I'm Just a Bill

The one exception was the substantial restructuring of America's ailing pension system. The legislation passed by 93-5 in a late-night vote in the Republican-controlled Senate and now awaits approval by President Bush. The 900-page bill, known as the Pension Protection Act, intends to stabilize pensions for 44 million workers and encourage more of them to save for retirement by making permanent an array of tax breaks.

The bill requires most companies to fully fund their pension liabilities within seven years. Some experts criticized the new plan for shifting the burden of saving for retirement to individuals from companies and predicted closures of many companies' defined-benefit plans. But Len Burman, co-director of the Tax Policy Center, a nonprofit venture of the Urban Institute and the Brookings Institution, two research groups in Washington, D.C., says the provision allowing companies to automatically enroll employees in 401(k) plans is ultimately a benefit for workers.

The Republican-led effort to cut estate taxes that affect some of the wealthiest households passed in the House but foundered in the Senate. To sweeten it for Democrats, estate-tax reform was combined with a $2.10 increase in the hourly minimum wage, a cause dear to Dems' hearts, as well as a number of extensions of expiring tax breaks. The gamble failed. Burman says the chances of an estate-tax cut or minimum-wage increase getting priority on the legislative agenda in the fall is slim.

"They'll pick it up again if it looks like they can pass some kind of permanent estate-tax legislation," he says. "There's not a lot of time in September; they have a lot on their agenda."

SmartMoney.com spoke with Burman about how the latest legislative successes and failures on Capitol Hill will impact everyday Americans' wallets.

SmartMoney.com: Aside from tightening controls on companies that fall behind in their contributions to pension plans, what does the new pension legislation mean?

Len Burman: They made permanent some provisions enacted in 2001 that would raise the contribution limits on IRAs and 401(k)-type plans, and a tax credit for low income people who contribute to 401(k)s. All those would have expired in 2010. Now they're permanent. There's certainly an interest in encouraging savings. The question is whether these 401(k)s are the best way to do that. There's only a tiny fraction of workers who contributed the maximum amount to their 401(k)s and IRAs even before the 2001 legislation passed. Tax payers who get any benefit from raising the 401(k) limit from about $11,000 to $15,000, which is what the legislation does, is pretty small. They're highly compensated workers.

Low-income people don't save very much. The saving credit was meant to encourage people to participate in 401(k)s and IRAs. But if you don't owe income tax, you don't get a benefit from this credit. The other problem with the savers credit is you don't get the money until you get your income tax return. A lot of people don't pay income tax because they don't have money at the time. Those were the big elements of the pension legislation.

SM: How does a reduction in the estate tax factor into this measure?

LB: [What] didn't pass last week was the package of tax cuts, which included permanent relief from the estate tax. It would've raised the threshold for filing estate-tax returns to $5 million for individuals and $10 million for couples. That relief would have been permanent. It didn't pass because in the Senate you need 60 votes to pass a tax cut, to break a filibuster. Almost all the Democrats and a few Republicans objected to the estate-tax cut because it would have really eviscerated the tax.

SM: And who would end up being most affected by the cuts?

LB: The tax itself would have only applied to super-rich people.... The proposal would phase in a much higher exemption level and lower tax rates under the estate tax. When fully phased in, in 2015, the exemption level for the estate tax would increase from $1 million to $5 million and the top rate would decrease from 55% to 30% for most estates. Estates between $5 million and $25 million would be taxed at the capital gains tax rate, which is currently 15% but scheduled to increase to 20% in 2011. The current estate-tax exemption is $2 million and the top rate 46%.

The higher tax rates in 2011 and later occur because most of the tax cuts enacted in 2001-2003 expire at the end of 2010. The consequence would be a 90% reduction in the number of taxable estates from an estimated 62,940 in 2015 under current law to 6,720 under the proposal. Only very large estates — worth more than $5 million — would be taxable, and those few taxable returns would have their tax bills slashed. For example, the average estate between $10 million and $20 million would see its tax bill fall from $3.3 million in 2015 under current law to $969,000 under the proposal.

SM: The Republican effort to pass the estate tax bill by fusing it with a proposal to increase the minimum wage backfired. What else was at stake in this bill?

JB: They tried to pair it with an increase in the minimum wage — from $5.15 to $7.25 an hour — the first one in nine years. They also tied it to a package of extenders, called tax provisions. These are enacted for one or two years at a time. Congress pretends they're temporary, but they're continually extended. What happens is that they create a vehicle for passing other legislation. So some smaller things were put in this one: education tax subsidies, a subsidy to encourage employers to hire workers with disabilities. It also tied in some new subsidies for the timber [industry] because some senators were on the fence about the tax cuts, and they're in states with a lot of trees.

The Republicans are really dedicated to getting an estate-tax cut. At this point their failure to do so looks like a big legislative failure in their base.... They're trying to get a few Democrats to vote for it. When they try to tie it in with a minimum wage increase they threaten to alienate a lot of Republicans who are against any kind of increase. So this particular calculus backfired.

SM: What about the R&D tax credit that was embedded in that bill? Are there larger implications for companies because it failed to go through?

LB: From my perspective, the failure of expiring tax revisions is a good thing. It's a bad way to make policy. They only budget it for a few years, but they extend it for years. It's irresponsible budgeting. You're pretending tax revenues are coming in that you know are not in the base. And it undermines the objectives themselves. The research experimentation tax credit encourages companies to do research. Typically, companies have to plan far in advance with their research projects. If companies plan for 2008-09 they'll likely only do the research they would have done with or without the credit. It was part of the package of expiring provisions and right now it's expired.

In theory, companies making research expenditures might not get the credit. But my guess is that Congress will extend it by the end of this year, and will make it retroactive. [This method of extending expiring tax provisions] does make sense with new tax subsidies to try them out for a couple of years and see if they work. But virtually all the provisions in this package have been in law for years if not decades. So I don't think it's an efficient way of making legislation.

SM: How will the pension reform encourage workers to save more?

LB: I'm not a pension expert.... But one good thing about [the reform] is that it makes it easier for employers to set up plans, making it the default option for employees to participate. Right now most 401(k)s are set up so that you have to sign up for the plan and decide where you want the money invested. There's a lot of new research that suggests that people are lazy, that there's a lot of inertia, so they don't do it. If the default option is not to participate, workers won't participate.... Many people would say it's a good thing for employers to automatically enroll employees [in 401(k)s]. It alleviates concerns employers might have about liability by enrolling employees in plans by default. That could be the most significant thing in terms of savings.

The other thing it does is raise contribution limits, which probably induces a little bit more savings among high income people. One of the big concerns in this field is that a lot of tax-subsidized savings is just shifting money that would have been saved in other forms. It's probably true that highly compensated people benefiting from the exemption level would have been saving a lot anyway.

SM: What are the chances of the estate-tax cuts passing in the fall?

LB: There's going to be a lot of vote counting and arm twisting. They'll pick it up again if it looks like they can pass some kind of permanent estate-tax legislation. There's not a lot of time in September; they have a lot on their agenda. There's an appropriations bill, and there's an election in the fall. There's some talk about trying to deal with this in a lame duck session, which means the session would remain open. The president would call members back in late November after the elections and say, I want you to finish up what's on your legislative agenda. I don't really see how estate-tax cuts would be something they'd do. I don't see the politics of estate tax cuts to be any more favorable after November than before.