July 28,1999

Roth Opening Statement on the Taxpayer Refund Act of 1999

WASHINGTON -- The Senate Wednesday began debate on S. 1429, the Taxpayer Refund Act of 1999. Senate Finance Committee Chairman William V. Roth, Jr. (R-DE) delivered the following statement on the floor of the Senate:

"Mr. President, I don't think there's any parent who hasn't had the experience of sending a child into a store with a twenty-dollar bill to buy a carton of milk and a loaf of bread -- or maybe a dozen eggs. The child returns with the few essentials, and in a demonstration of maturity and responsibility returns the change to his or her parent. There's no question about who the change belongs to. After all, the parent earned the money. It's needed to support the family. And the family will certainly have important uses for it later. The child understands this; so does the parent. And most often the change is returned to the household budget to take care of other important needs.

"Washington needs to demonstrate the same responsibility when it comes to determining what to do with the change that's left over from running the government. There are surplus revenues in the Treasury. As with the child emerging from the grocery store, there is change -- big change -- left over after Congress has met the necessities of running the government. In trying to balance the budget in 1997, Congress miscalculated the revenues that would be generated by the economy. At the same time, the hard work, the thrift, investment, and risk-taking of Americans combined to create an unexpected windfall of revenues. Now the question Washington seems to be grappling with concerns who rightly deserves the windfall. It's a question that any parent or child can answer.

"American families -- those who created the wealth in the first place, those who need their precious resources to meet basic needs at home -- are rightly entitled to the revenues that they earned -- revenues that Washington did not plan for to meet the expenses of government for which Washington had budgeted. Now, like the child returning change for the twenty, we must hand back the money. And we must do it in a broad-based way that is fair to those who provided the funds to Washington in the first place. We must do it through broad-based tax relief that helps individuals and families at all income levels meet real needs.

"The broad-based tax relief plan that passed out of the Finance Committee with bipartisan support will do just that. It will benefit nearly every working American; it will help restore equity to the tax code and provide American families with the relief and resources they need to meet pressing concerns. It will help individuals and families save for self-reliance in retirement. It will help parents prepare for educational costs. It will give the self-employed and under-insured the boost they need to pay for health insurance. It will begin to restore fairness to the tax code by eliminating the marriage tax penalty.

"Let me tell you exactly how the plan works, and why it has received bipartisan support:

"This tax cut package will provide broad relief by reducing the 15% tax bracket that serves as the baseline for all taxpayers to 14%. In other words, no matter which tax bracket a family may be in, by cutting the 15% bracket, everyone will benefit, as they will pay 14% on their first portion of taxable income. At the same time, this plan expands the 14% bracket, dropping millions of Americans who are now paying taxes at 28% down to the lower bracket. For a middle-income family of four, these two changes will mean a tax savings of over $450 a year. And these provisions have already found bipartisan support.

"To restore equity to the tax code, this plan targets another bipartisan objective by eliminating the marriage tax penalty. For too long, husbands and wives who have worked and paid taxes have been penalized by their dual incomes. I've heard of some couples who have actually chosen not to marry because of the tax penalties their marriage would incur. This plan will fix that by giving working married couples the option of filing combined returns, using separate schedules to take advantage of the single filer tax rates and the single filer standard deduction.

"This is a change that's long overdue. American families have been suffering under the unfair burden of the marriage tax penalty for too long. A simple example shows us why:

"Robert and Diane are two single Americans who have fallen in love and want to marry. They're not considered wealthy. In fact, Robert is a hardworking foreman at an auto factory. Susan, his fiancee, is an experienced nurse. Each makes roughly $50,000 a year. Now, under current law -- when they file their separate tax returns -- they each take a personal exemption and the standard deduction, giving them a taxable income of $43,000. After applying the tax rates for singles, they each owe tax of about $8,745.

"If, however, Robert and Diane follow their hearts -- get married and start a family -- they realize that their total combined income would be $100,000. Should they marry, they would no longer be considered middle-class individuals, but many would regard them as a wealthy family, and under current law their combined income would be reduced by their two personal exemptions and by the standard deduction for married couples. And here's where they would hit their first marriage penalty problem, discovering that their new standard deduction is significantly less than the combination of the two standard deductions that they receive as singles.

"But, Mr. President, the marriage penalty does not end there. In fact, it gets worse. With their combined income, Robert and Diane -- now considered by many to be wealthy -- would have a taxable income of $87,400. This is where they would hit their second marriage penalty problem. The lowest tax rate bracket for married couples is less than twice as wide as the lowest tax rate bracket for singles. In other words, more of their income would now be taxable at higher rates. The result would be a total tax bill of $18,967, almost $1,500 more than they would have paid as singles. And that steep increase would come at a time when they could least afford it, a time when just starting out as a married couple they would be looking to buy a home, raise a family, and save for education.

"The legislation we introduce today -- this broad-based tax relief -- completely eliminates the marriage penalty for Robert and Diane. The Senate Finance Committee bill will allow Robert and Diane to file a joint return, but to calculate their tax liability as if they had remained single. They would each get the benefit of the more generous standard deduction and of the more generous rate brackets. Under this new approach, they would pay a total tax of $17,490, which is the combination of what they had each paid before. This saves them almost $1,500.

"But, Mr. President, in restoring equity to the tax code, we don't stop with the marriage penalty. Another important measure contained in this broad-based tax relief plan is the elimination of the alternative minimum tax for middle-income families -- families like David and Margaret Klaassen. Most of us know their story. The Tenth Circuit recently affirmed that under the current law, the Klaassens are required to pay the Alternative Minimum Tax despite the fact that it may not have been Congress' intent to impact families like the Klaassens when Congress passed the AMT.

"David and Margaret Klaassen are the parents of 10 dependent children. They had an adjusted gross income of $83,000 and roughly $19,000 of itemized deductions relating to state and local taxes, medical expenses, interest, and charitable contributions. Their reported adjusted gross income was $63,500, and with 12 personal exemptions their taxable income was $34,000, resulting in regular tax of $ 5,100.

"That would seem fair. And the Klaassens paid the bill. However, the IRS flagged the return and determined that the family was liable for the Alternative Minimum Tax, a provision in the code that was passed to make sure that wealthy individuals and families do not escape at least some liability through tax shelters and other tools they might use to minimize their liability. The IRS determined an AMT deficiency of $1,100. For AMT purposes, the Klaassens were disallowed a $3,300 deduction for state and local taxes. In addition, $2,100 in medical expenses were disallowed because of the 10% floor for AMT purposes. And finally, the Klaassens' entire $29,000 deduction for personal exemptions was disallowed because of the AMT. These adjustments resulted in alternative minimum taxable income of $68,800 -- twice the taxable income that the Klaassens had without the AMT.

"This simply isn't fair, Mr. President. It is not what Congress intended. The Finance Committee bill will help return fairness to the tax code by allowing families to receive the full benefits from their personal exemptions. This will also restore taxpayers' ability to receive their $500 per child tax credits, the Hope Scholarship tax credit, and other benefits that were intended to be available to middle-income families.

"These are changes that are long overdue. Again, they have strong bipartisan support. But our broad-based Taxpayer Refund Act of 1999 does so much more.

"This plan will also help individuals and families find self-reliance and security in retirement through expanded individual retirement accounts, as well as through enhanced 401(k) plans, 403(b) plans and 457 plans. These are critical programs -- programs that along with Social Security and personal savings help individuals prepare for their golden years.

"For savings through the workplace, there are 401(k) plans, 403(b) plans and 457 plans, each of which can be sponsored by different types of employers. For individual savings, there is either the traditional IRA or the Roth IRA. And all these different savings vehicles have different limits on how much individuals can save. However, our current system can do more, and the limitations that we placed on retirement savings in times of budgetary restraints should be re-examined in light of the current surplus. For example, the IRA contribution limit has not changed since 1982. Had it simply been indexed for inflation, it would be almost $5,000 today. What an opportunity that would present middle-class families to prepare for their futures. And that's exactly who benefits from IRAs -- middle- and even lower-income Americans.

"Fifty-two percent of all IRA owners earn less than $50,000. This same group makes about 65% of all IRA contributions, and right now they are limited by the $2,000 cap on contributions. IRS statistics also show that the average contribution level in 1993 for people with less than $20,000 in income was $1,500. Clearly -- if the average contribution of modest-income taxpayers is $1,500 -- this demonstrates that many of these Americans want to make contributions of more than the $2,000 limit. This tax relief bill will incrementally increase the amount that people can contribute to IRAs from $2,000 to $5,000.

"In the area of employer-provided savings vehicles, the current maximum pre-tax contribution to a 401(k) plan or a 403(b) annuity is $10,000. In addition, the maximum contribution to a 457(b) plan is $8,000. Finally, the maximum contribution to a SIMPLE plan is $6,000. These limits are indexed for cost-of-living increases.

"There has traditionally been a differential in contribution limits among the various types of plans: IRAs (which are individual plans) having the lowest limits; SIMPLE plans having a greater limit -- but not as much as a 401(k) plan; and 401(k) and 403(b) plans having the highest limits, but the greatest number of regulations. Since the IRA limit will be raised to $5,000, the bill will increase limits for 401(k) and 403(b) plans to $15,000 and for SIMPLE plans to $10,000; thereby continuing the differential. The limit for 457(b) plans for government employees will increase to $12,000.

"There is no question -- with rising concerns about security and self-reliance in retirement -- that these changes are needed. They will go a long way toward helping individuals and families achieve their economic goals. But the benefits this legislation has for retirement planning do not stop here. There are other provisions that will add new retirement vehicles, provide greater ability to transfer retirement savings between plans, promote retirement plans for small businesses, and simplify the retirement plan system for both employers and employees.

"One provision will allow employees 50 years old and older to make catch-up contributions to their retirement plans. This will be most important for women -- benefitting those who may have started their retirement savings late or who may have taken time off to raise children. Whatever the reason, once these individuals have reached 50, they will be eligible to make additional contributions to their retirement plans that are equal to 50% of their plans' maximum allowable contribution. In other words, their total annual contribution could be 150% of the normal contribution.

"Beyond restoring equity to the tax code and helping Americans prepare for retirement, the Taxpayer Refund Act of 1999 will also help individuals and families gain access to health care -- particularly those who are self-employed, or who are not covered by their employers -- this legislation will enhance the tax deductibility of health insurance. It does this by accelerating the full deductibility for health insurance for the self-employed and by providing the same benefit on a phased-in basis to employees who are not covered by their employers.

"In detail, the Taxpayer Refund Act of 1999 will provide an above-the-line deduction for health insurance and for long-term care for which the taxpayer pays at least 50% of the premium. It will allow long-term care insurance to be offered in cafeteria plans and provide an additional dependency deduction to caretakers of elderly family members. To benefit small businesses, this legislation will accelerate the 100% deduction for health insurance of self-employed individuals beginning in 2000.

"To help make education more affordable for families and students, the Taxpayer Refund Act of 1999 strengthens educational savings opportunities by making college tuition plans tax-free. In other words, families -- including grandparents, aunts and uncles -- can invest their after-tax income into a child's educational future. And when that money is used by the child, it will be tax-free on build-up and withdrawal.

This legislation also increases student loan interest deduction income limits for single taxpayers by $10,000 and adjusts the beginning income limits for married couples filing joint returns to twice that of a single taxpayer. Beyond these important changes, this tax relief plan promotes education by making deductions for employer-provided assistance permanent, and by allowing employer assistance to be used for graduate level courses.

"Again, these are necessary changes -- changes that will help families meet their priorities. Another important component of this tax relief package involves its treatment of estate and gift taxes. Here, our objective is to protect families, farmers, and small businessmen and -women who have worked their whole lives to build a future for their posterity. Members of the Senate Finance Committee can recall the heartrending testimony of Lee Ann Goddard Ferris whose 71-year-old father died in a tragic farming accident in Lost River Valley, Idaho. For more than 60 years, her family had worked the land. They owned over 2,600 acres -- 2,600 acres that had been purchased through decades of toil. In Lee Ann's own words, "My father's death was the most devastating event that any of us has ever gone through. The second most devastating event was sitting down with our estate attorney after his death. I'll never forget his words. The estate attorney said, 'There is no way you can keep this place, absolutely no way.'"

"Still suffering from her father's accidental death, Lee Ann couldn't believe what she was hearing. "How can this be?" she asked. "We own this land. We have no debt! We just lost my father, and now we are going to lose the ranch?" According to Lee Ann, "Our attorney proceeded to pencil out the estate taxes... and we all sat in total shock."

"Where's the fairness, Mr. President? Here a family works for more than half a century to build a ranch, only to hear that estate taxes would rob them of their legacy, their heritage, their home. "This tax situation has put a tremendous strain on my mother," Lee Ann testified. "Mother worries constantly and has had many sleepless nights. I don't know if any of you could ever imagine how hard it has been on her. She doesn't have her husband anymore. She worked hard her whole life and gave up a lot of material things to put her after-tax dollars back into the land to pay it off. Now, unless this tax law is changed or abolished, she will have to leave her home, which she loves, and our family will not have a base from which to carry on."

"With this legislation, Congress will do something to protect these families. The Taxpayer Refund Act of 1999 turns the unified estate tax credit into a true exemption, and it increases the exemption from $1 million to $1.5 million. This legislation also significantly reduces the actual estate tax rate, and it increases the annual gift tax exclusion from $10,000 to $20,000 by the year 2006.

"Each of the measures I've outlined as part of the Taxpayer Refund Act of 1999 is vitally important to the well-being of all families; each is a key component of this tax relief package. Again, our purpose is to be broad-based -- to provide the most meaningful tax relief possible -- to do it in a way that families can meet their individual needs -- and to present a plan that can receive strong bipartisan support.

"With this major tax relief package -- $792 billion over ten years -- we meet all of these criteria. And, in the process, we leave over $500 billion to meet pressing concerns here in Washington, such as preserving and strengthening Medicare.

"Mr. President, we are able to do all this and to keep the budget balanced for a simple reason: the work, investment, and job creation achieved by Americans everywhere have succeeded in creating long-term economic growth. It's not right that the reward for this success is that today our taxes are the highest percent of our Gross National Product than at any other time in post-war history. These same Americans -- the authors of the success story -- are rightful heirs to the wealth they're creating. After paying for the government programs for which Congress has planned and budgeted, the change must now be returned to the taxpayer.

"This legislation not only returns the change by cutting taxes, it increases access to health care; it makes education more affordable; it helps taxpayers prepare for self-reliance and retirement; it keeps their home, farm, and family business safe from death taxes. These are objectives that are shared by everyone. They are objectives that can be embraced by Senators and Congressmen on both sides of the political aisle. They are objectives that can be made realities by being passed into law. "