Forbes' flat-tax plan excited the media more than it did
the public, and Bob Dole's campaign pledge for a 15 percent across-the-board
tax cut was greeted with yawns.
Not too surprisingly, voters have a right to be skeptical about
tax-simplification schemes and tax-cutting promises. The Tax Foundation
- a conservative tax-policy thinktank - claims that Americans
haven't seen their federal tax burden lessened since 1983. How
can this be - in light of the Reagan Revolution, which saw passage
of the Tax Reform Act of 1986 that lowered federal tax rates?
The answer, which many shop owners along with other taxpayers
learned to their chagrin, was that the reduction in tax rates
was more than offset by the repeal of deductions and credits that
many taxpayers long enjoyed.
The very real rules just now coming into play may well mean lower
taxes for body shops - and their owners. Waiting for the fulfillment
of campaign promises, congressional threats or the IRS's "good
intentions," on the other hand, may be quite a bit less rewarding.
Mark E. Battersby is a tax and business consultant based in Ardmore,
Pa.
Electronic Payroll Taxes
The IRS, despite taking serious hits by politicians and lawmakers
over its efforts to modernize, is moving swiftly ahead with plans
to require most businesses to utilize the government's electronic
payments system. All body shop businesses can begin paying their
payroll taxes electronically under the new Electronic Federal
Tax Payment System (EFTPS). While mandatory participation in the
program has been delayed until July 1, 1997, for 1.2 million employers
who paid more than $50,000 in 1995 employment taxes, the system
is presently functioning.
Congress delayed required participation because of concerns that
smaller businesses did not have sufficient notification and that
EFTPS did not have enough capacity to handle the influx of so
many accounts in coming years. The IRS maintains that no new or
expensive equipment is required to use EFTPS - the only tool required
is a telephone.