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House Republicans Push Tax Cuts for Beaten-Up Investors

Legislation: Bills, seen by critics as a campaign message, aim to mitigate portfolio losses and help 401(k) savers hurt by the bear market.

October 09, 2002|From Associated Press

WASHINGTON — House Republicans, concerned about voters' preelection anxiety over stock market losses, Tuesday began pushing a pair of tax cuts for investors whose retirement accounts and stock portfolios have been mauled by the bear market.

Although the bills cleared a committee hurdle and probably will be passed by the GOP-controlled House, their chances in the Senate appear slim, given that the Democrats running the Senate contend that the bills' main purpose is a campaign message.

The House GOP legislation would increase the amount of net capital losses that investors can use to offset ordinary income each year from $3,000--a level first set in 1978--to $8,250. The change would be effective from the beginning of 2002, meaning investors could deduct a higher level of losses suffered this year on tax returns they will file in April.

Democrats said this could spark a stock sell-off because investors must sell losing stocks and mutual funds--thereby "realizing" the capital loss--before they can use the losses to reduce their taxable income.

Such a sell-off would further depress the markets this year, Democrats say, and would primarily benefit wealthier taxpayers with annual incomes above $150,000 for married couples. In addition, some lawmakers noted that current net losses in excess of $3,000 already can be used to reduce tax bills in future years.

"I just question whether this is necessary," said Rep. Gerald D. Kleczka (D-Wis.). "We just keep passing these tax bills and passing them, and we don't give a hoot about the economy."

The second GOP bill would gradually raise the age at which retirees must begin mandatory withdrawals from 401(k) and individual retirement accounts from 70 1/2 to 75 by 2007, adding a few years to rebuild lost value. It also would increase, in 2003, tax-advantaged contribution limits to $5,000 for IRAs and $15,000 for 401(k)s. Current law raises the limits to those levels over the next few years.

Rep. Rob Portman (R-Ohio) said the age limit, in place since 1962, is a hardship for the increasing number of people who want to work beyond age 70 1/2 without losing value in their retirement accounts.

Only about 3% of people with retirement accounts contribute the maximum amount, raising questions about how much the higher limit would help. And Democrats noted that senior citizens without other sources of income would be unlikely to wait until age 75 to begin withdrawals.

The combined cost of the bills, about $65 billion over 10 years, also is an issue. The federal budget ended fiscal 2002 on Sept. 30 about $167 billion in the red, supplanting previous projections for a surplus. Neither House bill contains spending cuts or tax increases to offset the cost.

With voters heading to the polls Nov. 5 with control of Congress at stake, Democrats contend that the GOP is pushing the bills only as a last-minute effort to appear sensitive to voters' rising worries about unemployment, shaky pension funds and the deep stock market swoon.

Republicans counter that the bills would provide a needed measure of relief for savers.

"While the fundamentals of our economy are solid, there is more we can do to help build the confidence and restore the losses of America's investors," said Rep. William M. Thomas (R-Bakersfield), chairman of the House Ways and Means Committee, which approved both bills along party lines Tuesday.

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