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Lame Duck Session and Bad Tax Policy

The 111th Congress resumes session today.  With the recent mid-term elections over and a significant shift of power coming in January, this session has been dubbed a lame duck session.  A lame duck isn’t supposed to accomplish much, yet Congress has a lot of unfinished business and little time.

Two of the biggest issues Congress needs to tackle are the 2011 budget and taxes.

The U.S. Government started a new fiscal year on October 1, 2010, yet none of the 13 appropriation bills that govern federal spending have passed both houses of Congress.  To keep the government from shutting down, Congress passed a continuing resolution that allows federal agencies to continue spending based on the 2010 budget.

The other major issue that has dominated the political discourse for months is the scheduled elimination of lower tax rates, otherwise referred to as the “Bush tax cuts.”  The biggest point of contention is whether or not the lower tax rates should be extended to high income taxpayers (i.e., individuals earning over $200,000 and couples earning over $250,000). 

I will explore the arguments of maintaining the Bush tax cuts in subsequent articles.  Today’s topic is the political process and poor tax policy that is likely to result.

When the current tax rates were enacted in 2001 and 2003, they were scheduled to sunset at the end of 2010.  Thus, if Congress does nothing, tax rates and brackets will revert back to the rules that were in place at the end of 2000. It will literally take an act of Congress to extend the current rates beyond December 31, 2010. 

You may have your opinion of whether or not this is good for the country or the economy.  Irrespective of that issue, it’s bad tax policy to wait until the last minute to make a decision.

Congress has known for at least 7 years that the current rules would expire, but they have not acted.  In my mind, it’s a travesty that we are 46 days away from a new year and no one knows what the rules will be.   That may not seem like a big deal, but it is very challenging for business owners, managers and entrepreneurs, who are planning months or years in advance.  Many of my clients have been asking me for months what tax rules will change in 2011.  All I could tell them was that no one knows, and with six weeks to go, we still don’t know. 

With so much to do in a matter of a few days, I question the veracity of the decisions Congress will be making.  Will they be casting votes for what’s best for the country and the economy, or will their votes be primarily based upon politics and the desire to get out of town quickly?  Granted, these issues are always part of the process, but deferring these major issues to the lame duck session has created more pressure than was necessary.

Tax policy and the 2011 budget affect every person in the nation.  To postpone these major decisions and deal with them in a lame duck session is an indictment of political leaders from all political parties and persuasions. 

Over the past year there has been a lot of frustration with the political process.  Politicians will argue the process is not important, but that’s not true.  The Founding Fathers created a process that was designed to generate good legislation for the nation.  A poor process results in poor legislation.  Additionally, the process is a reflection of the culture of Washington.  Passing major legislation that affects every American in a lame duck session, is an indication that the legislative process is not functioning well, which will result in poor financial decisions and bad tax policy.

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