The Era of Constant Tax Law Change
Happy New Year, fellow citizens of Covidland.
In 1986, President Reagan signed the most sweeping changes to the income tax code in our country’s history. It is instructive to review some details of that process and consider how dramatically things have changed in these final years of our republic.
The administration’s initial proposal was presented to Congress in November of 1984 and passed by the Senate in June of 1986 - eighteen months later. The final bill was approved by 97 out of 100 senators. The new laws did not begin taking effect until January 1987 and most of the significant changes were phased-in over a four-year period.
Today we live in an era of almost ceaseless changes to the tax code, often with only a few weeks of debate, with bills written by lobbyists and read by no one. So full of holes are these bills that many of the details are in fact administrative law created by IRS, not Congress.
Rather than compromise and consensus, today’s bills are entirely partisan affairs, which results in wild swings when the party in power changes and leaves the interest of large portions of the electorate without any say or influence. Like the Affordable Care Act, which was passed without a single Republican vote, Trump’s Tax Cuts and Jobs Act of 2017 passed with a 100% partisan vote in the Senate. Even as I write this, the multi-trillion dollar Build Back Better act’s passage is in the hands of a single senator from West Virginia. Just as small business had no seat at the table for the Affordable Care Act and got crushed with higher insurance premiums, high property tax states – especially New Jersey – had no champion in the Tax Cuts and Jobs Act, leaving many of us paying MORE income taxes after a ‘tax cut’ bill.
Another effect of the partisan nature of our tax laws is that some of the many changes are – by law – temporary. To avoid filibusters and budgetary restraints, almost every change these days have built-in sunsets. For instance, not many people realize that the elimination of the job expense deductions and the $10,000 cap on state and property taxes are temporary changes that go away after 2025. A more current example is the $250 a month child credit, which began in July and required the passage of Build Back Better to continue, has already stopped.
For me, the craziest part of this new era is the speed at which these changes are made and how, in some cases, they even require violating the laws of physics. Prior to Clinton, presidents commonly passed tax-law changes in their first year of office, which began taking effect the following January. In 1993, however, Clinton signed a tax-law increase that was retroactive to January 1st of 1993 – before he was even president. It certainly seems illegal to me, but in 2021, Bush passed a tax cut retroactive to January 1st 2021, so it is now an accepted practice. There is no way to prepare for a tax-law change that takes place BEFORE the bill is signed, nor is there any way to prepare for massive tax reform passed in December which takes effect on January 1st with no phase in, like the Reagan reform.
The craziest part of the crazy, however, is the recent practice of RETROACTIVELY changing the PRIOR YEAR’S tax laws, not only AFTER THE YEAR IS OVER, but even after the tax filing process has begun. This is the income tax equivalence of quantum physics (which few people believe, and no one understands). This practice started becoming a regular feature a few years ago, but generally it was limited to a few pet-deductions favored by some congressman whose vote was required to pass some other measure. It seldom effected more than a small percentage of filers.
Last year, in the middle of March, Congress made sweeping changes to the prior year’s tax code, especially with regards to unemployment and repayment of Obamacare subsidies. Roughly a third of the hundreds of tax returns I had already e-filed instantly became incorrect. Worse, the bill was void of important details in applying the new law changes, leaving IRS to effectively write half the bill themselves. For example, Congress specified income levels at which some unemployment would be tax-free WITHOUT stipulating whether unemployment itself was included in the calculation. With just weeks left in ‘tax season’, IRS spent two weeks announcing the details and changing the forms – including three times changing their own decisions. Ultimately, they capriciously decided while unemployment would NOT be included in determining if part of your unemployment was tax-free, ALL of your unemployment – taxable or not – WAS included in determining the portion of your Social Security subject to taxes.
IRS was already behind processing millions of returns from the Covid lockdowns in 2020. Then, Congress put IRS in charge of administering the three stimulus payments. The mid-season, retroactive law changes was the final blow. The past six months – by a wide margin – has seen the most delays and incorrect IRS letters that I have seen over the past 30 years. Hopefully, the 2021 tax year filing will be smoother. Likely it will be, but only in a relative way.