Statements on Introduced Bills and Joint Resolutions S. 1436

S. 1436. A bill to amend the Internal Revenue Code of 1986 to allow a deduction for State and local sales taxes in lieu of State and local income taxes, and for other purposes; to the Committee on Finance.

(At the request of Mr. DASCHLE, the following statement was ordered to be printed in the RECORD.)

Mr. GRAHAM of Florida. Mr. President, when Congress enacted the Tax Reform Act of 1986, it was heralded for its simplicity, efficiency and fairness. Yet the legislation was not fair to states such as Florida that choose not to finance the government through the imposition of an income tax. Residents from these States are forced to pay a higher Federal income tax liability than comparable citizens of other States. This results from the 1986 Act's elimination of the Federal income tax deduction for State sales taxes.

Today, Senators NELSON of Florida, DASCHLE, JOHNSON and I are introducing the Sales Tax Equity act to remedy this inequity and lift our constituents from second-class status. The bill allows taxpayers to elect a deduct State and local sales taxes in lieu of a deduction for State and local income taxes. Although the election is available to residents of all States, the practical effect of the bill is to make the deduction for State taxes available to residents of States with no State income tax. Residents from these States should not be forced to pay higher Federal tax bills simply because their State government's funding does not derive from an income tax.

To avoid burdensome record-keeping requirements, the deduction for State and local sales taxes would be determined by tables produced by Treasury. Those tables will take into consideration the sales tax rates in the various States and average consumption.

The Joint Committee on Taxation estimates the cost of restoring this fairness to the citizens of non-income tax States at $26 billion over ten years. Under most circumstances it should not be incumbent upon those of us who are trying to restore equity in our Federal tax laws to find offsets for this cost. The problem we face, however, is that last week the Office of Management and Budget announced that the deficit for this year would be 455 billion dollars—165 billion dollars greater than the previous record deficit. The fiscal hole in which we now find ourselves—primarily as a result of the fiscal mismanagement of the Bush Administration—places an extra burden on us. The responsible approach to fixing this problem, therefore, requires us to put together a proposal that will not exacerbate the deficit. Fortunately, offsets exist that will fully offset the cost of the restored sales tax deduction and improve the Nation's tax laws by making it tougher for taxpayers to avoid paying their fair share.

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In his last report to the IRS Oversight Board, former Commissioner Rossotti identified corporate tax shelters as one of the top problems facing the IRS. To combat this growing problem, the bill includes measures to crack down on the proliferation of tax shelters. The purpose of these provisions is to reinforce the Treasury department's administrative enforcement regime. A key element of the Service's enforcement regime is their ability to detect potentially abusive transactions. Thus, the bill promotes disclosure of such transactions through a framework of increased penalties and limited defenses in the event of nondisclosure.

The legislation also clarifies the judicially created doctrine of economic substance and imposes a new 40 percent strict-liability penalty for those transactions that fail this new requirement. Clarification of the economic substance doctrine requires that the taxpayer establish that (1) The transaction changes in a meaningful way, apart from the Federal income tax consequences, the taxpayer's economic position, (2) the taxpayer has a substantial non-tax purpose of entering into the transaction, and (3) the transaction is a reasonable means of accomplishing such non-tax purpose.

In addition to cracking down on potentially abusive transactions, our bill will shut down known abusive transactions. Last year, at the request of the Chairman and Ranking Members of the Senate Committee on Finance, the Joint Committee on Taxation investigated Enron's tax returns. One of the areas on which the Joint Committee focused was the tax shelter arrangements, offshore entities, and special purposes entities that Enron used to reduce its tax liability. The Joint Committee issued its report on this investigation on February 13, 2003 and included recommendations for shutting down some of the tax shelters used by the company. This legislation includes those recommendations.

The legislation also eliminates incentives in our tax code that encourage individuals and corporations to renounce their U.S. citizenship to avoid paying U.S. tax. For individuals, the legislation generally subjects U.S. citizens who relinquish their U.S. citizenship and certain long-term U.S. residents who terminate their U.S. residence to tax on the net unrealized gain in their property as if such property were sold at fair market value on the day before the expatriation or residency termination. Only a gain in excess of $600,000, $1.2 million for a married couple, is subject to tax.

The legislation also establishes new rules to thwart efforts by some U.S. corporations to reincorporate in a foreign country in order to avoid paying U.S. tax. These proposals are identical to legislation passed previously by the Senate.

There is one additional, and crucial, benefit of our legislation. It will not slow down the current conference negotiations on legislations extending the child credit expansion to low-income families. As my colleagues know, legislation resolving this matter has passed both the House and Senate and the differences between the two bills must be reconciled. It is important for that legislation to get resolved as soon as possible so that the IRS has ample time to send checks out to these families this summer. Some have suggested that resolution of the sales tax issue—a matter not included in either the House or Senate bill—be attached to the child credit bill. I fear that such an attempt would further complicate resolution of that important legislation.

I hope our colleagues will look upon this legislation in the spirit with which it is offered. It is fundamentally unfair that for the past seventeen years the residents of our States have faced higher Federal income tax liabilities than their fellow citizens living in other States. We feel that we have structured our legislation in a manner that corrects this inequity without jeopardizing the tax benefits available to residents of other States. Furthermore, the bill is fiscally responsible and improves the tax system by making it more difficult for those who would use tax shelters and other devices to lower their taxes.