Transition Rules : $5-Billion Cap on Tax Relief Could Set Off Mad Scramble

In their rush to complete action on a comprehensive tax revision bill, tax writers may have left one of the trickiest tasks for last.

Instead of settling on the hundreds of detailed “transition rules” designed to provide special relief for certain taxpayers from the provisions of the new bill, the tax conferees simply established a $5-billion bundle of money to fund such exemptions.

That $5-billion limit could set off a mad scramble among lawmakers to ensure that tax relief for their favorite local business constituents and public projects are included in the final package, which is scheduled to go to the House and Senate floors shortly after Congress returns from vacation on Sept. 8.

Set Up to Guard Investments

The transition rules are designed to protect certain investments and projects that are still on the drawing boards or just getting under way from losing current tax benefits that their sponsors had been counting on when they planned them. In some cases, the right transition rules can mean hundreds of millions of dollars in savings.

Lobbyists and lawmakers can be expected to devote considerable energy over the next few weeks to saving tax benefits for certain projects that can mean the difference between financial success or failure.

The decision on which transition rules to grant will generally be left up to Senate Finance Committee Chairman Bob Packwood (R-Ore.) and House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), who hammered out the details of the compromise tax plan approved by the conference committee Saturday night in an intense series of negotiating sessions.

Although selectively aimed at particular taxpayers, most transition rules are considered a legitimate and integral part of crafting any tax bill. While many of the rules are screened by the committee staff on their merits, the choice of which exemptions to grant is a highly political process and there are no clear standards that explain why one project gets relief when another does not.

Bill Listed 175 Rules

The Senate bill contained about 175 transition rules valued at nearly $5.5 billion. The House tax bill had an even longer list of exceptions valued at nearly $24 billion, but many of the transition rules included in the House bill will no longer be necessary because the effective date of most provisions in the bill was pushed back to Jan. 1, 1987.

The investment tax credit, however, would be repealed retroactively as of Jan. 1, 1986, under the tax plan, leading many firms to seek to have certain investments “grandfathered” under the old tax laws.