Bumpy road ahead for tax-relief measures.

• Author: Prysock, Mark
• Position: WashingtonInsights

Aumber of tax bills are under consideration in Congress, the most significant of which is the international reform legislation that would eliminate the U.S. extraterritorial income (ETI) tax regime and replace it with an extensive package of domestic and international business tax provisions. Separate bills were approved by the House Ways & Means Committee and the Senate Finance Committee last year, and now await consideration by the full House and Senate.

Other tax legislation will also command attention this year. The list of pending tax matters includes: energy tax legislation, extension of expiring tax provisions, pension legislation, charitable giving tax incentives, the Internet tax moratorium and the new U.S.-Japan income tax treaty.

Still, several factors will mitigate the likelihood of Congress actually enacting tax relief. The most important factor may be the budget deficit. Both parties acknowledge that the federal budget deficit, expected to reach $477 billion this year, will likely hinder the chances of passing major business or individual tax relief. Last year, a bipartisan coalition of Senate budget hawks limited the amount of tax relief in the final economic growth package to $350 billion over 10 years, and also sought to require revenue offsets for all subsequent tax legislation. With many policymakers on both sides of the aisle now sensitive to the growing concern in U.S. and foreign financial markets over rising federal deficits, it may prove difficult to enact major tax relief without corresponding revenue offsets.

Election-year politics will also shape the outcome of the tax-relief debate. Congressional Republicans, with strong support from the Administration, will likely seek to build on a record of enacting significant individual tax relief in each of the past three years. Congressional Democrats will attempt to thwart any major tax relief by demonstrating that such relief would increase budget deficits and therefore be fiscally irresponsible. They will push their alternative agenda on economic recovery, education, affordable health care and retirement security. If Democrats successfully portray additional tax relief as irresponsible, Republicans may choose to postpone their tax-relief efforts until next year.

The election year may impact the likelihood of tax relief by shortening the legislative schedule. House and Senate leaders have announced a very tight schedule leading up to the November elections. In addition...