PAYGO or 'no go'--a balancing act between taxes and relief.

• Author: North, Cady
• Position: Washington insights - Pay-as-you-go

Every financial executive wants to hear two words: tax relief. However, Congress and the new administration have some very difficult choices to make regarding taxes--both those set to expire next year and new ones. That's because it needs to find solutions to the current economic situation, while the United States faces the largest deficit in its history.

Several key provisions set to expire after 2010 will raise individual tax rates. They will also raise taxes on capital gains, dividends and estates as well as lower the child tax credit. Once current economic hurdles have been cleared, Congress will likely look at major tax reform legislation to help individuals with their tax bills and help corporations spur job creation and growth.

Relief from the alternative minimum tax (AMT) and lowering corporate tax rates are the top two reforms being debated in the new Congress.

However, it may prove difficult to reach consensus on these reforms since Congress must abide by pay-as-you-go (PAYGO) rules, which require all new spending to be offset with either spending cuts or new taxes--with few exceptions. Only in times of emergency related to events like war and sustained low economic growth can PAYGO rules be suspended.

Given the current recession, the economic exception will allow Congress to move forward on many spending initiatives, at least temporarily.

Indeed, Congress renewed its pledge to PAYGO when it convened the 111 th session in January. Some factions, including the "Blue-Dog Democrats" in the House, have even proposed fully codifying the rules into statute.

With PAYGO, major tax relief could be a double-edged sword for financial executives, however. While tax relief would be beneficial, the revenue raisers enacted to pay for the relief might result in a higher effective tax rate for some companies.

The 'Mother of All Tax Bills'

In October 2007, Rep. Charles Rangel (D-N.Y.), chair of the House Ways and Means Committee, proposed revenue-neutral legislation, which became known as the "mother of all tax bills." In it, he proposed to repeal the individual AMT and reduce the corporate income tax rate. He also proposed several revenue raisers to offset the tax cuts.

The largest revenue raisers proposed under Rangel's bill include proposals to: impose surtaxes on incomes over $200,000 and $500,000, at 4 percent and 4.6 percent, respectively; repeal the domestic manufacturing deduction; repeal the "last-in, first-out" (UFO) inventory accounting...