WASHINGTON'S LABYRINTHINEWAYS By Otto J. Hetzel After More Than One Hundred Days into His Administration, Bush Proceeding Effectively to Implement Major Items in His Campaign Agenda. Despite a razor-thin election win, the Bush Administration has essentially achieved his major objective, enact a giant tax cut, and is closing in on the second of his principal campaign commitments, provide increased federal support for education tied to achievement tests. In the case of the tax bill, he secured sufficient bipartisan support to reach his objective by the Memorial Day recess. The education bill is close to enactment as well. Although he lost the popular vote by 500,000 and secured the presidency on the basis of one Supreme Court vote and a several hundred vote lead in Florida that was declining before manual recounts were halted, Bush has not been deterred in implementing his campaign promises. Major Tax Cut Approved. To the surprise of many, given the original lack of popular support for the concept, Bush's tax cut proposal was the basis for a roughly $1.35 trillion reduction to take effect over eleven years. The amount, the largest cut in twenty years, was only reduced by 20 percent from the $1.6 trillion in cuts he campaigned on, and its size is very significant. Fears of some are that future budget flexibility will be lost due to the reduction in revenues and domestic program initiatives will suffer. The House rapidly passed the first of three phases for Bush's tax cut, reducing tax rates at the top level from 39 percent with lesser reductions for lower brackets, and creating a new initial tax level of 10 percent, while retaining the 15 percent rate most taxpayers currently pay. These rate reductions will reduce federal revenues by over $840 billion during the next decade. Many cuts will not occur until later years. The conference version approved, however, had to use some budget legerdemain, so all the rate reductions were designed to expire in 2010 to keep within budget resolution limits, with the expectation that when they expire pressure to reenact them will ensure their continuation. Budget impact for the full period of the bill adopted would otherwise have exceeded $1.9 trillion. Tax Breaks for Education Expenses. Added in the conference committee draft, three major tax breaks were provided for educational expenses (revenue loss of $5 billion): Section 529 plan accounts were expanded, permitting up to $250,000 to be invested for college expenses, none of which will be taxed when withdrawn for expenses; tax free contributions to educational IRAs were increased from $500 to $2,000 annually for educational expenses (at all levels); and, a tuition deduction of up to $4,000 was also created that could be used to pay tuition at private schools, in lieu of vouchers. Other Tax Cuts Provided. Estimated revenues lost for other provisions over ten years include: virtual elimination of the so-called marriage tax penalty (revenue loss of $60 billion) that primarily impacts those with higher incomes generated by two wage earners; increases in the child care credit from $500 to $1,000 (revenue loss of $190 billion); deductions for tuition and increased limits for IRAs (revenue loss of $106 billion); and, phase out of estate taxes in ten years (revenue loss of $145 billion). Pressures for Rapid Enactment. There was great pressure to enact the whole package before summer, both to deliver on the campaign promise and because new long-term estimates of the available surpluses to be released by then might show a smaller surplus if the softening of the economy since Bush's election was not abated. This would have heightened the warnings that the size of the cut will substantially reduce funds available for various, and especially domestic, programs over the next decade. Rate Decreases Still Primarily Benefit the Wealthiest. In the Senate version, before a house divided equally between the parties during consideration of the tax measure, and through a vote on the final conference draft, some significant changes were made in who benefits from the cuts. The major difference will be that middle and lower income taxpayers will benefit more than Bush originally intended. The top rate will decrease from 39 to 35 percent, with other brackets dropping by 3 percent; while the 15 percent bracket that currently applies to 75 percent of taxpayers is unchanged (except for the marriage tax benefits), and the new 10 percent rate is applied to lower income taxpayers. Nevertheless, the wealthiest 1 percent, who Bush has pointed out pay the most taxes, will still receive the largest share of tax relief, about 43 percent of the tax reductions. Upper brackets will also benefit from repeal of current phaseout of personal exemptions. The 10 percent bracket relief will be applied retroactively to January 1, 2001. Estate Tax Changes. Increases in estate and gift tax unified credits will go from $1 million in 2002 to $4 million in 2010, with termination of the estate but not the gift tax in 2011. Rates will also phase down from 55 to 45 percent. The increase in the credit against estate tax in the interim, from $1 million to 4 million, is intended to encompass most of the relatively smaller family farms and businesses that would otherwise have to sell assets to pay current levels of estate taxes. This group is often cited to justify repeal. The relief is a bit illusory, however. Estimates are for savings of only $145 billion over eleven years. Estate taxes apparently impact only 2 percent of estates annually. Those affected will end up paying almost as much if not more in gift taxes than the impact of current estate taxes on appreciated assets because the assets will not be revalued at time of the owner's death. The effect will be to pass on the tax impact to the next generation once the asset is transferred, by gift or at death, rather than imposing an estate tax at the time of death on the deceased's estate. Now we learn why some who supported the changes refer to it as repeal of the "death" tax, but that characterization is not the complete story. The impact of estate tax changes would affect many more persons as a result of discontinuation of the current "stepped-up basis" for valuing assets as of the date of death. Heirs ultimately would have to pay the full appreciation in value (at least at capital gains rates) on estate assets, meaning that the loss in tax revenues ultimately would almost be recouped. Predictions of the death of their specialty for estate tax practitioners also have been overblown. The new provisions should not eliminate the tax practice of estate planners, rather they will now become "gift" planners. Early Partial Refunds. To create more spending monies in the economy, the new tax law requires the Treasury Department to process millions of rebates of at least $300 plus an additional $100 per child for families below certain tax thresholds this year. While Treasury anticipates 95 million 2000 taxpayers will receive such checks, another 32 million, the bottom 60 percent of income earners, will receive no rebates. For those who get them, these payments should be enough, as the President specifically noted, to cover increased energy costs especially at the gas pump. Over time the cuts will amount to reductions of 10 to 20 percent from current tax levels according to some estimates. Much of the relief will not become effective until five or more years from now, however, and some will only occur more than eight years from now in a later president's term. Democratic Takeover in the Senate with Party Switch of Senator Jeffords Will Have Profound Effects on White House Agendas. When Senator Jeffords (I-Vt.) starts voting with Democrats in June 2001, Democrats will determine what measures will be taken up and in what order. Democratic committee chairs will dictate what policies will be considered and when. One can expect them to pursue their own rather than those of the White House. For instance, Democrats will take over control of committees such as Judiciary, Banking and Currency, and Armed Services, with resultant changes in focus, scheduling of legislation, and consideration of presidential nominees in these areas. For instance, consideration of judicial nominations will be one of the many matters impacted by the change in control. That Jeffords will become an Independent matters little once he joins Democrats in voting for Senate leadership. Senator Lott (R-Miss.) will be taking the hardest hit, since he will lose his ability to determine the calendar and schedule for the body and must endure the second guessing that is already starting to come out as Republican committee chairs confront loss of their positions of power. Congress Still Closely Divided, as Senate Democrats Move from Unprecedented Power Sharing in Committees to Full Control. The Scene in the Senate. Before Jeffords' switch, the Senate's 50-50 tie in membership meant that Republican control was dependent upon the vote of the Vice President (and the health of two fragile Republican Senators, Thurmond and Helms). That situation brought forth an unprecedented power-sharing arrangement as each of the twenty committees arrived at specific agreements on allocating space, funds, and staff positions. In many instances, good personal working relationships between senators made power-sharing transitions relatively smooth. That was not the case for all committees, however, and potentially contentious issues, including who can initiate hearings, call witnesses, issue subpoenas, and schedule votes, remained in Republican hands. That has now changed. Committees will no longer be headed by Republican chairs, who now will become Ranking Minority Members. As a result of their earlier accommodation with Democrats, however, Republicans are not apt to lose too many staff and funds because of the changeover. Since the original agreement was to last only so long as the 50-50 split continued, an obvious motivation for the arrangements was to prevent retaliation by Democrats if a Republican died or control otherwise shifted. It is anticipated that Democrats will create a one-vote majority in all committees in light of their new 50-49 majority. This may create a fragile working majority in most committees, but not like the sometimes 2 to 1 majorities that had been imposed in the past. The likely approach is that an additional Democrat will be added to current committee membership without forcing Republicans to decide who must step off. The changes in staffing obviously have created some extra costs, since Republicans at the start of this Congress did not reduce their own staff support. Rather they authorized Democrats to add more staff. The additional costs were estimated at $13 million. Allocation of space has also been a major problem, since it is generally limited and room for additional staff is lacking. Previously close quarters are becoming even more cramped. How much Republican staff will suffer by the changeover was not clear at press time. The death of any Democratic member could again cause a reversal. Maintaining the health of any of its ailing members is obviously going to be a high priority for each party in the Senate. In the House. There are 220 Republicans and 211 Democrats, 2 Independents, and 2 vacancies. Allocation of committee positions is nevertheless strongly tilted towards Republicans who have imposed a 59-41 percent advantage in the critical Ways and Means Committee, as contrasted to the 51-49 actual Party percentages in the House. Democrats only got one new seat on Ways and Means, two on Appropriations, and two on Energy and Commerce. Denied opportunities on prestigious committees, some Democrats are openly hostile and unlikely to exercise the comity and bipartisanship Republicans need to continue to deliver the Administration's agenda. The 1992 Campaign Mantra, "It's the Economy Stupid," Again Becoming Relevant. While economic times were positive over the last eight years, the 1992 election mantra emphasizing the economy was shelved. However, as stock market values started to slump following the November elections and by March large percentage drops had occurred in stock values, the condition of the economy has come back into the limelight. In an early effort to push his tax cut proposals, Bush referred to the "troubling economic news" to justify his tax cuts as an economic stimulus. As noted above, that is unlikely, and while markets have rebounded in May, there are mixed signals regarding a positive economy for the remainder of the year. The Bush Administration will have a lot riding on positive economic times. A specter on the horizon, however, is how sharp increases in energy costs will impact the economy, hence a rush to find an energy policy that can moderate price increases. Results in the mid-term elections that will affect control of Congress may well ride on how well Republicans handle energy costs. How to balance increases in fossil fuels against environmental concerns will be the tricky exercise they must successfully handle. Education Bill Nearing Enactment. While not on the same rush timetable as tax relief, or necessarily as crucial as energy policy, reform of federal educational assistance that is also moving quickly towards enactment with bipartisan support represents a major Bush domestic priority accomplishment. The bill would increase federal funding for education while holding local governments responsible for results, using testing results of school children to make local districts more accountable for their educational role. Part of his original education package included vouchers that would allow parents from failing schools to use public funds for private school tuition. That element of his proposal appears dead. Conservatives made a last ditch fight on the House floor to retain that provision and to give states more flexibility in using federal funds, but if successful this would likely doom passage of any bill because of Democratic defections. The flexibility provision would allow some states to redistribute funds heretofore largely reserved for the poorest schools. It has been challenged because it could allow federal funds to be diverted to wealthier districts whose parents are often better organized politically. The testing requirements have not been without controversy, as well. Testing would be in reading and math for students in grades three through eight. In addition to measuring how children are progressing, the provision would allow comparisons of school achievement in a state and rating of administrators. The provisions would not create a national test, only comparisons within a state. Debate on the bill discussed whether states should have the ability to vary the actual tests by districts thereby preventing accurate comparisons, and whether they should be consistent over the years, or could they be changed. Changes would make evaluations of progress more difficult. The principle of whether federal requirements should be imposed is at the core of these discussions. Efforts to substitute a tax credit for tuition for private schools as an alternative to unacceptable educational vouchers were successfully achieved when such provisions were adopted as a last minute insert in the final conference version of the tax cut bill that was approved rather than in the education measure. Bush Curb on Long-standing ABA Role in Vetting Federal Judicial Appointments, Portends Increased Partisanship in the Senate over Nominees. For over fifty years, the ABA has provided advice about prospective federal judges to the White House, Justice Department, and Senate. In March, the ABA was told by the White House counsel that its role as special adviser on professional qualifications of nominees for nine prior presidents would no longer be considered before nominations are sent to the Senate. The change would mean the ABA would no longer have a "special role" prior to nominations, but could still weigh in during the confirmation process. The move, widely attributed to Federalist Society members in the Administration, seems likely to polarize further a nominations process that is becoming more rather than less partisan. Early indications of increased partisanship were shown in the strong opposition to Ted Olson, the nominee for Solicitor General, resulting in a 9-9 committee vote by party lines. His nomination only moved forward for full Senate consideration and narrow approval as a result of Senator Lott's intervention under procedures operative in the Senate when it was under Republican control. The Senate Judiciary Committee will be considering more than 100 judicial vacancies now available to the new Administration, partly as a result of the delays imposed on appointees nominated by the Clinton Administration. ABA evaluations will still continue and will be provided to the new Democratically controlled committee, which will determine who will be given hearings and when, as Republicans did to the Clinton Administration. What comes around, goes around. But, ABA assessments now are more likely to occur in public causing possible embarrassment to the Administration for nominating some candidates and to the nominees themselves, as well. "Midnight" Regulations and Their Rollback. Pity legal counsel for most federal departments and agencies that were required to spend late nights and weekends at the conclusion of the Clinton Administration drafting, filing, and publishing last minute regulations, and then had to turn around and rollback many of these as soon as Bush Administration leaders arrived. Under the "Card" memo, promulgated by Andrew Card, Bush's Chief of Staff, the effective dates of final rules were to be delayed and regulations awaiting publication were to be withdrawn for review before issuance. The integral document is the Federal Register in which regulations must be published to be binding. The vehicle for legal challenges is the Administrative Procedure Act. Not only regulations were under review. Most matters in litigation were also subject to review and the priorities of the new Administration. One of the most obvious of these is the pending monopolization suit against Microsoft. Political Contributions by Business Interests Key to Early Policy Changes. A number of early successes were achieved by business interests in the opening days of the new Administration and in Congress. Most actions had bipartisan support. So, never underestimate the value of well-placed campaign contributions. It's not clear the change in Senate control would have changed anything. Several examples of Administration and congressional actions reflecting increased business influence have generally been cited: Ergonomics Regulations Cancelled. Within weeks after the new Congress took office, regulations setting job-related ergonomics standards for work-place conditions affecting 1.8 million persons (mostly women) who experience repetitive motion distress were withdrawn. The standards were developed over the last ten years. In soliciting congressional support to oppose them, businesses successfully contended the new standards would be extremely costly to implement. The result is that provisions that only went into effect January 16 were reversed in a two-day period by a joint House-Senate resolution to the President under the previously unutilized Congressional Review Act. The resolution not only rejects the specific regulations, but it has been also interpreted as forbidding an agency from issuing a similar regulation. Bankruptcy Bills Passed. Next was the almost immediate adoption of legislation in each house in March to impose limits on use of bankruptcy laws. Currently 1.4 million persons annually file petitions to discharge their debts. The bills were similar to that vetoed by President Clinton last session as too stringent on consumers. Bush has indicated he would sign the Conference Report legislation when it is approved. The slightly different versions of the bills will need to be resolved in an upcoming conference committee. The legislation was strongly lobbied for by credit card companies and banks that were major contributors to candidates in the last election. Carbon Monoxide Restrictions Abandoned. Another success was persuading the Administration to reverse the Bush campaign commitment on reducing carbon dioxide emission standards on power plants and manufacturing facilities. This change in position was rationalized on the grounds that the need for increased energy sources overrode restrictions seen by many as essential for slowing the effects of global warming on the environment. These trends are attributed to causing polar melting and increased water levels along with energy and agricultural problems. Major New Bipartisan Tax Credit Program Quietly Enacted at End of Last Congress Will Generate $15 Billion in New Investments in Urban and Rural Areas. On December 21, 2000, President Clinton signed the Community Renewal Tax Relief Act of 2000 that includes the New Markets Tax Credit, which was jointly sponsored by Speaker Dennis Hastert (R-Ill.) and President Clinton to spur investment of $15 billion in new private capital into a range of privately managed investment vehicles to make loans and equity investment in "New Market" businesses. This program came into being during the focus on Florida election results, so few seem to be aware of it. With its enactment was born a new acronym, "CDE," standing for "community development entity" through which individual and corporate investors will be able to realize tax credits worth more than 30 percent of the amount invested in present value terms. For-profit community development financial institutions (CDFIs), for-profit subsidiaries of community development corporations, SBA-licensed New Market venture capital companies, and Specialized Small Business Investment Companies will be eligible to act as CDEs. They will be able to increase their lending and investments by attracting additional outside capital and private-sector involvement in their market generating activities through the tax credits. The tax credit program to be administered by the Treasury Department provides for $8 billion in tax credits over a seven-year period. It does not require appropriations, but will obviously have a budget impact since the tax credits are direct losses of revenue to the government. CDEs are anticipated to provide small businesses with long-term capital that can be used to grow a business before a return on the funds is due the investor, allowing the equity investment to relieve short-term cash flow pressures, lower the cost of financing, and provide a cushion to absorb start-up costs. CDEs will compete for awards from Treasury's CDFI Fund based on objective criteria, including management team expertise and experience of the CDE in working with disadvantaged businesses and communities. Once an allocation is made, the CDE can provide a given amount of tax credits to private equity investors it attracts. Investors can claim a 5 percent credit on their investment for each of the first three years and 6 percent for each of the next four years, totaling over 30 percent over the life of the investment in present-value terms. Any taxable investor, including individuals, companies, and investment funds, will be eligible for the credits, which should be attractive to banks and thrift institutions, investment and insurance companies, venture capital funds, finance companies, and individuals. In turn the CDE will decide upon investments in specific businesses or loans with the funds raised from investors. Objects of such investments are likely to be small technology firms, inner-city shopping centers, manufacturers, retail stores, and micro-entrepreneurs. To qualify, a business must be located either in a census tract with a poverty rate of at least 20 percent or one in which the median income does not exceed 80 percent for the SMSA or the state. The business (which can be a subsidiary of another business) must also have a "substantial connection" with the community. This is to be determined on the basis that: 50 percent of the business' income must be derived from activity in the low-income community; a substantial proportion of the business property must be located in the community; and employees of the business must perform a substantial proportion of its work in the community. Less than 5 percent of the business's assets can be held in unrelated investments. Bush Administration Announces Competition for Third Round of Empowerment Zones and Newly Authorized Renewal Communities. Also included in the same bill enacted in December 2000 was authority for the next Administration to designate nine more Empowerment Zones through a competition. This time rather than a prize of $100 million for each selected, only tax credits will be available for stimulating economic development in designated areas. An additional forty separate areas will be eligible for designation as Renewal Communities, which also will use special eligibility for tax credits as the primary stimulus for revitalization. Both programs will shortly announce requirements for applications that will need to be submitted in September 2001. House Democrats Sue Commerce Secretary in California Federal Court over Critical Census Data. Sixteen House Democrats from the Government Reform Committee, nine more than needed under a 1928 law authorizing "any seven members" of a committee to require an executive agency to provide information that relates to the panel's jurisdiction, have filed suit in California District Court to force disclosure by the Commerce Department of census data compiled on more than 6 million persons, disproportionately minorities, who the Census Bureau estimates were missing from the basic count. A statistical technique can be used to adjust figures for the missing persons, but upon the Bush Administration taking office, the Secretary refused to use the adjustments because of questions about the accuracy of doing so. If these persons are not included in the final counts, this could affect the numbers used for redistricting states for upcoming elections. The Secretary has indicated he might be willing, however, to use adjustment techniques to determine population to be used to allocate federal funds that are based upon population data. Your correspondent Otto J. Hetzel is a professor of law emeritus at Wayne State University and practices law in Washington, D.C.