Tax Reform Prospects Good, Say Veterans of 1986 Reform

Developments since the 1986 Tax Reform Act was signed favor a successful outcome for the current reform effort, said two experts who worked for congressional committees producing the earlier legislation. But they also agreed that a tax reform bill probably won’t be enacted until next year.

Don Longano and Mel Schwarz spoke Monday morning at an AICPA press briefing in Washington titled “Tax Reform: Then and Now.” Longano is former Democratic chief tax counsel to the House of Representatives Ways and Means Committee, now a principal in the Washington National Tax Services Office of PwC. Schwarz served on the staff of the Joint Committee on Taxation and is currently director of tax legislative affairs in the National Tax Office in Washington of Grant Thornton LLP. Both also have prominent roles on volunteer AICPA committees and task forces advocating tax reform priorities.

The session was moderated by Edward Karl, AICPA vice president–Taxation.

While the level of political conflict in Washington today is sometimes pointed to as likely to stymie necessary compromises, the 1986 act was achieved despite similar conflicts and disagreement on the direction of and even the need for tax reform, Schwarz said.

“The fact that we don’t necessarily see a joining of hands between the political parties and singing of ‘Kumbaya’ is no reason to believe a tax reform effort cannot take place,” Schwarz said. “In the process of the ’86 act, we buried the whole process three or four times.”

Similarly, the process today could repeatedly appear to be defunct but, resurrected, find a way forward, he said. Now, as then, some proposals will have to be discarded along the way.

“They say it can’t be done in an election year,” Longano said. Yet, he noted, the 1986 act passed the Senate that summer and was signed by President Ronald Reagan less than two weeks before a general election.

The current situation is analogous to where matters stood in the late summer of 1985, Schwarz and Longano agreed. Efforts had begun as early as Reagan’s call for comprehensive tax reform in his State of the Union address in January 1984. A major Treasury Department report in response in November that year laid out some proposals that ultimately became the 1986 act.

Some positive factors are similar as well, Longano said: a consensus on the need for tax reform, especially to simplify individual tax provisions; able leadership by congressional committee chairmen and President Barack Obama; and expertise among taxwriting members of Congress. With 11 working groups of the House Ways and Means Committee and weekly meetings by Senate Finance Committee Chairman Max Baucus, D-Mont., the process is already under way, he said.

House working groups on small businesses, financial products, and foreign-source income have already publicly released discussion drafts (available at the committee’s website).

Moreover, Longano said, advances in communications technology in the past nearly three decades can be a “friend to this process.” In May 1985, when Reagan spoke on national television about tax reform, Longano’s boss, then-chairman of Ways and Means Dan Rostenkowski, D-Ill., gave the opposition party’s response, calling for citizens’ ideas.

Longano recalled the more than 70,000 letters Rostenkowski received in response that congressional staffers were expected to read and tally—an impossible task. Now, citizens can post their comments and ideas directly on the committee’s website.

Legislative reports and drafts can also be disseminated to interested parties electronically on the website, making the committee markup process potentially faster and easier. “Gucci Gulch is finished,” Longano quipped, referring to the onetime nickname for a hallway in the Longworth House Office Building, so called because of the expensive brand of shoes favored by lobbyists camped out there awaiting releases of legislative drafts. (A book recounting the history of the Tax Reform Act of 1986 is titled Showdown at Gucci Gulch.) Electronic drafts can also be circulated and among legislators and aides and edited much more efficiently than the piles of paper once needed, he said.

In response to a question, Schwarz and Longano agreed a major goal of tax reform should be simplifying individual tax provisions, despite another technological advance since 1986: tax preparation software designed for self-filing.

For example, tax software isn’t likely to help a family with a young child plan for college, Longano said, mainly because the Internal Revenue Code’s many tax incentives for higher education aren’t harmonized with each other. The issue is one of the AICPA’s top 10 issues of tax administrability that should be addressed in tax reform.

“There are at least 14 different education deductions, credits, and incentives that have been put in the Code since the 1986 act, all well-founded and well-meaning,” Longano said. “But they’re inconsistent, their phaseouts are different, and their objectives are different. Harmonizing them is the kind of real reform that needs to be done on the individual side.”