Statement of Administration Policy: H.R. 4210 - Tax Fairness and Economic Growth Act of 1992

(Senate)
(Gephardt (D) Missouri)

The Administration strongly supports enactment by March 20th of the President's short-term economic growth proposal. The President's plan addresses the immediate challenges facing the economy: it will create jobs, increase the value of real estate and small businesses, and stimulate savings and investment. It is fully paid for with entitlement reforms and satisfies the pay- as-you-go requirement of the Omnibus Budget Reconciliation Act of 1990 (OBRA).

The President will veto H.R. 4210, the Democratic proposal reported by the Finance Committee, if it is presented to him in its current form. The bill would:

— Raise income tax rates substantially and permanently for individuals.

— Increase taxes by more than $100 billion. More than two-thirds of all taxpayers facing tax increases will be small businessmen and women and entrepreneurs. Small businesses are the primary source of new job creation.

— Fail to provide adequate incentives for short-term job creation or to generate investment incentives necessary for long-term growth.

— Increase the deficit by $2.2 billion in FY 1992 and $1.8 billion in FY 1993. Enactment of this bill could trigger a $4 billion pay-as-you-go sequester on Medicare, FY 1993 crop payments to farmers, Social Services Block Grants, emergency unemployment benefits, Family Support Payments to States, the Veterans' Housing Loan Program, and other entitlement programs. (These estimates do not take into account the provisions identified on page 4 of this statement that have not yet been scored.)

Specifically, the Administration strongly objects to the following provisions of H.R. 4210:

— The first-time homebuyer credit provides benefits to less than 20 percent of first-time homebuyers because the credit is limited to newly constructed residences.

— The capital gains exclusion for small business stock is far too narrowly targeted and does not provide adequate incentives for broad-based capital formation and job creation.

— The capital gains provision would not provide meaningful incentives for entrepreneurial risk-taking. Under the proposal, the sale of a successful investment is penalized by generally taxing the gain at the highest marginal rate because the capital gain is included in determining the applicable tax brackets. This is a particular problem for enterprises and investments that are sold in a single transaction such as family farms, personal residences and high-tech businesses. Moreover, the proposal continues the incentive to hold substantially appreciated assets rather than make funds available for new productive investment.

— Various provisions in the proposal significantly increase the effective tax burden on the real estate industry when the industry can least afford it. For example, the depreciable life of non-residential real estate would be lengthened.

— The $300 per child tax credit does not provide benefits to over 40 percent of American families with children under 19 years old, and almost 50 percent of such children are not covered. The credit is phased out for many middle-income families.

— The bailout of privately negotiated health benefit plans will principally benefit selected large eastern coal companies. This bailout is financed by an industry-wide tax that will hurt consumers and all coal workers not covered under the Bituminous Coal Operators Association agreement. This wholly unjustified bailout is highly objectionable from both an employment policy and a health policy perspective.

— The bill diverts income tax revenues of $2.2 billion over the next decade to the rail pension fund, substituting for rail sector contributions. This diversion subsidizes a high-wage industrial sector and inappropriately sets a precedent for taxpayer support for other private pension systems.

— The "Self Reliance Loan" proposal would provide $2.6 billion in new direct loan entitlements on top of existing postsecondary loan and grant programs. With this much loan volume and 500 participating schools, the initiative is not a "demonstration" but a full-blown program unsupported by any evidence that it is actuarially sound or that the complex administrative procedures envisioned can work. Moreover, collection procedures would further involve the Internal Revenue Service in many taxpayers' daily lives.

— The Administration opposes Section 2514 as stated in the Department of Treasury views letter to ways & Means Committee Chairman Rostenkowski dated November 20, 1991.

— The bill repeals the supplemental young child (wee tot) credit to the Earned Income Tax Credit, which allows eligible families with children under the age of one to claim a supplemental credit based on earned income. This provision, which grants additional relief to low income families with young children, was a pivotal component of child care legislation enacted in 1990.

— The provisions relating to small group health insurance parallel the President's proposals in many respects, but they could be strengthened significantly. In particular, the Administration's Health Insurance Network proposal is more comprehensive and less costly than the grant program in this bill. Because there is broad support for this kind of health market reform, these provisions should be considered as separate legislation, outside the context of a tax bill, so that reforms can be enacted this year.

Pay-As-You-Go Scoring

H.R. 4210 as reported by the Finance Committee would reduce receipts in FYs 1992-1994 and increase direct spending in FYs 1993-1997; therefore, it is subject to OBRA's pay-as-you-go requirement. A budget point of order should apply against any bill that is not fully offset for pay-as-you-go purposes in each year.

OMB's preliminary scoring estimates of this bill are presented in the table on the next page. Final scoring of this legislation may deviate from these estimates. If H.R. 4210 were enacted, final OMB scoring estimates would be published within five days of enactment, as required bv OBRA.

ESTIMATES FOR PAY-AS-YOU-GO*
($ in millions)

The above estimates do not include the outlay effects of provisions relating to student loans; small employer health benefits; and coal miners' health benefits, because insufficient time was given to accurately determine the scoring effects of these provisions. The statutory language is being reviewed and estimates are under development.

The above estimates also do not include the potential impact that the Taxpayer Bill of Rights provisions may have on revenues. The Department of the Treasury estimates preliminarily that these provisions (excluding a provision concerning retroactive regulation, which has not yet been estimated) could reduce revenues by at least $0.2 billion in FY 1993 and $1.1 billion between FY 1993 and FY 1997 because of their impact on IRS operations. These costs have not been scored against this bill at this time, however, because of remaining technical and legal uncertainties still under review.

It appears likely that the provisions in the two preceding paragraphs, taken together, would increase the deficit.