[Congressional Record Volume 149, Number 108 (Monday, July 21, 2003)]
[Senate]
[Pages S9641-S9642]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. NELSON of Florida (for himself, Mr. Graham of Florida, Mr. 
        Daschle, and Mr. Johnson):
  S. 1436. A bill to amend the Internal Revenue Code of 1986 to allow a 
deduction for State and local sales taxes in lieu of State and local 
income taxes, and for other purposes; to the Committee on Finance.
  (At the request of Mr. Daschle, the following statement was ordered 
to be printed in the Record.)
 Mr. GRAHAM of Florida. Mr. President, when Congress enacted 
the Tax Reform Act of 1986, it was heralded for its simplicity, 
efficiency and fairness. Yet the legislation was not fair to states 
such as Florida that choose not to finance the government through the 
imposition of an income tax. Residents from these States are forced to 
pay a higher Federal income tax liability than comparable citizens of 
other States. This results from the 1986 Act's elimination of the 
Federal income tax deduction for State sales taxes.
  Today, Senators Nelson of Florida, Daschle, Johnson and I are 
introducing the Sales Tax Equity act to remedy this inequity and lift 
our constituents from second-class status. The bill allows taxpayers to 
elect a deduct State and local sales taxes in lieu of a deduction for 
State and local income taxes. Although the election is available to 
residents of all States, the practical effect of the bill is to make 
the deduction for State taxes available to residents of States with no 
State income tax. Residents from these States should not be forced to 
pay higher Federal tax bills simply because their State government's 
funding does not derive from an income tax.
  To avoid burdensome record-keeping requirements, the deduction for 
State and local sales taxes would be determined by tables produced by 
Treasury. Those tables will take into consideration the sales tax rates 
in the various States and average consumption.
  The Joint Committee on Taxation estimates the cost of restoring this 
fairness to the citizens of non-income tax States at $26 billion over 
ten years. Under most circumstances it should not be incumbent upon 
those of us who are trying to restore equity in our Federal tax laws to 
find offsets for this cost. The problem we face, however, is that last 
week the Office of Management and Budget announced that the deficit for 
this year would be 455 billion dollars--165 billion dollars greater 
than the previous record deficit. The fiscal hole in which we now find 
ourselves--primarily as a result of the fiscal mismanagement of the 
Bush Administration--places an extra burden on us. The responsible 
approach to fixing this problem, therefore, requires us to put together 
a proposal that will not exacerbate the deficit. Fortunately, offsets 
exist that will fully offset the cost of the restored sales tax 
deduction and improve the Nation's tax laws by making it tougher for 
taxpayers to avoid paying their fair share.

[[Page S9642]]

  In his last report to the IRS Oversight Board, former Commissioner 
Rossotti identified corporate tax shelters as one of the top problems 
facing the IRS. To combat this growing problem, the bill includes 
measures to crack down on the proliferation of tax shelters. The 
purpose of these provisions is to reinforce the Treasury department's 
administrative enforcement regime. A key element of the Service's 
enforcement regime is their ability to detect potentially abusive 
transactions. Thus, the bill promotes disclosure of such transactions 
through a framework of increased penalties and limited defenses in the 
event of nondisclosure.

  The legislation also clarifies the judicially created doctrine of 
economic substance and imposes a new 40 percent strict-liability 
penalty for those transactions that fail this new requirement. 
Clarification of the economic substance doctrine requires that the 
taxpayer establish that (1) The transaction changes in a meaningful 
way, apart from the Federal income tax consequences, the taxpayer's 
economic position, (2) the taxpayer has a substantial non-tax purpose 
of entering into the transaction, and (3) the transaction is a 
reasonable means of accomplishing such non-tax purpose.
  In addition to cracking down on potentially abusive transactions, our 
bill will shut down known abusive transactions. Last year, at the 
request of the Chairman and Ranking Members of the Senate Committee on 
Finance, the Joint Committee on Taxation investigated Enron's tax 
returns. One of the areas on which the Joint Committee focused was the 
tax shelter arrangements, offshore entities, and special purposes 
entities that Enron used to reduce its tax liability. The Joint 
Committee issued its report on this investigation on February 13, 2003 
and included recommendations for shutting down some of the tax shelters 
used by the company. This legislation includes those recommendations.
  The legislation also eliminates incentives in our tax code that 
encourage individuals and corporations to renounce their U.S. 
citizenship to avoid paying U.S. tax. For individuals, the legislation 
generally subjects U.S. citizens who relinquish their U.S. citizenship 
and certain long-term U.S. residents who terminate their U.S. residence 
to tax on the net unrealized gain in their property as if such property 
were sold at fair market value on the day before the expatriation or 
residency termination. Only a gain in excess of $600,000, $1.2 million 
for a married couple, is subject to tax.
  The legislation also establishes new rules to thwart efforts by some 
U.S. corporations to reincorporate in a foreign country in order to 
avoid paying U.S. tax. These proposals are identical to legislation 
passed previously by the Senate.
  There is one additional, and crucial, benefit of our legislation. It 
will not slow down the current conference negotiations on legislations 
extending the child credit expansion to low-income families. As my 
colleagues know, legislation resolving this matter has passed both the 
House and Senate and the differences between the two bills must be 
reconciled. It is important for that legislation to get resolved as 
soon as possible so that the IRS has ample time to send checks out to 
these families this summer. Some have suggested that resolution of the 
sales tax issue--a matter not included in either the House or Senate 
bill--be attached to the child credit bill. I fear that such an attempt 
would further complicate resolution of that important legislation.
  I hope our colleagues will look upon this legislation in the spirit 
with which it is offered. It is fundamentally unfair that for the past 
seventeen years the residents of our States have faced higher Federal 
income tax liabilities than their fellow citizens living in other 
States. We feel that we have structured our legislation in a manner 
that corrects this inequity without jeopardizing the tax benefits 
available to residents of other States. Furthermore, the bill is 
fiscally responsible and improves the tax system by making it more 
difficult for those who would use tax shelters and other devices to 
lower their taxes.

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