Tax Policy: A Conversation with Senators Breaux and Lott on the Outlook for Tax Policy

    View Authors 1 November 2010
    Q: Congress hasn’t done much by way of tax legislation this year, and major issues are still unresolved including extensions of the 2001 and 2003 tax cuts. What do you foresee happening during a lame duck session of Congress?

    Senator John Breaux: Well, the only thing Congress absolutely must pass is a continuing resolution to fund the government beyond December 3rd. However, there is a real possibility that the House and Senate could work on a major tax bill during lame duck. I expect the House and Senate to reconvene the week of November 15 and focus that week largely on internal organization. When they come back after Thanksgiving, they will have about three weeks to legislate prior to adjourning for Christmas.

    Senator Trent Lott: And, of course, Congress reconvenes in early January at which point the makeup of the House and Senate will be much different than it is during lame duck. So, if they want to act on taxes in lame duck, it will have to be bipartisan, or else Senate Republicans will want to push action into 2011 when they have greater numbers.

    And remember, there’s a possibility one or more new Republicans will be seated during a lame duck session (for example, in Illinois or West Virginia) depending on the outcome of the special Senate elections in those states. That only bolsters Senate Republicans’ hands during lame duck, which complicates the outlook somewhat.

    Q: What does that mean for marginal tax rates, capital gains and dividends?

    TL: There’s a path forward, and it is probably a simple straight extension of the Bush tax cuts for a couple of years. I don’t think Senate Republicans are going to want to go much beyond that during a lame duck session.

    JB: For that to work, the President must agree to it. Thus far, he’s been unwilling to go there, though the Administration is hinting there is room for compromise. And, while some Congressional Democrats have signaled a willingness to vote for something beyond the President’s proposal, not very many have agreed to a straight extension as of yet. But that might change come December.

    Q: Couldn’t Congress just punt to next year, and pass legislation retroactively?

    JB: Yes, that remains a possibility. However, most Americans will feel the tax increase in the first paycheck in January, on account of the IRS withholding tables changing absent legislative action in lame duck.

    TL: I think that is going to be a significant motivating force during lame duck. Nobody’s tipping their hand just yet, but when that tax increase on all working Americans is staring them in the face, it could force a positive result.

    Q: What else might Congress focus on during lame duck?

    JB: Possibilities include tax legislation, appropriations, and as a wild card perhaps a deficit reduction bill depending on what the President’s Fiscal Responsibility Commission recommends when they report in early December. I think tax is the most likely of the three given the uncertainty that will be created should the tax rates not be extended prior to January 1.

    TL: They’re going to have to pick their issues carefully. Three weeks is not a lot of time to legislate in the Senate, and, again, Senate Republicans will have the numbers to ensure nothing passes that is not bipartisan in nature.

    Q: Getting back to taxes, Congress has yet to address either the tax “extenders” that lapsed at the end of 2009, or the estate tax which is currently at zero but which springs back come January first. What’s the outlook on those fronts?

    TL: I would assume that should a major tax bill be put on the floor that extenders would be a part of it. That should be part of a larger deal.

    JB: It would also be wise for them to include at least a couple of years of estate tax as part of that mix. If nothing else, a straight extension of 2009 exemption levels and rates. The uncertainty created by the lack of Congressional action will only get worse when the pre-2001 $1M exemption/55 percent rate kicks back in come January.

    Q: What do you see on the horizon for tax legislation in 2011 and 2012?

    TL: It depends entirely on whether they pass an extension of the Bush tax cuts during lame duck. If not, that will clearly be item number one out of the gate, especially if the House is in Republican control. And the President and Democrats in the Senate will have to deal with it then. My advice to them would be to do at least two years during lame duck so that they can focus on other things early in the next Congress.

    JB: I think one way or another Congress is going to be looking at important corporate tax issues in the next year or so. Discussion on the corporate tax rate, deferral, tax credits like R & D, are all going to be on the table.