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Wednesday, November 08, 2006

Divided Government May Help Solve Tax Issues, Expert Says

Tuesday's election results have turned control of the U.S. House, and possibly the Senate, to Democrats. That development may actually help solve some thorny tax issues, according to a tax expert.

"As Democrats take control of the House tax-writing committee they face a number of important issues that have been left unresolved: finding long-term solutions to the growing alternative minimum tax (AMT), which threatens to raise taxes for millions of middle-class taxpayers; fashioning permanent estate- and gift-tax reform; and permanently resolving the fate of important tax provisions like the research and development tax credit that now expires on an annual basis," says Clint Stretch, managing principal of Tax Policy with Deloitte Tax LLP.

"Ironically, divided government, with Republicans controlling the White House and Democrats in charge of the House, could make resolution of these issues easier than it was under single-party rule," he says. "In the past, the strict discipline of House Republicans often produced legislation that could not pass the Republican-controlled Senate, where the threat of filibusters by Senate Democrats (sometimes with help from moderate Senate Republicans) blocked action."

Compromises necessary in the Senate were hard to negotiate through the House, Stretch says. To establish a record of legislative success, newly empowered House Democratic tax writers will have to produce legislation that has support beyond the most traditional Democratic constituencies, he says.

"They must appeal to an increasing number of more conservative or centrist Democratic House members and ultimately to both Republicans and Democrats in the Senate where margins will be exceptionally thin. This kind of legislative effort -- if done without partisan overtones -- will almost certainly be something a number of House Republicans can work with in forging final legislation that can be characterized as bipartisan," he says.

Democrats will not have an easy time of it, however, Stretch adds.

"The poor long-term condition of federal finances will likely lead them to restore pay-go rules, which will mean that tax cuts will have to be financed with offsetting spending cuts or a tax increase," he says. "The White House can be counted on to block any significant substantive tax increase, although it has shown in prior budgets a willingness to raise revenue through improving compliance and curtailing abuses. The question is how aggressively will the Administration and Congress be in characterizing revenue-raising initiatives as anti-abuse measures if they actually seek together to protect middle-class taxpayers from the AMT and forge a compromise on estate tax relief."


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