S. Rept. 104-354 - TO AMEND THE CONGRESSIONAL BUDGET ACT OF 1974 TO PROHIBIT THE CONSIDERATION OF RETROACTIVE TAX INCREASES.104th Congress (1995-1996)
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104th Congress Report
SENATE
2d Session 104-354
_______________________________________________________________________
TO AMEND THE CONGRESSIONAL BUDGET ACT OF 1974 TO PROHIBIT THE
CONSIDERATION OF RETROACTIVE TAX INCREASES.
__________
R E P O R T
of the
COMMITTEE ON GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
together with
ADDITIONAL VIEWS
to accompany
S. 94
TO AMEND THE CONGRESSIONAL BUDGET ACT OF 1974 TO PROHIBIT THE
CONSIDERATION OF RETROACTIVE TAX INCREASES
August 27, 1996.--Ordered to be printed
Filed, under authority of the order of the Senate of August 2, 1996
COMMITTEE ON GOVERNMENTAL AFFAIRS
TED STEVENS, Alaska, Chairman
JOHN GLENN, Ohio WILLIAM V. ROTH, Jr., Delaware
SAM NUNN, Georgia WILLIAM S. COHEN, Maine
CARL LEVIN, Michigan FRED THOMPSON, Tennessee
DAVID PRYOR, Arkansas PETE V. DOMENICI, New Mexico
JOSEPH I. LIEBERMAN, Connecticut THAD COCHRAN, Mississippi
DANIEL K. AKAKA, Hawaii JOHN McCAIN, Arizona
BYRON L. DORGAN, North Dakota BOB SMITH, New Hampshire
Albert L. McDermott, Staff
Director
Christine M. Ciccone, Deputy Staff
Director
Christine M. Schabacker, Counsel
Leonard Weiss, Minority Staff
Director
Michal Sue Prosser, Chief Clerk
C O N T E N T S
----------
Page
I. Summary and Purpose..............................................1
II. Background.......................................................1
III. Legislative History..............................................3
IV. Section-by-Section Analysis......................................5
V. Regulatory Impact Statement......................................5
VI. CBO Cost Estimate................................................6
VII. Administration Views.............................................6
VIII.Additional Views of Senator John Glenn...........................8
IX. Changes to Existing Law..........................................9
104th Congress Report
SENATE
2d Session 104-354
_______________________________________________________________________
TO AMEND THE CONGRESSIONAL BUDGET ACT OF 1974 TO PROHIBIT THE
CONSIDERATION OF RETROACTIVE TAX INCREASES
_______
July 23, 1996.--Ordered to be printed
Filed under authority of the order of the Senate of August 2, 1996
_______________________________________________________________________
Mr. Stevens, from the Committee on Governmental Affairs, submitted the
following
R E P O R T
together with
ADDITIONAL VIEWS
[To accompany S. 94]
I. Summary and Purpose
S. 94 amends the Congressional Budget Act of 1974 to
prohibit the consideration of retroactive tax increases by
creating a 60-vote point of order, which may be raised in the
Senate or House of Representatives when a bill, joint
resolution, amendment, motion or conference report applies a
tax increase retroactively. The purpose of S. 94 is to make it
more difficult for Congress to pass legislation that applies a
tax increase retroactively.
II. Background
Concern about the retroactive application of taxes predates
the founding of this country. This concern has, over the years,
led to many legislative proposals at both the federal and state
level designed to curb or prohibit the creation of a
retroactive tax liability.
As recently as August 1993, Congress passed, and President
Clinton signed into law, H.R. 2264, the Omnibus Budget
Reconciliation Act of 1993 (P.L. 103-66), which included an
increase in the estate tax rate with a retroactive effective
date of January 1, 1993. At that time, concern was raised that
the tax obligation retroactively increased the tax liability of
individuals who had died prior to the date the new law was
signed by President Clinton, and after the effective date of
January 1, 1993.
In citing the estate tax example, it should be noted that
Congress voted to reduce the estate tax rate as part of the
Reagan tax cuts in 1981. The estate tax rate was reduced from
70 percent to 60 percent in 1983, to 55 percent in 1984, and
was scheduled to be reduced to 50 percent in 1985. In 1984 and
again in 1988, Congress took action to extend the 55 percent
rate which was carried through 1992, at which time the rate was
scheduled to drop to 50 percent. In 1991, Congress included a
provision in H.R. 11 to further extend the 55 percent rate.
President Bush vetoed H.R. 11, and the estate tax rate dropped
to 50 percent effective January 1, 1993.
During the 1993 debate on H.R. 2264, Senator Burns offered
an amendment to make all tax increases, which included the
estate tax increase, effective no earlier than the date of
enactment. The amendment was defeated by a vote of 46 yeas to
52 nays (June 24, 1993, Cong. Rec. S7925). During the debate on
the conference report to H.R. 2264, Senator McCain raised a
point of order that the retroactive estate tax increase
violated the U.S. Constitution. The Senate failed to sustain
the point of order by a recorded vote of 44 yeas to 56 nays
(August 6, 1993, Cong. Rec. S10655).
Subsequent to the enactment of H.R. 2264, Senator
Hutchison, who had been a cosponsor of the Burns amendment,
offered an amendment to H.R. 3167, Unemployment Compensation
Amendments, to allow the top rate on estate and gift taxes to
revert downward to 50 percent as of January 1, 1993. A Budget
Act point of order was raised against the amendment, and the
Senate failed to waive the rules on a recorded vote of 50 yeas
to 44 nays (October 26, 1993).
In 1994, forty Members of Congress joined in an amicus
curiae brief in the case of United States v. Carlton, 114 S.Ct.
2018, which addressed whether the lack of notice of the
retroactive change violated the Due Process clause of the Fifth
Amendment. The Court held in Carlton that the proper standard
for determining whether a retroactive tax satisfies the
requirements of due process is that it be supported by a
rational legislative purpose. The Court determined that
Congress had not acted arbitrarily and its action was
reasonable.
A number of bills have been introduced in the 103rd and
104th Congresses addressing the issue of retroactive taxation.
They include proposals to enact a Constitutional amendment to
prohibit retroactive taxation, to create a statutory
prohibition against retroactive taxation, as well as proposals
such a S. 94, creating a procedural hurdle for consideration of
such legislation.
S. 94 was introduced to restrain the potential for passing
tax legislation with a retroactive effective date. Unlike some
other legislative proposals, S. 94 modifies the budget rules
which govern the consideration of certain legislation in
Congress. S. 94 would not prohibit the consideration or
enactment of retroactive taxes, but would make consideration of
such a measure subject to a 60-vote point of order. This bill
is needed to assure that when Congress decides to legislate tax
changes retroactively, it has broad support and not just a
simple majority.
III. Legislative History
S. 94 was introduced by Senator Coverdell of Georgia on
January 4, 1995. The bill was jointly referred to the Committee
on Governmental Affairs and the Committee on the Budget with
instructions that if one committee reports, the other committee
has 30 days to report or be discharged.
Hearing
The Senate Committee on Governmental Affairs held a hearing
on December 7, 1995. Testimony was presented by Senator Paul
Coverdell from Georgia; Senator Kay Bailey Hutchison from
Texas; Joseph E. Schmitz, Esquire, Craven and Schmitz, and
Professor of Constitutional Law at Georgetown University; Nancy
Mitchell, Economist and Vice President for Policy
Implementation, Citizens for a Sound Economy; Peter Ferrara,
General Counsel and Chief Economist, Americans for Tax Reform;
Charles F. ``Rick'' Rule, Esquire, Covington and Burling; Wayne
Nelson, Communicating for Agriculture; and Robert Proctor,
Chairman of the Board of Trustees, Southeastern Legal
Foundation.
The purpose of the hearing was to receive testimony on the
fairness, economic impact and constitutional implications of
retroactive taxation.
Senator Coverdell began his testimony with a quote from
Thomas Jefferson: ``Every man should be protected in his lawful
acts and be certain that no ex post facto law shall punish or
damage him for them.'' Senator Coverdell stated that, in his
opinion, the U.S. Constitution prohibits retroactive taxation
in three ways--through the guarantee of due process, the
prohibition against bills of attainder, and ex post facto
laws--noting that case history has applied the ex post facto
provision to only criminal and not civil matters. Citing his
small business background, and the fact that most businesses in
the United States fall into the small business category,
Senator Coverdell testified that a Congress which arbitrarily
and capriciously changes rules in midstream is destabilizing
American families, businesses and communities.
Mr. Schmitz testified about his experience representing
forty Members of Congress, which included Senators Stevens,
McCain, Coverdell, and Hutchison who were present at the
hearing, and the Washington Legal Foundation as amici curiae in
U.S. v. Carlton. He stated his belief that the court ignored
the ex post facto argument due to the political considerations
and only ruled on the due process challenge. The courts have
never ruled directly on the federal ex post facto clause, and
have relied on the Supreme Court's 1798 case involving the
State of Connecticut which limited the application of the ex
post facto law to criminal and not civil matters. Assuming ex
post facto law applied to criminal matters and this held for
the federal government, Mr. Schmitz pointed out that Section
7203 of the Internal Revenue Code makes the failure to pay
federal taxes a crime. This could be the basis upon which to
argue the ex post facto clause.
Mr. Mitchell and Mr. Ferrara provided several examples of
the economic impact that retroactive taxation has on
individuals and businesses. It was pointed out in their
testimony that unforeseen tax liabilities are often paid out of
individual savings. Arbitrary changes in the tax code can turn
a good deal into a bad deal for a taxpayer, and the taxpayer
has no recourse. Uncertainty in the tax code makes a financial
transaction more risky, which increases the cost of the
transaction. Over time, this uncertainty leads to lower rates
of investment, lower rates of savings and less jobs and lower
wages. Mr. Ferrara, addressing the concern that S. 94 would not
allow Congress to go back and fix inadvertent loopholes, stated
that any inadvertent loophole would have the same effect on an
individual and should be fixed prospectively.
Mr. Rule testified about their procedural problems
associated with a court challenge to a retroactive tax. He
cited the Anti-Injunction Act and the Declaratory Judgment Act
which prohibit injunctive suits by taxpayers to enjoin tax
statutes for the collection of taxes.
Compelling testimony was given by Mr. Nelson, who spoke
about his personal experience with the estate tax increase
included in the 1993 legislation. Mr. Nelson, who farmed wheat,
sunflowers, corn and grain sorghum with his father, until his
father's death in the spring of 1993, was required to pay
several thousand dollars more in estate taxes due to the
retroactive increase. Although he was able to sell part of the
family assets to pay the estate taxes while retaining enough
land to stay in business, not all family farmers are as
fortunate. He testified that tax planning is fundamental to
financial management for any business, particularly family
farms.
Mr. Proctor shared his experience representing taxpayers in
Georgia in class action and public interest suits against the
state and local governments.
During the hearing, Senator Glenn noted that legislation
enacted into law under President Reagan, at which time Senator
Dole was Chairman of the Senate Committee on Finance in the
early 1980's, included retroactive taxes. It should be noted
that during Senator Dole's tenure as Chairman (1981-1984), he
was instrumental in pushing through Congress the 1981 Reagan
tax cut, which was the largest tax cut in history. The net
effect of all tax legislation crafted under Chairman Dole was a
substantial tax reduction. In addition, the 1986 Tax Reform Act
cut taxes for individuals by $122 billion over five years and
removed millions of lower-income taxpayers from the tax rolls.
Committee Action
The Committee considered S. 94 at a business meeting held
April 18, 1996.
Chairman Stevens offered an amendment to change the
effective date to January 1, 1997, so it would not affect any
pending legislation in the 104th Congress. Without objection,
the amendment was adopted by voice vote.
At the mark-up, Chairman Stevens offered an amendment on
behalf of Senator Roth, a member of the Committee who also
serves as Chairman of the Finance Committee. The amendment
reflected the views of Senator Roth that the point of order
should apply only to those tax increases made effective before
a date ``contemporaneous with congressional action specifying
such a date.'' In a statement, Senator Roth identified examples
of congressional action as the release of a Chairman's mark,
the release of a joint statement by the Chairmen of the House
Ways and Means and Senate Finance Committees, or the
introduction of a bill by the Chairman and Ranking Member of
either tax-writing committee. The Roth amendment was agreed to
by voice vote.
The Committee voted to favorably report S. 94, as amended,
on a roll call vote by 7 yeas; Senators Stevens, Roth, Cohen,
(Thompson by proxy), (Cochran by proxy), Smith, Brown, Levin,
and Lieberman, 2 nays; Senators Glenn, (Pryor by proxy), and
Akaka.
IV. Section-by-Section Analysis
Section 1. Amendments to the Congressional Budget Act of 1974
Subsection (a) In General
A new Section 314 (a) and (b) are added to the Budget Act
entitled ``Prohibition on the Consideration of Retroactive Tax
Increases.''
Sec. 314 (a) In General
This section states that it shall not be in order in the
House of Representatives or the Senate to consider any bill,
joint resolution, amendment, motion, or conference report, that
increases a tax and applies the increase before a date
contemporaneous with congressional action specifying such date.
Sec. 314 (b) Increases a Tax
This section defines a tax increase as any change in rate
of tax, deduction, exemption, credit, exclusion, or similar
change in the Internal Revenue Code which will result in a
larger tax liability.
Subsection (b) Supermajority Point of Order
This section provides that a point of order raised under
this new section may be waived by a three-fifths vote, sixty,
in the Senate.
Subsection (c) Technical and Conforming Amendment
This section amends the table of contents to include
Section 314.
Subsection (d) Effective Date
Establishes January 1, 1997 as the effective date of the
law.
V. Regulatory Impact Statement
Paragraph 11(b)(1) of Rule XXVI of the Standing Rules of
the Senate requires that each report accompanying a bill
evaluate ``the regulatory impact which would be incurred in
carrying out the bill.''
The enactment of S. 94 would have no regulatory impact on
the public, nor would it constitute an undue regulatory burden
on any department or agency. The legislation applies only to
procedures for the consideration of certain legislation by the
Congress.
VI. CBO Cost Estimate
U.S. Congress,
Congressional Budget Office,
Washington, DC, June 5, 1996.
Hon. Ted Stevens,
Chairman, Committee on Governmental Affairs, U.S. Senate, Washington,
DC.
Dear Mr. Chairman: The Congressional Budget Office has
reviewed S. 94, as ordered reported by the Senate Committee on
Governmental Affairs on May 16, 1996. S. 94 would amend the
Congressional Budget Act of 1974 to prohibit Congressional
consideration of retroactive tax increases. CBO estimates that
enacting the bill would have no direct effect on the federal
budget.
If you wish further details, please feel free to contact me
or your staff may wish to contact Stephanie Weiner.
Sincerely,
June E. O'Neill, Director.
------
U.S. Congress,
Congressional Budget Office,
Washington, DC, June 25, 1996.
Hon. Ted Stevens,
Chairman, Committee on Governmental Affairs, U.S. Senate, Washington,
DC.
Dear Mr. Chairman: The Congressional Budget Office has
reviewed S. 94, as ordered reported by the Senate Committee on
Governmental Affairs on May 16, 1996. S. 94 would amend the
Congressional Budget Act of 1974 to prohibit Congressional
consideration of retroactive tax increases. The proposed
legislation contains no intergovernmental or private section
mandates as defined in Public Law 104-4 and would impose no
direct costs on state, local, or tribal governments.
If you wish further details, please feel free to contact me
or your staff may wish to contact Stephanie Weiner.
Sincerely,
June E. O'Neill, Director.
VII. Administration Views
A letter by Secretary of the Treasury, Robert Rubin
outlining the views of the Clinton Administration on S. 94 as
amended, follows:
The Secretary of the Treasury,
Washington, DC July 10, 1996.
Hon. Ted Stevens,
Chairman, Committee on Governmental Affairs, U.S. Senate, Washington,
DC.
Dear Ted: In February, I wrote to you expressing the
Administration's concerns with S. 94, as introduced. Since that
time, the Committee on Government Affairs has approved S. 94
with amendments. I write to you to reiterate the
Administration's concerns with the amended version of the
legislation.
As amended, S. 94 would create a point of order against
consideration of tax increases that apply ``before a date
contemporaneous with congressional action specifying such
date.'' While this language is an improvement over S. 94 as
originally introduced (which would have raised a point of order
against tax increases that apply to ``taxable years beginning
before the date of enactment of the law''), it still poses an
undue constraint on the ability of Congress to make necessary
fiscal adjustments. If it were to become necessary to adjust
tax rates prospectively, for instance, the point of order could
result in the loss of as much as a year's worth of revenues:
because it is typically impractical to institute a rate change
within a taxable year, Congress typically might choose to
institute a blended rate or a transitional rate structure (as
was done in the Economic Recovery Act of 1981 and the Tax
Reform Act of 1986) for the entire year of enactment. Such a
blended or transitional rate would appear to be subject to a
point of order under S. 94.
In addition, S. 94 unduly encumbers the ability of the
Administration to propose loophole-closing tax proposals that
may depend in part on an immediate effective date to prevent a
rush to market, even in cases where the Congress may fully
agree with the need for the loophole-closing proposal. For
example, on February 6, 1995, the Administration proposed as
part of its FY 1996 budget to eliminate a loophole that allows
individuals who renounce U.S. citizenship to avoid U.S. taxes.
Although different versions of this legislation were ultimately
developed in the Senate and the House, all versions--including
the version in the vetoed Balanced Budget Act--retained the
Administration's original February 6, 1995, effective date.
Under S. 94, such an effective date--despite bipartisan,
bicameral consensus that it is entirely appropriate for
preventing abuse--would have been subject to a point of order.
The task of balancing the budget would be made more
difficult under S. 94. As I indicated in my previous letter, at
this time when the Congress and the Administration are working
hard to improve the Nation's fiscal position, such constraints
are troublesome.
Sincerely,
Robert E. Rubin.
VIII. ADDITIONAL VIEWS OF SENATOR JOHN GLENN
In principle, I oppose retroactive taxes. However, I
realize that--at times--they may be necessary because a
determined minority seeks to delay implementation in order to
provide a window for an unfair tax loophole to be exercised by
some persons. For example, on February 6, 1995, President
Clinton proposed, as part of his Fiscal Year 1996 budget plan,
to eliminate a tax loophole that allows individuals who
renounce U.S. citizenship to avoid paying U.S. taxes. Although
different versions of this proposal have since been put forth
in the House and Senate, every version has retained the
original effective date of February 6, 1995. The Balanced
Budget Act proposed by the Republican majority included this
Administration proposal with the original effective date of
February 6, 1995.
Retroactive taxes have been part of our Nation's history
since 1917. They have been signed into law by Democratic and
Republican Presidents. They have been supported--at various
times--by Democratic and Republican Congresses.
The Committee report makes several references to an estate
tax enacted in 1993. This tax was an extension of an already
existing estate tax. It was first applied when former Senator
Dole was Chairman of the Senate Finance Committee and it was
signed into law by President Reagan. It was extended in 1987.
The Congress attempted to extend it again in 1992, but the
legislation was not enacted into law. Estate planners around
the country were well aware of this provision and the
likelihood of its enactment in the next tax bill.
President Reagan remains one of our Nation's most popular
Presidents. During his years in office, he signed bills
containing retroactive taxes in 1981, 1982, 1984, and 1986.
There were a dozen retroactive tax increases enacted during his
term.
Then Senator Dole was Chairman of the Senate Finance
Committee in the early 1980's when the Tax Equity and Fiscal
Responsibility Act was written. In August of 1982, the
conference report on that measure was reported for
consideration by the Congress. At that time, the unemployment
rate was at 10 percent and rising. That conference report
retroactively taxed unemployment benefits. This retroactive
taxation was not part of any bill that had passed the Senate or
the House. It was added, and this is former Senator Dole's
quote ``near the end of the conference.''
Unlike the 1993 estate tax cited in the Committee report,
this retroactive tax on 5.3 million unemployed Americans was
unanticipated. It required these Americans to pay eight months
of back taxes on previously exempt income. I use this example
because I do not want the 1993 tax increase on the top one
percent of taxpayers to be our only example of a retroactive
tax.
In closing, I would like to note that three bills are
currently pending on the Senate calendar which contain
retroactive tax increases. They are H.R. 3286, the Adoption
Promotion and Stability Act, H.R. 3448, the Small Business Job
Promotion Act and S. 1028, the Kennedy-Kassebaum health
insurance bill. All of these bills enjoyed bipartisan support
in Committee action.
John Glenn.
IX. Changes to Existing Law
In compliance with paragraph 12 of Rule XXVI of the
Standing Rules of the Senate, changes in existing law made by
S. 94, as reported, are shown as follows (existing law proposed
to be omitted is enclosed in black brackets, new matter is
printed in italic, existing law in which no change is proposed
is shown in roman):
CONGRESSIONAL IMPOUNDMENT CONTROL ACT OF 1974
Table of Contents
* * * * * * *
313. Extraneous Matter in Reconciliation Legislation
314. Prohibition on the Consideration of Retroactive Tax Increases
* * * * * * *
TITLE III--CONGRESSIONAL BUDGET PROCESS
* * * * * * *
extraneous matter in reconciliation legislation
Sec. 313. (a) * * *
* * * * * * *
prohibition on the consideration of retroactive tax increases
Sec. 314. (a) In General.--It shall not be in order in the
House of Representatives or the Senate to consider any bill,
joint resolution, amendment, motion, or conference report, that
increases a tax and applies such increase before a date
contemporaneous with congressional action specifying such date.
(b) Increases a Tax.--The term ``increases a tax'' shall
include a change in any rate of tax, deduction, exemption,
credit, exclusion, or similar change to the Internal Revenue
Code of 1986 that will result in an obligation to pay a larger
tax.
* * * * * * *
SEC. 904. EXERCISE OF CONGRESSIONAL RULEMAKING POWER.
* * * * * * *
(c) Waiver.--Sections 305(b)(2), 305(c)(4) * * * Sections
301(i), 302(c), 302(f), 310(d)(2), 310(f), 311(a), 313, 314,
601(b), * * * may be waived or suspended in the Senate only by
the affirmative vote of three-fifths of the Members, duly
chosen and sworn.
(d) Appeals in the Senate from the decisions of the Chair
relating to any provision of title III or IV * * * An
affirmative vote of three-fifths of the Members of the Senate,
duly chosen and sworn, shall be required in the Senate to
sustain an appeal of the ruling of the Chair on a point of
order raised under sections 310(i), 302(c), 302(f), 310(d)(2),
310(f), 311(a), 313, 314, 601(b), * * *