The Great Tax Giveaway: How the Influential Win Billions in Special Tax Breaks (Part 1)

April 10, 1988

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THE BENEFICIARY. That paragraph describes Central Gulf Lines, the principal subsidiary of International Shipholding Corp. in New Orleans. It will save the company an estimated $8 million in taxes by allowing it to claim the investment tax credit and accelerated depreciation that Congress terminated for most corporate taxpayers.

Millionaire brothers Niels W. Johnsen of Rumson, N.J., and Erik F. Johnsen of New Orleans own 40 percent of the stock of International Shipholding Corp.

The two ships given favored tax treatment were built in shipyards in Japan and are carrying Japanese-manufactured autos to U.S. dealers. Each has a capacity for about 4,000 cars. The Green Lake made its maiden voyage last October, arriving in Baltimore with a load of Toyotas. The second vessel, the Green Bay, made its first voyage last November, arriving at Long Beach, Calif., with a load of Hondas.


On Capitol Hill, such tax concessions are known as transition rules. In the beginning, they were intended to cushion the impact of tax-law revisions.

Lawmakers reasoned that when individuals or corporations entered into business, investment or financial arrangements based on one law, it was unfair to abruptly alter the law.

Sen. Bob Packwood (R., Ore.), who as chairman of the Senate Finance Committee personally passed on the rules inserted in the 1986 act, explained at the time the rationale for the exceptions:

"Transition rules are designed to ease the passage from the present law to the new law. These are necessary because people had relied upon the law as it was. In those cases, they deserved a transition."

That was a definition that would have applied in the 1950s, a time when massive overhauls of the Internal Revenue Code were a rarity. In fact, the 1954 revision was the most far-reaching in decades.

But by the 1980s, when Congress took to revising the tax code every year or two, adding thousands of pages of new laws and regulations, the old reasoning made little sense.

Lawmakers rewrote the code in 1981, 1982, 1984 and 1986, and in two of those years, 1981 and 1986, the changes touched the daily lives of every taxpayer.

This meant that if Congress intended to be fair, it would have to enact transition rules for millions of taxpayers, or none. Instead, it chose to give relief to select individuals and corporations.

As a result, most transition rules became little more than grants of immunity to those whose power and influence gave them access to congressional tax writers.

It is in that context that Congress now is preparing for a replay of 1986.

Passage of a major tax bill customarily is followed by legislation to correct inevitable typographical, spelling, punctuation, capitalization and other errors.

In the case of the 1986 Tax Reform Act, there are errant commas to be removed, parentheses to be closed or opened, capital letters to be made lower case and paragraphs to be renumbered.

One section refers to "New Orleans" when it should be "Pensacola." Another refers to "real" when it should be "rail." "Spring cotton" should be "spray cotton." "Diversatch" should be "Diversatech." And "1935" should be "1985."

Then there is the transition rule written into the law to grant special treatment in connection with the issuance of tax-exempt bonds in an unnamed state.

The law says in part that "a bond is described in this paragraph if . . . such bond is issued before Jan. 1, 1993, by a state admitted to the Union on June 14, 1776 . . ."

The Union, of course, did not exist on June 14, 1776, a date three weeks before approval of the Declaration of Independence, and 11 years before Delaware became the first state. Such is the way that tax laws are written.

Legislation introduced last week by the House Ways and Means and Senate Finance Committees will rectify these and other mistakes. It will also do something else. It will serve as a vehicle for Round 2 of congressional tax giveaways.

Lobbyists, lawyers and lawmakers - many of whom missed out on the tax- preference windfall in 1986 - are scurrying to include their clients and constituents in the second round.

Some are seeking remedies for businesses and individuals placed at a disadvantage when Congress indiscriminately penalized some taxpayers and rewarded others the last time. Some are seeking a fresh batch of tax favors. Some are seeking to correct what they perceive as legislative mistakes or oversights.

The drive to secure the breaks has become so intense that Congress may delay action on the technical-corrections legislation until after the November election.

The reason: Each new break adds to the federal deficit and encourages other members of Congress to seek similar, or additional, exemptions from a tax law that everyone else must comply with. In an election year - or, more accurately, in the months before an election - lawmakers would prefer to avoid publicity about arranging tax breaks for exclusive constituents. This leaves the tax-writing committees with four choices:

Enact a pure technical-corrections bill without any special breaks; drastically limit the number of such breaks to be included in the bill; postpone action on the legislation until after the election, when the bill can be loaded with concessions without incurring voter wrath, or enact a pure bill and, after the election, bury the breaks in other legislation.

Whatever happens, about all that can be said for certain, given Congress' record to date, is that the personal tax provisions will be cloaked in secrecy.

Members of the three tax-writing committees - the House Ways and Means Committee, Senate Finance Committee and Joint Committee on Taxation - have on occasion identified the beneficiaries of transition rules.

They also have concealed them.

It is possible, in a methodical reading of the more than three million words that make up the Internal Revenue Code - that's roughly the equivalent of five copies of War and Peace - to uncover some special-interest provisions.

But it is impossible to detect them all, since many are phrased in a way that disguises their true intent. Furthermore, others are slipped into the hundreds of bills that Congress enacts each year that are unrelated to the income tax.

These practices permit members of the tax-writing committees, when they choose to do so, to guarantee complete anonymity for those individuals and corporations excused from paying taxes.

With certain exceptions, lawmakers who request the private tax laws refuse to acknowledge their involvement, presumably for fear of antagonizing the mass of taxpaying voters who never receive preferential treatment.

Likewise, the tax-writing committees and their staffs refuse to identify those lawmakers, who, in the words of one congressman, dispense "favors to individuals the way royalty might do."

According to the official tabulation by the Senate Finance Committee and Joint Committee on Taxation, the 1986 Tax Reform Act contained about 650 provisions that they designated as transition rules.

The figure, like much of what the reformers had to say about their legislative handiwork, was both incorrect and misleading.

The tax-writing committees and their staffs misidentified the recipients of some tax gifts and omitted others - like Bizcap - from their tally.

An Inquirer investigation has established that the actual number of individuals who will profit from the special rules will run into the thousands. Most cannot be identified beyond their economic status - upper income.

The Senate Finance Committee staff also reported that the various concessions would result in a revenue loss of $10.6 billion, a figure that was certified by the Joint Committee on Taxation, the body with final responsibility for tax data. The estimate was as illusory as the reported number of tax dispensations.

The cost of one break was originally placed by the Joint Committee at $300 million. After passage of the legislation, the figure was adjusted upward to $7 billion.

That worked out to a 2,233 percent miscalculation, a mistake so large as to defy comprehension. It would be roughly akin to a family who bought a house expecting to pay $400 a month on its mortgage but who discovered, belatedly, the payments would actually be $9,332 a month.

It seems the tax writers intended to construct a law that only a small number of wealthy people could take advantage of. Instead, they wrote it in such a way that virtually all wealthy people could profit from it.

Congress responded as only Congress can do. It rephrased the provision to meet the original intent, inserted it in the federal budget bill enacted last December and promptly announced that the change constituted a tax increase that would generate billions of dollars in new revenue.


How do such errors come about?

When a member of a tax-writing committee suggests a specific tax break, a U.S. Treasury official explained, the committee staff makes an estimate based on the proposal.

But the "wording of the statute has not been finalized," he said, "and the people who are finalizing the language are not the ones who have been involved in making the estimate."

"So there's a misunderstanding between them that only becomes apparent after one sees the estimate by itself and also has the luxury of being able to see the wording of the statute."

Such blunders aside, even the understated $10.6 billion revenue-loss estimate from the 1986 tax bill represents a major drain when measured against the federal taxes that others must pay.

It exceeds the income taxes that will be paid by all low- and middle-income individuals and families in Vermont, South Dakota and Wyoming for the next five years.

It exceeds the telephone excise tax that will be paid through much of the 1990s by all low- and middle-income individuals and families - a regressive tax that was due to expire last December but that Congress retained in order to raise revenue to meet its budget goals. It is the equivalent of the income tax that will be paid by 1 million families earning $25,000 annually for the next five years.

Indeed, ordinary taxpayers across the country must make up part of the lost revenue. They are the individuals and families who, under the 1986 Tax Reform Act, are being taxed for the first time on college fellowships, full unemployment compensation benefits and some unreimbursed employee business expenses and who have lost all or part of their traditional deductions for medical expenses, sales taxes and consumer interest.

They are the individuals and families who, in many cases, will pay higher taxes this year as a result of Congress' decision to gut the progressive rate system and to tax a single professional woman who earns $25,000 at the same marginal 28 percent rate as an investor who earns $25 million.

They are the individuals and families who Jan. 1 began paying higher Social Security taxes - another levy borne disproportionately by low- and middle- income people - and who will see that tax go up again in 1990.

Congress' tax reformers, to be sure, downplay the cost of personal tax breaks and chide critics of them.

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