One year ago yesterday, House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) stood before an audience of New York business people and told them he understood their fears about overhauling the tax code and the interim confusion such massive changes could create.
"Business has good reason to gripe about continued uncertainty," Rostenkowski said then. "Tax reform can't be a game with endless overtimes."
That was long before Rostenkowski's committee produced a sweeping tax bill, which passed the House of Representatives in December. The legislation is pending before the Senate Finance Committee, and the final whistle on a tax package is months away, at best.
The politics have changed, but the confusion remains. Just as they were doing last year at this time, the business and financial worlds are operating in darkness, unable to calculate the tax consequences of transactions with certainty.
If anything, the situation has worsened. The House bill has an effective date of Jan. 1 of this year, but the Senate has not yet acted. As a result, investors and companies do not even know whether the economic decisions they are making this minute are covered by the current tax code or by some as-yet-unspecified new system. The only certainty is that uncertainty will be around for a while, complicating decisions about expenditures for facilities, equipment, research and development, and other investments.
"People are confused and some of them are angry," said Gerald Padwe, national tax director for Touche Ross, an accounting firm. "It's difficult, when you realize that the federal government is the biggest partner most businesses have."
Rep. James R. Jones (D-Okla.), who recently toured his state, said signs of a slowdown due at least in part to tax uncertainty can be found in small-town finances, in hospitals, in libraries and among businesses.
"The feedback I have gotten in Oklahoma, plus the limited feedback I have gotten from colleagues from other states, is that everything is at a standstill," Jones said.
Efforts are under way on Capitol Hill to try to lift this fog, perhaps through a joint statement from the leaders of the House and Senate tax-writing committees specifying the effective dates for any tax-revision bill. Non-binding resolutions have been passed in both houses calling for postponement of the effective dates of tax overhaul. Treasury Secretary James A. Baker III said last week that he and congressional leaders should meet "as soon as we can" to resolve uncertainty, according to Knight-Ridder.
But only one meeting between the principals -- Rostenkowski and Senate Finance Committee Chairman Bob Packwood (R-Ore.) -- has been held. Last week, the two chairmen decided to have their staffs study the consequences of changing the effective dates of selected provisions, and the consequences of not changing them.
The two plan to meet again next week to discuss this and other questions, but Rostenkowski has little interest in wholesale postponements of effective dates of the tax legislation, except in dire cases. When specific extensions have been granted in the past, congressional aides point out, they have encouraged other interests to come in and seek similar postponements, undermining the purpose of the legislation.
Putting off the dates of implementation for provisions limiting deductions also makes it more difficult for the eventual bill to bring in the same amount of federal revenue as the current tax system because the funds gained by limiting deductions rolls in later than the revenue lost by cutting rates, which the bill also would do.
"You could have a tremendous loss of revenue," said Sen. Lloyd Bentsen (D-Tex.), who wants the committee chairmen to issue a statement promising to delay implementation of the entire bill, including rate cuts, for a year.
Packwood has been asked by Finance committee members to negotiate such an agreement, and, like Rostenkowski, wants to distinguish the cases where postponement is needed from those where it will lead to abuses, aides said. Last week, Packwood cautioned against making economic decisions on the basis that the effective date might be postponed.
Several sources also suggested that Rostenkowski and Packwood might have difficulty in agreeing to a joint statement because they do not have the best of personal relations. Rostenkowski is said to remember that Packwood convened a House-Senate conference committee in December, even notifying the House conferees of the meeting, despite the fact that Rostenkowski had refused to schedule the meeting. Other sources said the incident did not lead to personal animosity between the two.
The longer it takes to produce some kind of agreement, the greater the possibility that other members of Congress will step in on their own. Rep. J. J. (Jake) Pickle (D-Tex.) and others, for example, already are pushing a resolution to postpone the effective date of the bill for limiting benefits from certain tax-exempt bonds.
Even if congressional leaders could produce a statement on effective dates for tax overhaul, however, it is unlikely the business and financial communities would be able to operate with complete certainty. Until the Senate passes a tax bill, a conference committee produces a compromise and President Reagan signs it -- an outcome that is far from certain -- the exact provisions to be changed, if any, won't be known.
"The question is, does the market demand a 'for sure,' or will they bet on a Packwood-Long-Rostenkowski-Duncan statement as the closest thing?" asked William Diefenderfer, chief of staff for the Finance committee. "It's not law, it's four relatively powerful people saying, 'this is how we want it to come out.' . . . There's still all those what-ifs."
Investors show few signs that they are reassured by the possibility of a congressional agreement on postponing some dates. Accountants and lawyers say they are flooded with telephone queries.
"I can't tell you how many calls we're getting from clients who are going crazy," said one source at a large accounting firm. "How you feel about changes in the tax laws depends on whether you're paid by the year or by the hour," said another.
Uncertainty over tax legislation is nothing new. Ever since Congress passed Reagan's tax cut in 1981, tax increases or tax revision have been on the table. Reagan himself raised the possibility of higher taxes just two months after the 1981 bill became law. In 1982, Congress passed a $98-billion, three-year tax increase.
In 1983, the House debated a revision measure, and Congress raised Social Security taxes. In 1984, additional legislation altering the tax code and raising revenue was approved. Even now, there is concern that the Gramm-Rudman-Hollings balanced-budget law could lead to higher taxes if it is upheld by the Supreme Court.
"It's not just tax reform, and it goes beyond this year," said Emil Sunley, a former Treasury Department official who is with the accounting firm of Deloitte Haskins & Sells. "We've had five years of major changes being considered and talked about."
This time around, however, the stakes are higher than they have been on other occasions. The House bill, like the president's proposal, is a sweeping rewrite of virtually the entire tax code. And the confusion is greater because the effective date incorporated in the House bill already has passed. Companies deciding whether to purchase a new piece of equipment or construct a building thus cannot be sure how they will be able to write off those costs.
The list of provisions that could affect ongoing economic decisions, depending on when or if they are enacted, covers purchases of equipment and machinery, construction of and investment in real estate, tax-exempt bonds, tax-deferred savings plans, trusts and estates, mergers and takeovers, research and development, long-term construction and production contracts and investments in securities, to name a few.
Tax provisions that expired at the end of last year are caught up in the morass, as is legislation covering operating losses that was first enacted in 1976 but never has gone into effect. Virtually the entire tax code is in limbo.
Adding to the confusion is the fact that no one knows when the bill will go into effect, if it becomes law. The recently passed House resolution called for a meeting of the four committee leaders and Baker to postpone until 1987 the effective date of "selected items;" the Senate wanted to delay the effective date for the whole thing to next Jan. 1.
Such a postponement, if announced in advance, could produce distortions in economic activity as investors rush to protect themselves from the consequences in advance. It would be especially easy to do so if the transition deadline were extended. Now, the bill specifies that an investment made after the proposed effective date is covered by current tax law only if a binding contract for that investment was entered into before Sept. 25.
Tax bills often are made effective as of the date of committee action, or when the legislation is introduced, to prevent distortions in economic activity. The Sept. 25 date, for example, is when Rostenkowski first released the proposal that became the House tax bill.
One possible compromise, analysts suggest, is to retain that deadline for binding contracts and postpone the effective date for most other provisions to next year. That could forestall some distortions that could spring from a blanket postponement.