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Wednesday December 17, 2014

Washington News

Washington Hotline

Washington Developments in 2014

What will happen in Washington this year? There are several discussion topics that will be active during 2014. These include the ongoing tax reform efforts, tax extenders and the November election.

1. Tax Reform – Senate Finance Committee Chair Max Baucus (D-MT) published several tax reform discussion drafts in 2013. However, he did not proceed to actually drafting a bill. House Ways and Means Committee Chair Dave Camp (R-MI) and his staff were drafting a house bill in October of 2013. However, after discussion with Speaker John Boehner, Chairman Camp decided to hold up release of the actual bill. It is possible that Camp may release additional discussion drafts in 2014.

2. Senate Finance Committee Chair – Sen. Baucus had indicated he planned to retire at the end of 2014. However, President Obama appointed him as Ambassador to China. Following the expected confirmation of Baucus by the Senate, the probable next Chairman of the Senate Finance Committee will be Sen. Ron Wyden (D-OR). Wyden has been very involved in the tax reform process for many years, but there will be a natural period of time to restart the effort in the Senate Finance Committee.

3. Tax Extenders – The 60+ tax extenders lapsed on December 31, 2013. The philanthropy community is particularly interested in the IRA charitable rollover. It passed initially in 2006 and has been effective each year since that time. Charitable organizations hope that there will be a bill this summer to enact the tax extenders. In an election year, there are several popular extenders such as the teachers' supplies deduction that encourage Congress to act. However, it is possible that the tax extenders bill may be held again until a lame duck session after the November election. If this occurs, charities will face a very compressed marketing campaign for 2014 IRA charitable rollovers. The favorable news is that the IRA rollover is on all of the published lists of tax extenders and therefore is very likely to pass.

4. Election Positioning – Taxes generally do not elect candidates. The discussion of lower rates in exchange for reduced itemized deductions may cause major problems for candidates. The inclination of taxpayers is to protect the existing benefit rather than exchange a deduction for lower rates. For this reason, the forthcoming election makes major tax reform more challenging in 2014.

Why 2014 Tax Reform is Difficult

Many Washington observers compare tax reform to the last successful major revision in 1986. Since that date, there have been over a dozen tax acts, but there has not been a single comprehensive reform of personal and business taxes.

Tax reform sounds good in concept, but is always politically difficult. There is a general agreement in both the House and the Senate among the tax committee members that the economy would benefit from lower personal and corporate tax rates. However, this necessarily requires limiting some personal and business deductions. The natural inclination of interest groups is to mobilize resources in a very powerful effort to protect each specific deduction or tax credit.

In 1986 there was a confluence of favorable factors. The factors included a strong economy, low unemployment and a general consensus among the White House, House and Senate leaders in favor of reform. There was an agreement to reform both personal and corporate taxes. The changes in the corporate depreciation schedules and the investment tax credit plus the increase in the capital gains tax provided the revenue that facilitated a large reduction in personal tax rates.

Even with all of these favorable factors, the road to reform in 1986 was very rocky. Despite major efforts by President Ronald Reagan and House Ways and Means Chair Dan Rostenkowski (D-IL), tax reform failed initially in the House and in the Senate Finance Committee. It took a strong bipartisan lobbying effort to move the bill through to passage.

The challenges in 2014 are readily evident. The U.S. economy is in a slow recovery and there still is fairly high unemployment. There is a lack of bipartisan agreement in the White House, Senate and House. A major philosophical division is whether the tax bill should raise major new revenue or be revenue neutral.

The loss of Senate Finance Committee Leader Max Baucus makes the transition more difficult in the Senate. As Baucus moves to a new position as Ambassador to China, incoming Chair Ron Wyden will face the challenges of the November election.

Editor's Note: Nearly all of the leadership in Washington agrees that tax reform is necessary. However, with the current political circumstances an actual bill is some distance in the future. The process may start when Chairman Camp decides to release an actual draft. While it is still a very long way to passage of major tax reform, the draft may establish a base for lower itemized deductions. For all supporters of philanthropy, it continues to be important to emphasize the uniqueness of the charitable deduction and hope that any initial draft published in 2014 will still protect that deduction.

Published January 3, 2014
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