[Senate Report 104-354]
[From the U.S. Government Publishing Office]




104th Congress                                                   Report
                                 SENATE  

 2d Session                                                     104-354
_______________________________________________________________________


 
    TO AMEND THE CONGRESSIONAL BUDGET ACT OF 1974 TO PROHIBIT THE 
              CONSIDERATION OF RETROACTIVE TAX INCREASES.

                               __________

                              R E P O R T

                                 of the

                   COMMITTEE ON GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                             together with

                            ADDITIONAL VIEWS

                              to accompany

                                 S. 94

     TO AMEND THE CONGRESSIONAL BUDGET ACT OF 1974 TO PROHIBIT THE 
               CONSIDERATION OF RETROACTIVE TAX INCREASES




                August 27, 1996.--Ordered to be printed



  Filed, under authority of the order of the Senate of August 2, 1996


                   COMMITTEE ON GOVERNMENTAL AFFAIRS

   TED STEVENS, Alaska, Chairman
JOHN GLENN, Ohio                     WILLIAM V. ROTH, Jr., Delaware
SAM NUNN, Georgia                    WILLIAM S. COHEN, Maine
CARL LEVIN, Michigan                 FRED THOMPSON, Tennessee
DAVID PRYOR, Arkansas                PETE V. DOMENICI, New Mexico
JOSEPH I. LIEBERMAN, Connecticut     THAD COCHRAN, Mississippi
DANIEL K. AKAKA, Hawaii              JOHN McCAIN, Arizona
BYRON L. DORGAN, North Dakota        BOB SMITH, New Hampshire
    Albert L. McDermott, Staff 
             Director
Christine M. Ciccone, Deputy Staff 
             Director
 Christine M. Schabacker, Counsel
  Leonard Weiss, Minority Staff 
             Director
  Michal Sue Prosser, Chief Clerk


                            C O N T E N T S

                              ----------                              
                                                                   Page
  I. Summary and Purpose..............................................1
 II. Background.......................................................1
III. Legislative History..............................................3
 IV. Section-by-Section Analysis......................................5
  V. Regulatory Impact Statement......................................5
 VI. CBO Cost Estimate................................................6
VII. Administration Views.............................................6
VIII.Additional Views of Senator John Glenn...........................8

 IX. Changes to Existing Law..........................................9



104th Congress                                                   Report
                                 SENATE

 2d Session                                                     104-354
_______________________________________________________________________



     TO AMEND THE CONGRESSIONAL BUDGET ACT OF 1974 TO PROHIBIT THE 
               CONSIDERATION OF RETROACTIVE TAX INCREASES

                                _______
                                

                 July 23, 1996.--Ordered to be printed

   Filed under authority of the order of the Senate of August 2, 1996

_______________________________________________________________________


Mr. Stevens, from the Committee on Governmental Affairs, submitted the 
                               following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                          [To accompany S. 94]

                         I. Summary and Purpose

    S. 94 amends the Congressional Budget Act of 1974 to 
prohibit the consideration of retroactive tax increases by 
creating a 60-vote point of order, which may be raised in the 
Senate or House of Representatives when a bill, joint 
resolution, amendment, motion or conference report applies a 
tax increase retroactively. The purpose of S. 94 is to make it 
more difficult for Congress to pass legislation that applies a 
tax increase retroactively.

                             II. Background

    Concern about the retroactive application of taxes predates 
the founding of this country. This concern has, over the years, 
led to many legislative proposals at both the federal and state 
level designed to curb or prohibit the creation of a 
retroactive tax liability.
    As recently as August 1993, Congress passed, and President 
Clinton signed into law, H.R. 2264, the Omnibus Budget 
Reconciliation Act of 1993 (P.L. 103-66), which included an 
increase in the estate tax rate with a retroactive effective 
date of January 1, 1993. At that time, concern was raised that 
the tax obligation retroactively increased the tax liability of 
individuals who had died prior to the date the new law was 
signed by President Clinton, and after the effective date of 
January 1, 1993.
    In citing the estate tax example, it should be noted that 
Congress voted to reduce the estate tax rate as part of the 
Reagan tax cuts in 1981. The estate tax rate was reduced from 
70 percent to 60 percent in 1983, to 55 percent in 1984, and 
was scheduled to be reduced to 50 percent in 1985. In 1984 and 
again in 1988, Congress took action to extend the 55 percent 
rate which was carried through 1992, at which time the rate was 
scheduled to drop to 50 percent. In 1991, Congress included a 
provision in H.R. 11 to further extend the 55 percent rate. 
President Bush vetoed H.R. 11, and the estate tax rate dropped 
to 50 percent effective January 1, 1993.
    During the 1993 debate on H.R. 2264, Senator Burns offered 
an amendment to make all tax increases, which included the 
estate tax increase, effective no earlier than the date of 
enactment. The amendment was defeated by a vote of 46 yeas to 
52 nays (June 24, 1993, Cong. Rec. S7925). During the debate on 
the conference report to H.R. 2264, Senator McCain raised a 
point of order that the retroactive estate tax increase 
violated the U.S. Constitution. The Senate failed to sustain 
the point of order by a recorded vote of 44 yeas to 56 nays 
(August 6, 1993, Cong. Rec. S10655).
    Subsequent to the enactment of H.R. 2264, Senator 
Hutchison, who had been a cosponsor of the Burns amendment, 
offered an amendment to H.R. 3167, Unemployment Compensation 
Amendments, to allow the top rate on estate and gift taxes to 
revert downward to 50 percent as of January 1, 1993. A Budget 
Act point of order was raised against the amendment, and the 
Senate failed to waive the rules on a recorded vote of 50 yeas 
to 44 nays (October 26, 1993).
    In 1994, forty Members of Congress joined in an amicus 
curiae brief in the case of United States v. Carlton, 114 S.Ct. 
2018, which addressed whether the lack of notice of the 
retroactive change violated the Due Process clause of the Fifth 
Amendment. The Court held in Carlton that the proper standard 
for determining whether a retroactive tax satisfies the 
requirements of due process is that it be supported by a 
rational legislative purpose. The Court determined that 
Congress had not acted arbitrarily and its action was 
reasonable.
    A number of bills have been introduced in the 103rd and 
104th Congresses addressing the issue of retroactive taxation. 
They include proposals to enact a Constitutional amendment to 
prohibit retroactive taxation, to create a statutory 
prohibition against retroactive taxation, as well as proposals 
such a S. 94, creating a procedural hurdle for consideration of 
such legislation.
    S. 94 was introduced to restrain the potential for passing 
tax legislation with a retroactive effective date. Unlike some 
other legislative proposals, S. 94 modifies the budget rules 
which govern the consideration of certain legislation in 
Congress. S. 94 would not prohibit the consideration or 
enactment of retroactive taxes, but would make consideration of 
such a measure subject to a 60-vote point of order. This bill 
is needed to assure that when Congress decides to legislate tax 
changes retroactively, it has broad support and not just a 
simple majority.

                        III. Legislative History

    S. 94 was introduced by Senator Coverdell of Georgia on 
January 4, 1995. The bill was jointly referred to the Committee 
on Governmental Affairs and the Committee on the Budget with 
instructions that if one committee reports, the other committee 
has 30 days to report or be discharged.

                                Hearing

    The Senate Committee on Governmental Affairs held a hearing 
on December 7, 1995. Testimony was presented by Senator Paul 
Coverdell from Georgia; Senator Kay Bailey Hutchison from 
Texas; Joseph E. Schmitz, Esquire, Craven and Schmitz, and 
Professor of Constitutional Law at Georgetown University; Nancy 
Mitchell, Economist and Vice President for Policy 
Implementation, Citizens for a Sound Economy; Peter Ferrara, 
General Counsel and Chief Economist, Americans for Tax Reform; 
Charles F. ``Rick'' Rule, Esquire, Covington and Burling; Wayne 
Nelson, Communicating for Agriculture; and Robert Proctor, 
Chairman of the Board of Trustees, Southeastern Legal 
Foundation.
    The purpose of the hearing was to receive testimony on the 
fairness, economic impact and constitutional implications of 
retroactive taxation.
    Senator Coverdell began his testimony with a quote from 
Thomas Jefferson: ``Every man should be protected in his lawful 
acts and be certain that no ex post facto law shall punish or 
damage him for them.'' Senator Coverdell stated that, in his 
opinion, the U.S. Constitution prohibits retroactive taxation 
in three ways--through the guarantee of due process, the 
prohibition against bills of attainder, and ex post facto 
laws--noting that case history has applied the ex post facto 
provision to only criminal and not civil matters. Citing his 
small business background, and the fact that most businesses in 
the United States fall into the small business category, 
Senator Coverdell testified that a Congress which arbitrarily 
and capriciously changes rules in midstream is destabilizing 
American families, businesses and communities.
    Mr. Schmitz testified about his experience representing 
forty Members of Congress, which included Senators Stevens, 
McCain, Coverdell, and Hutchison who were present at the 
hearing, and the Washington Legal Foundation as amici curiae in 
U.S. v. Carlton. He stated his belief that the court ignored 
the ex post facto argument due to the political considerations 
and only ruled on the due process challenge. The courts have 
never ruled directly on the federal ex post facto clause, and 
have relied on the Supreme Court's 1798 case involving the 
State of Connecticut which limited the application of the ex 
post facto law to criminal and not civil matters. Assuming ex 
post facto law applied to criminal matters and this held for 
the federal government, Mr. Schmitz pointed out that Section 
7203 of the Internal Revenue Code makes the failure to pay 
federal taxes a crime. This could be the basis upon which to 
argue the ex post facto clause.
    Mr. Mitchell and Mr. Ferrara provided several examples of 
the economic impact that retroactive taxation has on 
individuals and businesses. It was pointed out in their 
testimony that unforeseen tax liabilities are often paid out of 
individual savings. Arbitrary changes in the tax code can turn 
a good deal into a bad deal for a taxpayer, and the taxpayer 
has no recourse. Uncertainty in the tax code makes a financial 
transaction more risky, which increases the cost of the 
transaction. Over time, this uncertainty leads to lower rates 
of investment, lower rates of savings and less jobs and lower 
wages. Mr. Ferrara, addressing the concern that S. 94 would not 
allow Congress to go back and fix inadvertent loopholes, stated 
that any inadvertent loophole would have the same effect on an 
individual and should be fixed prospectively.
    Mr. Rule testified about their procedural problems 
associated with a court challenge to a retroactive tax. He 
cited the Anti-Injunction Act and the Declaratory Judgment Act 
which prohibit injunctive suits by taxpayers to enjoin tax 
statutes for the collection of taxes.
    Compelling testimony was given by Mr. Nelson, who spoke 
about his personal experience with the estate tax increase 
included in the 1993 legislation. Mr. Nelson, who farmed wheat, 
sunflowers, corn and grain sorghum with his father, until his 
father's death in the spring of 1993, was required to pay 
several thousand dollars more in estate taxes due to the 
retroactive increase. Although he was able to sell part of the 
family assets to pay the estate taxes while retaining enough 
land to stay in business, not all family farmers are as 
fortunate. He testified that tax planning is fundamental to 
financial management for any business, particularly family 
farms.
    Mr. Proctor shared his experience representing taxpayers in 
Georgia in class action and public interest suits against the 
state and local governments.
    During the hearing, Senator Glenn noted that legislation 
enacted into law under President Reagan, at which time Senator 
Dole was Chairman of the Senate Committee on Finance in the 
early 1980's, included retroactive taxes. It should be noted 
that during Senator Dole's tenure as Chairman (1981-1984), he 
was instrumental in pushing through Congress the 1981 Reagan 
tax cut, which was the largest tax cut in history. The net 
effect of all tax legislation crafted under Chairman Dole was a 
substantial tax reduction. In addition, the 1986 Tax Reform Act 
cut taxes for individuals by $122 billion over five years and 
removed millions of lower-income taxpayers from the tax rolls.

                            Committee Action

    The Committee considered S. 94 at a business meeting held 
April 18, 1996.
    Chairman Stevens offered an amendment to change the 
effective date to January 1, 1997, so it would not affect any 
pending legislation in the 104th Congress. Without objection, 
the amendment was adopted by voice vote.
    At the mark-up, Chairman Stevens offered an amendment on 
behalf of Senator Roth, a member of the Committee who also 
serves as Chairman of the Finance Committee. The amendment 
reflected the views of Senator Roth that the point of order 
should apply only to those tax increases made effective before 
a date ``contemporaneous with congressional action specifying 
such a date.'' In a statement, Senator Roth identified examples 
of congressional action as the release of a Chairman's mark, 
the release of a joint statement by the Chairmen of the House 
Ways and Means and Senate Finance Committees, or the 
introduction of a bill by the Chairman and Ranking Member of 
either tax-writing committee. The Roth amendment was agreed to 
by voice vote.
    The Committee voted to favorably report S. 94, as amended, 
on a roll call vote by 7 yeas; Senators Stevens, Roth, Cohen, 
(Thompson by proxy), (Cochran by proxy), Smith, Brown, Levin, 
and Lieberman, 2 nays; Senators Glenn, (Pryor by proxy), and 
Akaka.

                    IV. Section-by-Section Analysis

Section 1. Amendments to the Congressional Budget Act of 1974

            Subsection (a) In General
    A new Section 314 (a) and (b) are added to the Budget Act 
entitled ``Prohibition on the Consideration of Retroactive Tax 
Increases.''
            Sec. 314 (a) In General
    This section states that it shall not be in order in the 
House of Representatives or the Senate to consider any bill, 
joint resolution, amendment, motion, or conference report, that 
increases a tax and applies the increase before a date 
contemporaneous with congressional action specifying such date.
            Sec. 314 (b) Increases a Tax
    This section defines a tax increase as any change in rate 
of tax, deduction, exemption, credit, exclusion, or similar 
change in the Internal Revenue Code which will result in a 
larger tax liability.
            Subsection (b) Supermajority Point of Order
    This section provides that a point of order raised under 
this new section may be waived by a three-fifths vote, sixty, 
in the Senate.
            Subsection (c) Technical and Conforming Amendment
    This section amends the table of contents to include 
Section 314.
            Subsection (d) Effective Date
    Establishes January 1, 1997 as the effective date of the 
law.

                     V. Regulatory Impact Statement

    Paragraph 11(b)(1) of Rule XXVI of the Standing Rules of 
the Senate requires that each report accompanying a bill 
evaluate ``the regulatory impact which would be incurred in 
carrying out the bill.''
    The enactment of S. 94 would have no regulatory impact on 
the public, nor would it constitute an undue regulatory burden 
on any department or agency. The legislation applies only to 
procedures for the consideration of certain legislation by the 
Congress.

                         VI. CBO Cost Estimate

                                     U.S. Congress,
                               Congressional Budget Office,
                                      Washington, DC, June 5, 1996.
Hon. Ted Stevens,
Chairman, Committee on Governmental Affairs, U.S. Senate, Washington, 
        DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
reviewed S. 94, as ordered reported by the Senate Committee on 
Governmental Affairs on May 16, 1996. S. 94 would amend the 
Congressional Budget Act of 1974 to prohibit Congressional 
consideration of retroactive tax increases. CBO estimates that 
enacting the bill would have no direct effect on the federal 
budget.
    If you wish further details, please feel free to contact me 
or your staff may wish to contact Stephanie Weiner.
            Sincerely,
                                         June E. O'Neill, Director.
                                ------                                

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 25, 1996.
Hon. Ted Stevens,
Chairman, Committee on Governmental Affairs, U.S. Senate, Washington, 
        DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
reviewed S. 94, as ordered reported by the Senate Committee on 
Governmental Affairs on May 16, 1996. S. 94 would amend the 
Congressional Budget Act of 1974 to prohibit Congressional 
consideration of retroactive tax increases. The proposed 
legislation contains no intergovernmental or private section 
mandates as defined in Public Law 104-4 and would impose no 
direct costs on state, local, or tribal governments.
    If you wish further details, please feel free to contact me 
or your staff may wish to contact Stephanie Weiner.
            Sincerely,
                                         June E. O'Neill, Director.

                       VII. Administration Views

    A letter by Secretary of the Treasury, Robert Rubin 
outlining the views of the Clinton Administration on S. 94 as 
amended, follows:

                             The Secretary of the Treasury,
                                      Washington, DC July 10, 1996.
Hon. Ted Stevens,
Chairman, Committee on Governmental Affairs, U.S. Senate, Washington, 
        DC.
    Dear Ted: In February, I wrote to you expressing the 
Administration's concerns with S. 94, as introduced. Since that 
time, the Committee on Government Affairs has approved S. 94 
with amendments. I write to you to reiterate the 
Administration's concerns with the amended version of the 
legislation.
    As amended, S. 94 would create a point of order against 
consideration of tax increases that apply ``before a date 
contemporaneous with congressional action specifying such 
date.'' While this language is an improvement over S. 94 as 
originally introduced (which would have raised a point of order 
against tax increases that apply to ``taxable years beginning 
before the date of enactment of the law''), it still poses an 
undue constraint on the ability of Congress to make necessary 
fiscal adjustments. If it were to become necessary to adjust 
tax rates prospectively, for instance, the point of order could 
result in the loss of as much as a year's worth of revenues: 
because it is typically impractical to institute a rate change 
within a taxable year, Congress typically might choose to 
institute a blended rate or a transitional rate structure (as 
was done in the Economic Recovery Act of 1981 and the Tax 
Reform Act of 1986) for the entire year of enactment. Such a 
blended or transitional rate would appear to be subject to a 
point of order under S. 94.
    In addition, S. 94 unduly encumbers the ability of the 
Administration to propose loophole-closing tax proposals that 
may depend in part on an immediate effective date to prevent a 
rush to market, even in cases where the Congress may fully 
agree with the need for the loophole-closing proposal. For 
example, on February 6, 1995, the Administration proposed as 
part of its FY 1996 budget to eliminate a loophole that allows 
individuals who renounce U.S. citizenship to avoid U.S. taxes. 
Although different versions of this legislation were ultimately 
developed in the Senate and the House, all versions--including 
the version in the vetoed Balanced Budget Act--retained the 
Administration's original February 6, 1995, effective date. 
Under S. 94, such an effective date--despite bipartisan, 
bicameral consensus that it is entirely appropriate for 
preventing abuse--would have been subject to a point of order.
    The task of balancing the budget would be made more 
difficult under S. 94. As I indicated in my previous letter, at 
this time when the Congress and the Administration are working 
hard to improve the Nation's fiscal position, such constraints 
are troublesome.
            Sincerely,
                                                   Robert E. Rubin.
              VIII. ADDITIONAL VIEWS OF SENATOR JOHN GLENN

    In principle, I oppose retroactive taxes. However, I 
realize that--at times--they may be necessary because a 
determined minority seeks to delay implementation in order to 
provide a window for an unfair tax loophole to be exercised by 
some persons. For example, on February 6, 1995, President 
Clinton proposed, as part of his Fiscal Year 1996 budget plan, 
to eliminate a tax loophole that allows individuals who 
renounce U.S. citizenship to avoid paying U.S. taxes. Although 
different versions of this proposal have since been put forth 
in the House and Senate, every version has retained the 
original effective date of February 6, 1995. The Balanced 
Budget Act proposed by the Republican majority included this 
Administration proposal with the original effective date of 
February 6, 1995.
    Retroactive taxes have been part of our Nation's history 
since 1917. They have been signed into law by Democratic and 
Republican Presidents. They have been supported--at various 
times--by Democratic and Republican Congresses.
    The Committee report makes several references to an estate 
tax enacted in 1993. This tax was an extension of an already 
existing estate tax. It was first applied when former Senator 
Dole was Chairman of the Senate Finance Committee and it was 
signed into law by President Reagan. It was extended in 1987. 
The Congress attempted to extend it again in 1992, but the 
legislation was not enacted into law. Estate planners around 
the country were well aware of this provision and the 
likelihood of its enactment in the next tax bill.
    President Reagan remains one of our Nation's most popular 
Presidents. During his years in office, he signed bills 
containing retroactive taxes in 1981, 1982, 1984, and 1986. 
There were a dozen retroactive tax increases enacted during his 
term.
    Then Senator Dole was Chairman of the Senate Finance 
Committee in the early 1980's when the Tax Equity and Fiscal 
Responsibility Act was written. In August of 1982, the 
conference report on that measure was reported for 
consideration by the Congress. At that time, the unemployment 
rate was at 10 percent and rising. That conference report 
retroactively taxed unemployment benefits. This retroactive 
taxation was not part of any bill that had passed the Senate or 
the House. It was added, and this is former Senator Dole's 
quote ``near the end of the conference.''
    Unlike the 1993 estate tax cited in the Committee report, 
this retroactive tax on 5.3 million unemployed Americans was 
unanticipated. It required these Americans to pay eight months 
of back taxes on previously exempt income. I use this example 
because I do not want the 1993 tax increase on the top one 
percent of taxpayers to be our only example of a retroactive 
tax.
    In closing, I would like to note that three bills are 
currently pending on the Senate calendar which contain 
retroactive tax increases. They are H.R. 3286, the Adoption 
Promotion and Stability Act, H.R. 3448, the Small Business Job 
Promotion Act and S. 1028, the Kennedy-Kassebaum health 
insurance bill. All of these bills enjoyed bipartisan support 
in Committee action.

                                                        John Glenn.

                      IX. Changes to Existing Law

    In compliance with paragraph 12 of Rule XXVI of the 
Standing Rules of the Senate, changes in existing law made by 
S. 94, as reported, are shown as follows (existing law proposed 
to be omitted is enclosed in black brackets, new matter is 
printed in italic, existing law in which no change is proposed 
is shown in roman):

             CONGRESSIONAL IMPOUNDMENT CONTROL ACT OF 1974

                           Table of Contents

          * * * * * * *
313. Extraneous Matter in Reconciliation Legislation
314. Prohibition on the Consideration of Retroactive Tax Increases
     * * * * * * *

                TITLE III--CONGRESSIONAL BUDGET PROCESS

          * * * * * * *

            extraneous matter in reconciliation legislation

    Sec. 313. (a) * * *
          * * * * * * *


     prohibition on the consideration of retroactive tax increases


    Sec. 314. (a) In General.--It shall not be in order in the 
House of Representatives or the Senate to consider any bill, 
joint resolution, amendment, motion, or conference report, that 
increases a tax and applies such increase before a date 
contemporaneous with congressional action specifying such date.
    (b) Increases a Tax.--The term ``increases a tax'' shall 
include a change in any rate of tax, deduction, exemption, 
credit, exclusion, or similar change to the Internal Revenue 
Code of 1986 that will result in an obligation to pay a larger 
tax.
          * * * * * * *

SEC. 904. EXERCISE OF CONGRESSIONAL RULEMAKING POWER.

          * * * * * * *
    (c) Waiver.--Sections 305(b)(2), 305(c)(4) * * * Sections 
301(i), 302(c), 302(f), 310(d)(2), 310(f), 311(a), 313, 314, 
601(b), * * * may be waived or suspended in the Senate only by 
the affirmative vote of three-fifths of the Members, duly 
chosen and sworn.
    (d) Appeals in the Senate from the decisions of the Chair 
relating to any provision of title III or IV * * * An 
affirmative vote of three-fifths of the Members of the Senate, 
duly chosen and sworn, shall be required in the Senate to 
sustain an appeal of the ruling of the Chair on a point of 
order raised under sections 310(i), 302(c), 302(f), 310(d)(2), 
310(f), 311(a), 313, 314, 601(b), * * *

                                
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