Congress Ends 2005 Session; Tax Reconciliation Conference Ahead in 2006

By Jeff Carlson and Paula Cruickshank, CCH Washington Staff Writers

Congress ended its 2005 legislative session on December 22, 2005, putting off until early 2006 what promises to be a difficult conference committee on a $60 billion tax reconciliation package.

With the Senate slated to return for legislative business on January 18, 2006, and the House on January 31, a conference to reconcile the two chambers vastly different tax relief bills will not begin until the first weeks of February at the earliest.

In floor statements late on December 21, Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) and ranking member Max Baucus (D-Mont.) vowed to move the legislation forward as soon as possible in 2006. Leaders in both chambers, however, have yet to announce conferees which would clear the way to begin informal talks before Congress returns to full legislative activity.

A number of critical provisions, including protection from the alternative minimum tax (AMT) and extension of business tax credits, such as the research and development tax credit and the work opportunity tax credit, expire on December 31. Lawmakers typically, however, make those measures retroactive in order to provide a seamless extension. Most contentious are provisions in the House-approved tax reconciliation bill that extend reduced tax rates for capital gains and dividend income.

The budget reconciliation bill, a measure that could well impact the outcome of the tax reconciliation conference, also remains unfinished. Although initially approved by both the House and Senate, the bill must return to the House for a roll call vote after Senate Democrats altered the final version by raising several points of order. It is expected to pass again and be signed into law.

Because the deficit reduction measure cuts $40 billion in the growth of federal spending--from 7.3 percent annually for five years to 7.1 percent--including funds for Medicaid, Medicare and other public assistance programs, the parliamentary maneuver by Democrats could prove troublesome. Republican leaders had hoped to have the bill cleared long before conference negotiations began for the tax reconciliation bill, which has been criticized by Democrats as far too generous to the wealthy.

Democrats hope to use the debate over spending cuts to sway public opinion before the tax reconciliation conference in order to put pressure on the Republican majority to drop tax relief provisions they oppose.

Senate Democratic Minority Leader Harry Reid (D-Nev.), in a statement released December 21, assailed the budget reconciliation bill, saying the legislation "targets ordinary Americans by cutting programs like student aid, Medicare, and Medicaid, all to partially pay for another round of budget busting tax breaks for special interests and multi-millionaires." Reid pointed out that the tax breaks backed by the Republican leadership cost substantially more than the spending cuts save and will result in more deficit spending.

Republicans countered that the expiring tax cuts have led to the current economic expansion, resulting in record revenues coming into the federal treasury and a lowering of the federal budget deficit. Continuing the tax cuts is necessary to continuing America's economic growth, according to GOP lawmakers.

The budget reconciliation measure does, however, strengthen Republican's hand in one sense as it adds back another $10 million to the tax reconciliation budget, raising the total cost of tax relief protected under the reconciliation process to $70 billion. But that still does not give Congress enough room to move AMT relief, capital gains and dividend tax cut extensions, and business tax credit extensions under the reconciliation process. House Ways and Means Chairman Bill Thomas (R-Calif.) dodged the problem by moving a separate AMT bill outside of his reconciliation bill, but Senate Democrats are hoping to keep the AMT fix within the reconciliation process. Grassley has reportedly said he would like to now move the AMT separately in order to squeeze more tax breaks into the reconciliation process.

Final passage of the budget reconciliation bill will also impact employer-paid pension plans. The Deficit Reduction Act includes increases in premiums paid by employers to the Pension Benefit Guaranty Corporation (PBGC) in an effort to reduce the federal budget.

The bill makes three changes to current law that will generate approximately $6.7 billion in savings over five years. The measure increases the flat-rate premium paid by all single-employer plans from $19 to $30 per participant, and indexes the increase to wage inflation. In addition, it raises the per participant premium for multi-employer plans from $2.60 to $8.00 immediately, and likewise is indexed for wage inflation.

In another tax-related matter, the American Institute of Certified Public Accountants (AICPA) in a letter dated December 14 asked Senate Finance Committee Chairman Grassley and House Ways and Means Committee Chairman Thomas to correct an inequity in the current Internal Revenue Code regarding capital gains exclusions for the sale of a residence by a surviving spouse.

After meeting minimum residency requirements, a married couple is allowed an exclusion of $250,000 per person on recognizing capital gains upon selling a home. Under current law, a surviving spouse has only until the end of the tax year in which the death occurred to use the exclusion. If the sale of the home occurs after the calendar year end, the surviving spouse is limited to the $250,000 exclusion available to a single taxpayer. The AICPA proposal would permit a 12-month window from the date of death for a surviving spouse to use the full $500,000 exclusion.

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Posted December 29, 2005.