topleft
topright

Issue Brief: Tax Reform

Updated March 2008


It is unlikely that Congress will attempt significant tax reform in the 110th Congress. While various legislative efforts have been introduced, the reality of reform during a presidential election year is dim, however, one must keep an eye on 2009.

Background

In 2005, President Bush’s appointed an Advisory Panel on Federal Tax Reform to recommend options for making the tax code simpler, fairer, and more conducive to economic growth. In November 2005, that report was delivered to the Treasury Secretary with many proposals, the cornerstone being repeal of the Alternative Minimum Tax. The report also includes many provisions that would be harmful to state and local governments if they became law. Specifically, the Panel recommended eliminating the deductibility from federal taxation of state and local income, sales, and property taxes, and excluding corporations from deducting tax-exempt interest on municipal bonds holdings. Recommendations to exempt all dividend income and create greater retirement savings incentives were also included in the report.

Neither Congress nor the Administration have pursued enacting the Panel’s recommendations.

Also in January 2005, the Joint Committee on Taxation released a report, Options to Improve Tax Compliance and Reform Tax Expenditures that contains over a dozen provisions that negatively impact state and local governments. Similar to the Panel’s recommendations, the report has not become law. However, it is believed to be one resource where lawmakers may turn to when and if wholesale tax reform occurs. A briefing sheet on the report is attached to this issue brief.

Activity in the 110th Congress

To begin the long-term conversation on tax reform, House Ways and Means Chairman, Charles Rangel (D-NY), unveiled legislation, H.R. 3970, the Tax Reduction and Reform Act of 2007, in November 2007 that encompasses a variety of tax reform measures. Most importantly, and as was the case with the Advisory Panel’s report, the hallmark of the proposal is to eliminate the Alternative Minimum Tax. The Alternative Minimum Tax was created in the late 1960s to ensure that very high income taxpayers pay their fair share of taxes and do not abuse various tax deductions. However, due to other tax law changes and the fact that the thresholds set for the AMT are not indexed to inflation, many unintended taxpayers have had to pay the AMT. To alleviate this, Congress has adopted ‘patches’ that increase the threshold amount, thus providing relief for millions of middle-class Americans. Rangel’s bill would repeal the AMT entirely, at a cost estimated at $1 trillion. H.R. 3970 contains provisions that both save and cost the government money, but in its totality it is revenue neutral. The Chairman’s bill does not contain any provisions adverse to state and local governments.

Related Public Policy Statements

 

Additional Resources

 

 

GFOA • Federal Liaison Center • (202) 393-8020 • (202) 393-0780 FAX • Email