[Congressional Record Volume 145, Number 39 (Thursday, March 11, 1999)]
[Senate]
[Pages S2601-S2603]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SHELBY (for himself, Mr. Bond, Mr. Coverdell, Mr. Hagel, 
        Mr. Kyl, Mr. Burns, Mr. Gramm, Mr. Ashcroft, Mr. Thomas, Mr. 
        Abraham, Mr. Grassley, Mr. Helms, Mr. Inhofe, Mr. Sessions, Mr. 
        Grams, Mr. Cochran, Mr. Hutchinson and Ms. Snowe):
  S. 602. A bill to amend chapter 8 of title 5, United States Code, to 
provide for congressional review of any rule promulgated by the 
Internal Revenue Service that increases Federal Revenue, and for other 
purposes; to the Committee on Government Affairs.


                     the stealth tax prevention act

  Mr. SHELBY. Mr. President, I rise today with my colleague Senator 
Bond, to introduce the Stealth Tax Prevention Act. Among the many 
powers given to Congress by the Constitution of the United States, the 
responsibility of taxation is perhaps the most important. The Founding 
Fathers rationale behind bestowing this power to Congress is that 
because, as elected representative, Congress remains accountable to the 
voters when they levy and collect taxes. Politicians are rightly held 
responsible to the public for producing fair and prudent tax 
legislation.
  Three years ago, Mr. President, Congress passed the Congressional 
Review Act, which provides that when a major agency rule takes effect, 
Congress has 60 days to review it. During this time

[[Page S2602]]

period, Congress has the option to pass a disapproval resolution. If no 
such resolution is passed, the rule then goes into effect.
  As you know, Mr. President, the Internal Revenue Service maintains an 
enormous amount of power over the lives and the livelihoods of the 
American taxpayers through their authority to interpret the Tax Code. 
The Stealth Tax Prevention Act, that Senator Bond and I are introducing 
along with Mr. Coverdell, Mr. Hagel, Mr. Kyl, Mr. Burns, Mr. Gramm, Mr. 
Ashcroft, Mr. Thomas, Mr. Abraham, Mr. Grassley, Mr. Helms, Mr. Inhofe, 
Mr. Sessions, Mr. Grams, Mr. Cochran, Mr. Hutchinson, and Ms. Snowe, 
will expand the definition of a major rule to include, Mr. President, 
any IRS regulation which increases Federal revenue. Why? Because we 
need to return the authority of taxation to the United States Congress.
  For example, if the Office of Management and Budget finds that the 
implementation and enforcement of a rule would result in an increase of 
Federal revenues over current practices or revenues anticipated from 
the rule on the date of the enactment of the statute, the Stealth Tax 
Prevention Act would allow Congress to review the regulations and take 
appropriate measures to avoid raising taxes on hard working Americans, 
in most cases, small businesses.
  The discretionary authority of the Internal Revenue Service exposes 
small businesses, farmers, and others to the sometimes arbitrary 
actions of bureaucrats, thus creating an uncertain and, under certain 
cases, hostile environment in which to conduct day-to-day activities. 
Most of these people do not have lobbyists that work for them other 
than their elected Representatives. The Stealth Tax Prevention Act will 
be particularly helpful in lowering the tax burden on small business 
which suffers disproportionately, Mr. President, from IRS regulations. 
This burden discourages the startup of new firms and ultimately the 
creation of new jobs in the economy, which has really made America 
great today.
  Americans are now paying a higher share of their income to the 
Federal government than at any time since the end of World War II. 
They, Mr. President, as you well know, pay State income taxes. They pay 
property taxes. On the way to work in the morning they pay a gasoline 
tax when they fill up their car, and a sales tax when they buy a cup of 
coffee.
  Allowing bureaucrats to increase taxes even further, at their own 
discretion through interpretation of the Tax Code is unconscionable. 
The Stealth Tax Prevention Act will leave tax policy where it belongs, 
to elected Members of the Congress, not unelected and unaccountable IRS 
bureaucrats.
  Mr. BOND. Mr. President, today I join my distinguished colleague from 
Alabama, Senator Shelby, in reintroducing legislation, which we proudly 
offered in the 105th Congress and will work to enact during the 106th 
Congress. Our goal is to ensure that the Treasury Department's Internal 
Revenue Service does not usurp the power to tax--a power solely vested 
in Congress by the U.S. Constitution. ``The Stealth Tax Prevention 
Act'' will ensure that the duly elected representatives of the people, 
who are accountable to the electorate for our actions, will have 
discretion to exercise the power to tax. This legislation is intended 
to curb the ability of the Treasury Department to bypass Congress by 
proposing a tax increase without the authorization or consent of 
Congress.
  The Stealth Tax Prevention Act builds on legislation passed 
unanimously by the Senate in the 104th Congress. As Chairman of the 
Committee on Small Business, I authored the Small Business Regulatory 
Enforcement Fairness Act--better known as the Red Tape Reduction Act--
to ensure that small businesses are treated fairly in agency rulemaking 
and enforcement activities. Subtitle E of the Red Tape Reduction Act 
provides that a final rule issued by a Federal agency and deemed a 
``major rule'' by the Office of Information and Regulatory Affairs of 
the Office of Management and Budget cannot go into effect for at least 
sixty days. This delay is to provide Congress with a window during 
which we can review the rule and its impact, allowing time for Congress 
to consider whether a resolution of disapproval should be enacted to 
strike down the regulation. To become effective, the resolution must 
pass both the House and Senate and be signed into law by the President 
or enacted as the result of a veto override.
  Later this month, I will commemorate the third anniversary of the Red 
Tape Reduction Act's enactment by highlighting the progress made to 
date and the obstacles small businesses continue to face primarily due 
to agency noncompliance. Because of the IRS' significant impact on the 
activities of small businesses, the Service's implementation of the Red 
Tape Reduction Act and the Regulatory Flexibility Act is of utmost 
importance to the Committee on Small Business.
  The bill Senator Shelby and I introduce today amends this law to 
provide that any rule issued by the Treasury Department's Internal 
Revenue Service that will result in a tax increase--any increase--will 
be deemed a major rule by OIRA and, consequently, not go into effect 
for at least 60 days. This procedural safeguard will ensure that the 
Department of the Treasury and its Internal Revenue Service cannot make 
an end-run around Congress, as it attempted with the ``stealth tax'' it 
proposed on January 13, 1997.
  In that case, the IRS issued a proposal that is tantamount to a tax 
increase on businesses structured as limited liability companies. The 
IRS proposed to disqualify a taxpayer from being considered as a 
limited partner if he or she ``participates in the partnership's trade 
or business for more than 500 hours during a taxable year'' or is 
involved in a ``service'' partnership, such as lawyers, accountants, 
engineers, architects, and health-care providers.
  The IRS alleges that its proposal merely interprets section 
1402(a)(13) of the Internal Revenue Code, providing clarification, when 
in actuality it is a tax increase regulatory fiat. Under the IRS 
proposal, disqualification as a limited partner will result in a tax 
increase on income from both capital investments as well as earnings of 
the partnership. The effect will be to add the self-employment tax 
(12.4% for social security and 2.9% for Medicare) to income from 
investments as well as earnings for limited partners who under current 
rules can exclude such income from the self employment tax.
  Under the bill introduced today, this tax increase on limited 
partners, if later issued as a final rule, could not go into effect for 
at least 60 days following its publication in the Federal Register. 
This window, which coincides with issuance of a report by the 
Comptroller General, would allow Congress the opportunity to review the 
rule and vote on a resolution to disapprove the tax increase before it 
is applied to a single taxpayer.
  The Stealth Tax Prevention Act strengthens the Red Tape Reduction Act 
and the vital procedural safeguards it provides to ensure that small 
businesses are not burdened unnecessarily by new Federal regulations. 
Congress enacted the 1996 provisions to strengthen the effectiveness of 
the Regulatory Flexibility Act, a law which had been ignored too often 
by government agencies, especially the Internal Revenue Service. Three 
of the top recommendations of the 1995 White House Conference on Small 
Business sought reforms to the way government regulations are developed 
and enforced, and the Red Tape Reduction Act passed the Senate without 
a single dissenting vote on its way to being signed into law on March 
29, 1996. Despite the inclusion of language in the 1996 amendments that 
expressly addresses coverage of IRS interpretative rules, the IRS 
continues to bypass compliance with the Regulatory Flexibility Act.
  As 18 of my Senate colleagues and I advised Secretary Rubin in an 
April 9, 1997, letter, the proposed IRS regulation on limited-partner 
taxation is precisely the type or rule for which a regulatory 
flexibility analysis should be done. Although, on its face, the 
rulemaking seeks merely to ``define a limited partner'' or to 
``eliminate uncertainty'' in determining net earnings from self-
employment, the real effect of the rule would be to raise taxes by 
executive fiat and expand substantially the spirit and letter of the 
underlying statute. The rule also seeks to impose on small businesses a 
burdensome new recordkeeping and collection of information requirement 
that would affect

[[Page S2603]]

millions of limited partners and members of limited liability 
companies. The IRS proposed this ``stealth'' tax increase with the 
knowledge that Congress declined to adopt a similar tax increase in the 
Health Security Act proposed in 1994--a provision that the 
Congressional Joint Committee on Taxation estimated in 1994 would have 
resulted in a tax increase of approximately $500 million per year.
  The Stealth Tax Prevention Act would remove any incentive for the 
Treasury Department to underestimate the cost imposed by an IRS 
proposed or final rule in an effort to skirt the Administration's 
regulatory review process or its obligations under the Regulatory 
Flexibility Act. By amending the definition of ``major rule'' under the 
Congressional Review Act, which is Subtitle E of the Red Tape Reduction 
Act, we ensure that an IRS rule that imposes a tax increase will be a 
major rule, whether or not it has an estimated annual effect on the 
economy of $100,000,000. Our amendment does not change the trigger for 
a regulatory flexibility analysis, which still will be required if a 
proposed rule would have ``a significant economic impact on a 
substantial number of small entities.'' We believe the heightened 
scrutiny of IRS regulations called for by this legislation will provide 
an additional incentive for the Treasury Department's Internal Revenue 
Service to meet all of its procedural obligations under the Reg Flex 
Act and the Red Tape Reduction Act.
  I urge my colleagues to join us in supporting this important 
legislation to ensure that the IRS neither usurps the proper role of 
Congress--nor skirts its obligations to identify the impact of its 
proposed and final rules. When the Department of the Treasury issues a 
final IRS rule that increases taxes, Congress should have the ability 
to exercise its discretion to enact a resolution of disapproval before 
the rule is applicable to a single taxpayer. The Stealth Tax Prevention 
Act Senator Shelby and I introduce today provides that opportunity.
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