NAIFA GovWatch

“Gang of Six” Revived as Possible Debt Limit Solution

Issue: Tax Reform

Date: July 20, 2011

Action Taken: After several weeks without any news from the budget-negotiating “Gang of Six” that became the “Five Guys,” on July 19 the full Gang of Six was revived and presented a deficit reduction plan to the Senate. This proposal is the new focus of discussion for Washington’s efforts to enact a debt-ceiling increase before the current ceiling is hit on August 2.

The Gang of Six budget proposal and the other budget and deficit-reduction proposals currently under discussion have significant implications for an accelerated tax reform process. Here is a summary of how the tax reform elements may affect your clients and your business:

Gang of Six Budget Plan
The deficit-reduction proposal of Senators Kent Conrad (D-ND), Dick Durbin (D-IL), Mark Warner (D-VA), Saxby Chambliss (R-GA), Mike Crapo (R-ID), and Tom Coburn (R-OK) would require the tax-writing committees to approve a tax simplification/reform plan within six months. The plan calls for a number of elements that could impact financial advisors and their clients (many of them positively):

Repeal of the CLASS Act (the government-run private long-term care/disability insurance program enacted in last year’s health reform law);
Complete a permanent repeal of the alternative minimum tax (AMT);
Tax rate lowering and simplification: three individual rate brackets set between 8 and 12 percent, 14 and 22 percent, and 23 and 29 percent; one corporate tax rate to be set between 23 and 29 percent;
Inflation calculation adjustment, which would lower the inflation rate used to calculate everything from tax brackets, to maximum contributions or income qualifications for tax-advantaged accounts, to Social Security payments (results in more “bracket creep” and lower Social Security payments over time); and
Tax expenditure changes: the tax-writing committees are directed to “reform, not eliminate” tax expenditures for retirement savings and health insurance (as well as home mortgage interest and charitable contributions), which might take the form of changing contribution caps, replacing tax deductions with tax credits, or other modifications to these critical tax rules.

McConnell-Reid “Fall-Back” Plan
The “fall-back” plan being negotiated between Senate Majority Leader Harry Reid (D-NV) and Senate Minority Leader Mitch McConnell (R-KY) would give President Obama authority to raise the debt limit on his own, in three installments prior to the 2012 election, subject to a Congressional resolution of disapproval that the President could veto. This plan includes over $1 trillion in spending cuts, and process reforms including the creation of a “super committee.” The super committee would consist of 12 lawmakers, three from each party from the House and from the Senate. The committee would write a tax simplification/reform plan that would be subject to a simple majority, up-or-down (no amendments) vote, which would have to be done by year-end (or perhaps within six months). This expedited process of tax reform could pose considerable risk to life insurance, annuity, pension and employeebenefit tax rules.

Senator Coburn’s Solo Plan
Just one day before officially rejoining the Gang of Six, Senator Coburn introduced his own deficit reduction plan. The Coburn plan would reduce the deficit by over $9 trillion over 10 years, and includes specific proposals for tax reform. While the overall plan is unlikely to win sufficient support for enactment, pieces of it may find their way into the deficit reduction and tax reform debates. Coburn’s tax reform suggestions include:

Capping the health insurance exclusion at $7,500 for individuals and $15,000 for families;
The same inflation calculation adjustment as in the Gang of Six plan; and
Limiting the home mortgage interest deduction to $500,000 in principal on one residence.

Cut/Cap/Balance Plan
On July 19, the House approved, by a 234 to 190 vote, H.R.2560, the “cut-cap-balance” plan to reduce the deficit and to raise the debt ceiling. H.R.2560 now goes to the Senate, where it is expected to fail. The bill would raise the debt limit only after Congress approves an amendment to the Constitution that would phase in a cap on federal spending at 19.9% of gross domestic product (GDP), impose a two-thirds vote requirement on measures that would raise taxes, and require that budget outlays could not exceed receipts. The bill also includes over $1 trillion in spending cuts to take effect in 2012, but it includes no specific tax reform proposals.

Next Steps: Though each of the budget plans would have tax reform implications, no specific tax changes are expected to be enacted before August 2. How is the debt ceiling uncertainty impacting you and your clients now?

Please take a moment to answer this short survey (3 questions) to tell us about how the debt ceiling debate is impacting your business: http://www.naifa.org/surveys/advocacy/debtcrisis.htm.

NAIFA Staff Contact: Diane Boyle, Vice President - Federal Government Relations; or Lillian Vogl, , Esq., Director - Federal Government Relations or Dani Kehoe, Of Counsel.

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