Proposal to sunset the Internal Revenue Code

On June 16, 1998, Tax Executives Institute submitted the following comments on proposals to sunset the Internal Revenue Code on a designated date without specifying a replacement tax system. The comments took the form of a letter from TEI President Paul Cherecwich, Jr. to Speaker of the House Newt Gingrich and House Minority Leader Richard Gephardt. On July 27, a substantially similar letter was sent to Senate Majority Leader Trent Lott and Senate Minority Leader Tom Daschle.

On behalf of Tax Executives Institute, I am writing to express the Institute’s serious concern about proposals to sunset the Internal Revenue Code on a designated date without specifying a replacement tax system. In our view, these proposals reflect either a misapprehension of the importance of certainty and predictability to business enterprises and individuals or a disregard for the consequences of “terminating” the tax system. They illustrate the folly of making tax policy by sound bite and should be rejected.


Tax Executives Institute is the principal association of corporate tax executives in North America. TEI is a nonpartisan, not-for-profit membership association that represents approximately 5,000 in-house tax professionals employed by 2,800 of the leading companies in the United States and Canada. TEI is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. TEI members deal with, and are frustrated by, the complexities of the tax laws on a daily basis, and know that abrupt or ill-conceived shifts in the law — changes without due consideration of transitional issues — exact a heavy toll.

Sunsetting the Code: A Beguiling but Unwise Move

Later this week, the House of Representatives is scheduled to vote on H.R. 3097, which is styled “The Tax Code Termination Act.” The legislation would sunset the Internal Revenue Code on December 31, 2001. Although the legislation includes a hortative declaration that any new federal tax system should be approved by Congress in its final form no later than July 4, 2001 (to permit a six-month transition to the new system), there is no assurance that the principles underlying a replacement system could be agreed upon, that the new system’s contours could be defined, and that meaningful and comprehensive transition rules could be developed in time to meet that ambitious deadline. What is more, there is substantial doubt whether, even if the Fourth of July 2001 target were met, the six-month transition period contemplated by the legislation would be sufficient to avoid major disruptions in particular industries or the economy as a whole.

Given our members’ ongoing experiences with the tax laws, it should come as no surprise that TEI supports efforts to improve and simplify the Internal Revenue Code. Moreover, while the Institute itself has not taken a position on which of the competing tax reform proposals should be adopted (in large measure because of the diversity of our membership and the divergence of their views), we fully understand the desire of many members of Congress “to scrap the Code” and replace it with a different system. And we appreciate the popular appeal of striving to make the tax law simpler and fairer.

The legislation before the House, however, is nothing more than a Siren’s song — alluring but ultimately dangerous — because it is far from clear how the legitimate objectives of tax reform can best be achieved. The ongoing debate in Congress and the country at large, while spirited, demonstrates that finding consensus will not be easy or quick. Even assuming that agreement can be expeditiously achieved on “where” tax reform should take us, determining the “how” of getting there will pose additional challenges. Whether or not you agree with the estimates of the U.S. General Accounting Office and the Treasury Department that the implementation of a new tax system would require between 18 and 24 months, it is clear that the change cannot be made overnight. It is also clear that individuals and businesses — the U.S. economy as a whole — cannot convert to the new system with the ease of flicking a light switch. Transition rules cannot be handled as an afterthought. Indeed, given the intricacies of the American economy, how it interacts and is integrated with the global marketplace, and the overriding importance of the tax law in providing incentives to salutary behavior (such as investments in plants and equipment, retirement savings, home ownership, municipal bonds, and charitable giving), the “pain” of the transition from the current regime to a new one could well overwhelm the promised benefits of reform.

Supporters of H.R. 3097 argue that the legislation is necessary to force action on tax reform. Even if that were true — and Congress’s recurring inability to renew expiring tax provisions in time to forestall gaps in the law suggests that future Congresses may not feel so obliged — TEI questions whether the uncertainty and potential chaos is worth the risk. For example, a company that otherwise would invest millions of dollars in a multi-year expansion of its manufacturing facilities might well demur if the pending legislation were enacted because of uncertainty over whether or how, after December 31, 2001, it would be able to recover its costs. (There are an estimated $3 trillion in unrecovered costs of existing property, and of course the current economic expansion is dependent on sustained future investments.) Similarly, individuals who would otherwise invest and save toward retirement might pause because of uncertainty over how their retirement earnings would be taxed. To repeal the Internal Revenue Code without specifying a replacement system — to exalt the exhilaration of “doing it now” over the necessity of “doing it right” — is to threaten major disruptions of the economy and the lives of the American people. The proposal might score well in public opinion polls, but that does not make it any less imprudent.

Once again, TEI appreciates the surface appeal of calls to terminate the Internal Revenue Code. H.R. 3097 and similar bills, however, would create a sense of urgency for tax reform much like plunging the detonator on a time bomb and then scrambling to disarm it before it explodes. The action might cause the adrenaline to flow, but we question whether the Nation would be the better for it. Because the bill fails to meet the standards of reasoned and responsible legislation, Tax Executives Institute urges you to work toward its rejection.


Tax Executives Institute appreciates this opportunity to present its views on the proposal to sunset the Internal Revenue Code. Any questions about the Institute’s views should be directed to either Michael J. Murphy, TEI’s Executive Director, or Timothy J. McCormally, the Institute’s General Counsel and Director of Tax Affairs. Both individuals can be reached at (202) 638-5601.

COPYRIGHT 1998 Tax Executives Institute, Inc.

COPYRIGHT 2004 Gale Group

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