Thursday, March 26, 2009

Legislation, or Making Sausage?

There was a time when tax legislation was so boring that much of it was made in a back room in Washington. That started to change in the mid-1980s when Ronald Reagan brought tax policy out into the open, and the trend has only accelerated now that we have several political news cable networks which need a constant stream of "news" to fill air time.

Even the Federal Estate Tax became ripe for public discussion in the months leading up to the 2001 tax bill. The result of that discussion was a scaled increase in the exempt amount, to the present $3,500,000 per person, with the Estate Tax to be eliminated for those dying in the year 2010, only for the tax to come back with the exemption to be lowered to $1,000,000 in the year 2011.

Not many tax professionals thought that the 09/010/011 back and forth would actually occur, but it did provide for a rare opportunity for humor in meetings with clients over these past several years. Imagine a hypothetical meeting of a doctor discussing the health of a parent with a child in December 2009, with no Estate Tax a few weeks away.

Doctor: "I'm afraid I have some bad news, your (Mom/Dad) may be brain dead and in any event will probably not live much longer. I'm sorry, we should probably discontinue life support."

Child/heir: "Thanks, Doc, but (Mom/Dad) looks great to me, keep the life support going and I'll give you a buzz on January 2."

At the moment, it is expected that the Obama administration will propose to Congress to simply freeze the $3.5M exemption in place, eliminating the 010/011 flip flop, and it would also appear that there are the votes in Congress to pass such a bill. This would certainly allow many clients to do some logical estate planning, rather than wait and guess what the law could be.

But the reality is that "what the tax laws will be" is harder to predict than ever, because there is only one sensational news story between the American public and a new, fresh tax bill. If one Congress passes a law, the next Congress can change it.

In the Estate Tax context that sensational news story might be a simple one about a ne'r-do-well heir or heiress living the high life while the rest of the country struggles. Or, the sensational story could be about a small business forced out of business by an Estate Tax levied upon the death of the founder. Either one of these stories, of course, would be an anecdote.

But if you think making laws via anecdote is far fetched, consider the AIG bonus debate which raged last week. I thought after 20 years I'd seen it all, but a tax bill proposed to basically confiscate a payment under an employment contract to such a small group of identifiable people -- even for a cynical tax lawyer that was news. Is Congress making law, or sausage? Would it matter how the bonuses were going to be spent? Or is it just the concept of the use of taxpayer money?

Certainly, many bills are passed by the House of Representatives with the knowledge that the cooler heads may prevail in the Senate.

But in the meantime it is harder than ever to explain the law to clients when every discussion must contain a disclaimer about how quickly the law can change.