The Line-Item Veto and the Tax Legislative Process: A Futile Effort at Deficit Reduction, But a Step Toward Tax Integrity

Abstract

On January 1, 1997, after more than 100 years of presidential lobbying,' Congress granted the President of the United States a line item veto. The line item veto represents Congress' latest attempt to allow budgetary power to drift to the Executive Branch in order to compensate for the ineffective internal budgetary processes of Congress.2 The new law allows the President to veto individual items within an appropriations bill or, on a more limited basis, a tax bill.

This Article concentrates on the implications of the Line Item Veto Act (sometimes referred to as the "The Line Item Veto Act of 1996") for the federal tax legislative process. As a point of departure for this discussion, Part I describes the budgetary process currently used by Congress to reduce spending and curtail annual budget deficits. Next, Part II describes how the proposals for a line item veto in the House and Senate were compromised in the 1996 Act. The commentary in Part II on the 1996 Act also includes an analysis of constitutional issues, a comparison with the state line item veto, and the primary criticism of the 1996 Act.

Part III addresses the question of whether it is appropriate to treat tax legislation in the same manner as spending bills and thereby subject tax legislation- to the line item veto. It focuses on "tax expenditure analysis" which is used to estimate the cost, in terms of "lost revenue," incident to provisions in the federal tax code that treat certain taxpayers or items of income or deduction in a preferential manner. The "lost revenue" is viewed as being equivalent to a direct government subsidy to the preferred taxpayer. The line item veto was made applicable to tax legislation because of this perceived equivalence.

Part IV addresses whether the tax system creates a "sense of integrity" in the public's mind and whether the line item veto is likely to improve that sense of integrity. This Section also examines the generally acknowledged tax policy criteria to demonstrate that such criteria are being set aside in the effort to address budgetary deficits.

In Part V, the "Deduction for Health Insurance Costs of Self-Employed Individuals" Act ("P.L. 104-7") is reviewed to demonstrate how a line item veto could have been applied to a recent tax bill and how the structural procedures adopted by Congress to address the budget deficit distort the tax legislative process. P.L. 104-7 was signed by President Clinton on the eve of the deadline for filing tax returns for calendar year 1994. It retroactively reinstated and made permanent the 25% deduction for amounts paid for health insurance by self-employed individuals.12 The Act also increased the deduction to 30% for tax years beginning after December 31, 1994.The revenue losses from the reinstatement of the health care deduction were paid for, in part, by the repeal of nonrecognition provisions for sales of broadcast assets under section 1071 of the Internal Revenue Code. 4 In signing the bill, President Clinton lamented his inability to veto provisions of the bill"5 granting special tax benefits to selected individuals. 16 P.L. 104-7 is one example of Congress'use of the tax code to subsidize certain activities and of the political balances often struck in tax legislation.

Finally, in Part VI, the author makes recommendations regarding special tax legislation and the line item veto to restore the integrity of the tax system, a public policy goal on par with a balanced budget plan. Budget deficit reduction and revenue reconciliation through revenue neutral changes in the federal tax law seem to have improved the integrity of the federal budget process at the cost of the integrity of the federal tax system.