Tax Increase Prevention And Reconciliation Act Of 2005--Conference Report

TAX INCREASE PREVENTION AND RECONCILIATION ACT OF 2005--CONFERENCE REPORT -- (Senate - May 11, 2006)

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Mr. KERRY. Mr. President, today we are debating a $70 billion tax reconciliation bill and the centerpiece of this bill is a provision to extend the lower tax rates on capital gains and dividends that do not expire until the end of 2008. I cannot support this bill for many reasons. It abuses the budget reconciliation process in order to provide an extension of tax cuts to those with incomes above a million dollars rather than addressing tax issues in a fiscally responsible manner.

This bill is the third and final piece of a flawed budget strategy that does not put us on a path towards deficit reduction. The first piece was the spending bill that cut $40 billion, with most of those cuts hitting those who need our help the most. The second piece was a $781-billion increase in the debt ceiling, which will bring the total to $3 trillion under this administration's watch. If you combine these three bills, the result is a $30 billion increase in the deficit and record level debt.

The conference report does not reflect the tax bill passed by the Senate. Back in November during the Senate Finance markup, I did not support the bill even though it did not include capital gains and dividends tax relief. I was concerned that the bill would come back from the House with this tax relief and that it would substantially increase the deficit in future years. The conference agreement does what I expected and it is even worse than I initially imagined.

The only reason this bill is before us is to extend the lower rate on capital gains and dividends. These lower rates do not even expire until the end of 2008. We have repeatedly heard how American families have benefited from this tax cut and that half of American households now have some investment income. We do not hear the entire side of the story. Even though about half of American households own stock, two-fifths of this stock is held in retirement accounts in which capital gains and dividends earned are not subject to taxation, and thus do not benefit from the lower rates on capital gains. According to the Federal Reserve Bank's Survey of Consumer Finance, only 17 percent of the households in the bottom 60 percent own stock and the average value is $52,000. This accounts for 9 percent of all taxable stock. Households in the top 1 percent own 29 percent of all taxable stock and 84 percent of these households own taxable stock with an average value of nearly $2 million.

These tax cuts are skewed towards the wealthy because they have more capital gains and dividends income than the average family. For those with incomes under $100,000, capital gains and dividend income accounts for 1.4 percent of their total income, but for those with incomes over $1 million, capital gains and dividends account for 31.4 percent of their income. According to the Urban-Brookings Tax Policy Center, those with income over $1 million will receive an average tax cut of $32,000 in 2009, whereas those with incomes below $50,000 will only receive an average tax cut of $11.

Not only will upper-income individuals benefit from this provision, they will benefit from a new provision that was added during the conference. This provision removes the income limits for converting from traditional individual retirement accounts--IRAs--to a Roth IRA. This provision was added to meet requirements of the budget rules, but don't be fooled, this provision is a gimmick. It is ironic that this gimmick is being used to solve a budget issue--it is being added to solve the budget issue of the capital gains and dividend provision having a $30 billion cost in the second 5 years of the bill. The Roth IRA provision does solve this budget problem, but this provision will add to the deficit. It raises revenue initially because contributions to Roth IRAs are not deductible, but it loses revenue because earnings in these accounts accumulate tax free.

Only households with income over $100,000 would benefit from the easing the restrictions on rollovers to Roth IRA accounts. The Tax Policy Center estimates that the 99.1 percent of the benefits of this provision will go to those in the top 20 percent of households with average incomes of $189,863. I have to admit that it is clever to offset one tax cut with another tax cut that only benefits families in the upper-income limits. This provision highlights how this bill makes a hypocrisy of the budget process.

As I said before, there are several budget gimmicks used in this bill to mask its real price tag of the bill and its total impact on the deficit. All this is being done just so the lower rates on the capital gains and dividends can be extended for another two years.

Many of those in the majority will argue that the lower rates on capital gains and dividends are needed to sustain economic growth. It is hard to prove that these tax cuts are the cause of recent economic growth. Prior to the enactment of these tax cuts, there were significant factors in support of an economic recovery. The President's Council of Economic Advisors was predicting a significant increase in employment growth starting in 2003 without the enactment of additional tax cuts. The rationale for cutting the tax on capital gains and dividends income is that it stimulates investment, but there is no solid data to support this conclusion. The stock market did much better during the 1990s when we had a higher tax rate on capital gains than it has done since the rates were cut in 2003.

Proponents argue that these cuts encourage a great deal of selling by investors, so much so that they pay for themselves. However, in a letter to Finance Committee Chairman Grassley, the Congressional Budget Office found that, ``[I]ncreases might suggest a large behavioral response to the tax rate cut--except that realizations also increased by 45 percent in 1996, before the rate cut. Thus changes in realizations are not necessarily the result of changes in taxes; other factors matter as well.'' CBO explained that asset values, investor decisions, and other economic conditions can influence capital gains realizations just as much.

CBO not only examined the year following the 2003 tax cuts, but they dug even deeper and did a historical analysis of capital gains cuts. The CBO experts found that, ``[a]fter examining the historical record, including that for 2004, we cannot conclude that the unexplained increase [in realizations] is attributable to the change in the capital gains tax rates.'' CBO concluded that much of the volatility in capital gains realizations ``seems unrelated to changes in the capital gains tax rates.''

However, the majority seems to think that the cutting taxes on capital gains and dividends is a priority and that debt financed tax cuts reflects sound economic policy. I disagree and believe that this bill chooses the wrong priorities. It fails to extend tax breaks that expired at the end of 2005. The research and development tax credit that is used to help businesses with innovative and groundbreaking research expired at the end of 2005.

This bill does not help families with the cost of college tuition. Due to the deepest cuts in student aid in more than a decade, loans will increase by an average of $5,800. At the end of 2005, a tax provision that provides a deduction for college expenses expired. This bill chooses not to extend this tax cut.

This bill does address the individual alternative minimum tax--AMT--for 2006, but not for 2007. The conference report reflects the Senate language that is based on an amendment that I offered with Senator Wyden. This AMT provision will prevent any new taxpayers from being impacted by the AMT in 2006 that were not impacted by the AMT in 2005. It is important that we address the individual AMT, and it can be done in a way that does not increase the deficit.

The individual AMT was created in 1969 to address the 155 individual taxpayers with incomes exceeding $200,000 who paid no federal income tax in 1966. Then, it applied to a tiny minority of households. But it is rapidly growing from 155 taxpayers in 1969, to 1 million in 1999 to almost 29 million by 2010. It now affects families with incomes well below $200,000. By the end of the decade, repealing the AMT will cost more than repealing the regular income tax.

In 1998, we began to notice that something was happening that was unintended--the AMT was beginning to encroach on middle class taxpayers. At that time, the AMT was expected to impact over 17 million taxpayers in 2010. The AMT problem resulted because the regular tax system is indexed for inflation, while the personal exemptions, standard, deduction, and AMT are not. Under the AMT, exemption amounts and the tax brackets remain constant. This has the perverse consequence of punishing taxpayers for the mere fact that their incomes rose due to inflation. The AMT has another perverse consequence. It punishes families for having children. The more children a family has, the lower the income necessary to trigger the AMT.

As we debated the Economic Growth and Tax Relief Reconciliation Act of 2001, I stressed the fact that the legislation would result in more individuals being impacted by the AMT and that not addressing the AMT hid the real cost of the tax cuts. This holds true today. A choice was made in 2001 to provide more tax cuts to those with incomes of over a million dollars rather than addressing a looming tax problem for the middle class. The Economic Growth and Tax Relief Reconciliation Act of 2001 did include a small adjustment to the AMT, but it was not enough. We knew at the time that the number of taxpayers subject to the AMT would continue to rise steadily. The combination of lower tax cuts and a minor adjustment to the AMT would cause the AMT to explode.

Each year that we wait to tackle the AMT, more taxpayers are impacted and the cost of addressing it only increases. We missed an opportunity in 2001 to address the AMT. Repeatedly, the AMT has been pushed aside to give priority to making the tax cuts for the wealthiest Americans permanent. So often we hear that the bulk of the tax cuts assist the average American family. This is ironic because by 2010, the AMT will take back 21.5 percent of the promised tax breaks for individuals making between $75,000 and $100,000 per year and 47 percent from individuals making between $100,000 and $200,000. However, households with annual income over $1,000,000 will only lose 9.2 percent of the tax cuts.

Instead of addressing the AMT for next year, this bill chooses to extend the lower rates for capital gains and dividends for 2009 and 2010. This bill ignores the fact that we will have to address the AMT for 2007. Without Congressional action, the AMT will impact 23 million taxpayers. To prevent additional taxpayers from being impacted by the AMT in 2007, the exemption amount will need to be increased at a cost of $48.3 billion. We need to address the AMT in a fiscally responsible manner before we extend tax breaks that do not expire until the end of 2008.

Furthermore, this bill chooses to provide tax breaks to the oil and gas industry. The Energy Policy Act of 2005 contained $2.6 billion over 10 years in tax breaks for oil and gas companies. Recently, President Bush said:

Record oil prices and large cash flows also mean that Congress has got to understand that these energy companies don't need unnecessary tax breaks like the write-offs of certain geological and geophysical expenditures, or the use of taxpayers' money to subsidize energy companies' research into deep water drilling. I'm looking forward to Congress to take about $2 billion of these tax breaks out of the budget over a 10-year period of time. Cash flows are up. Taxpayers don't need to be paying for certain of these expenses on behalf of the energy companies.

Not long ago, we heard the top oil executives testify before Congress that they do not need the tax breaks either.

At a time when the world's largest energy companies are reaping record-setting profits, this bill chooses to only scale back one of the new tax breaks for oil companies. Integrated oil companies will still receive benefit of a provision to expense their geological and geophysical expenditures. The provision only scales the tax break back by $189 million. The Senate bill included three provisions that address the tax breaks of large oil and gas companies, totaling $5 billion. This bill chooses not to include these provisions. Recently, I introduced legislation to address tax breaks provided to the oil and gas companies that would repeal over $28 billion in tax breaks for this industry.

It is embarrassing that this bill keeps in place tax breaks that are not needed by this industry while at the same time providing lavish benefits to oil and gas executives. An executive who makes $400 million a year does not need tax breaks. Executives rewarded with exorbitant amounts of stock options will be able to sell their stock and benefit from the lower tax rate on capital gains. It simply does not makes sense to provide a $42,000 tax break for millionaires when the average American family has seen a $1,950 increase in their cost of gas.

During this debate, we have heard that this bill does not provide tax cuts, that it is just a continuation of tax policy, but it is a continuation of a reckless tax policy. According to the Tax Policy Center, 87 percent of the benefits of the conference agreement go to the 14 percent of households with incomes above $100,000. The top 0.2 percent of households, those earning over a million a year would receive 22 percent of the benefits of this conference report. Those earning over $1 million will receive a $42,000 a year tax cut while the average tax cut for the 20 percent of households in the middle of the income spectrum would be just $20.

We should not continue a tax policy that helps those who do not need our help. While American families are struggling with the costs of health insurance, college education, and gas tax prices, it is not the time to extend tax cuts that only help a small percentage of elite taxpayers. Last quarter, the economy grew 4.8 percent, but wages only grew 0.7 percent. Middle-class families are not feeling confident about the economy. These families are not experiencing the 4.8 percent growth of the economy. They are worried about their economic future. They are living paycheck to paycheck. With the continuing cost of the wars in Iraq and Afghanistan, it is not the time to extend debt financed tax cuts. We could have a very different bill before us that would extend the tax cuts that help families with the cost of the education, address the AMT for next year, and help businesses with the cost of research. Instead, we have a continuation of a tax policy that contributed to the broadening disparity between the rich and the poor.

We are going through this process today, just so one provision in the bill can be passed--the extension of the dividends and capital gains cuts. These cuts expire at the end of 2008.

We do not need to make a farce out of the reconciliation process. We can do better and we should reject this bill and take up a bipartisan bill that helps all American families.

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