House and Senate negotiators have come to agreement on the tax reconciliation bill that is part two of the 2006 budget reconciliation process. Part one was the spending reconciliation bill that passed earlier this year cutting nearly $40 billion, mostly in services for low-income people.
The centerpiece of the $70 billion tax reconciliation bill is the extension to 2010 of capital gains and dividend tax breaks enacted in 2003 and set to expire in 2008. The package also includes a fix in the Alternative Minimum Tax for 2006 to protect more taxpayers from being subject to the tax. A study by the Tax Policy Center has found that these provisions will mean an average tax cut of just $20 for the 20 percent of households in the middle of the income spectrum (with an average annual income of $35,940), but the average tax cut for those in the top one percent of the income spectrum would be $13,800. For those with incomes above $1 million, the average tax cut would be $42,000. Read more here.

From the Senate’s perspective, the advantage of a tax reconciliation bill is that it needs only 51 votes to pass. But there are rules. One is that it can’t exceed an agreed-upon net total, in this case $70 billion over 5 years. Negotiators have agreed to an offset that brings in some revenues now, while costing more later. To accomplish this, the bill calls for changes in the treatment of retirement savings held in traditional IRAs. Higher income taxpayers, with incomes over $100,000, are currently not allowed to convert their traditional IRAs to Roth IRAs. By allowing them to do so, wealthy taxpayers will gain the benefit of not having to pay taxes when the accumulated savings are withdrawn. However, they will be taxed up front on contributions to the accounts. Those early taxes will generate income in the short run, but will lose revenue in the long run. Thus, this is a gimmick that gives another tax break to the wealthy and adds to the deficit.

Other revenue raisers were considered that would have ended certain business tax breaks. The Senate-passed bill, for example, included raising nearly $5 billion by changing rules that allowed oil companies to lower their tax liability. At a time when oil companies are experiencing record-high profits this offset would have made more sense than yet another tax break for the wealthy.

While the content of the tax reconciliation bill has been determined, there is tension among House and Senate Republicans regarding a strategy for moving it forward and addressing other tax provisions that did not make it into the reconciliation bill. Both the House and Senate tax reconciliation bills extended a number of tax breaks for individuals and corporations including research and development credits, tax credits for employers who hire low-income workers, and the sales tax deduction for individuals, all set to expire at the end of 2006 and not contained in the reconciliation bill. These tax provisions enjoy bipartisan support and will likely be included either in a separate tax cut bill or attached to other legislation moving forward. Because it would not have reconciliation protection any bill carrying these provisions would be subject to a filibuster and would therefore require 60 votes to pass the Senate. The bill would also be subject to amendments that could cause it to stall. Senator Grassley (R-IA) has been vocal about moving the latter provisions quickly to ensure they are addressed.

The tax reconciliation bill is likely to be voted on within the next few weeks. It will add to the deficit and put even more pressure to cut government programs that benefit low-income households.

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