Obama and the Problem of Tax Transition Rules

The extensive, substantive, and expensive Obamacare changes being made now on a regular basis by President Obama certainly appear to be an unconstitutional, if for no other reason than law changes of that magnitude seem clearly to be Congress’s domain. But the administration argues that these are just minor tweaks needed to ease the implementation of a vast new law. Let’s look at reality.

Government periodically changes tax rules through new legislation. Often, the new laws require clarification concerning how to interpret the law under certain conditions, and the law itself anticipates that the IRS will issue regulations, rulings, or procedures to assist in understanding the law. The President’s Obamacare changes have nothing to do with this, since the President is changing unambiguous, clearly understandable provisions of the law.

Often, especially when new laws reflect a major change from prior law, these new laws require a way to smooth the transition. So when President Clinton phased out exemptions and some deductions for high net-worth individuals, the law provided that only ⅓ of the disallowances would apply for the first year, ⅔ for the second year, and complete disallowances from the 3rd year forward. This is an example of a “transition rule”. It allowed for the substantial effects of the new law to be smoothly integrated into people’s tax lives.

As a CPA, I have to deal with the tax code side of things, and the process that happens with such tax changes is called the “transition rules”. Tedious as it may be, Congress spends a lot of time on these transition rules to get it right.

Having experienced major tax changes such as the 1986 IRC overhaul, and the Bush “tax cuts” of 2001 and 2003, I can say that the transition rules during these times were specific, onerous, and complicated. They particulars were negotiated by Congress down to every last period and exclamation point.

Everyone knows the transition rules are the province of Congress.

So for the President to come out and say that he has the universal right to make tax transition rules, it is laughable — and one of the biggest lies yet. If his advisors did not tell him it is Congress’s role to make transition rules, he should fire all of them for incompetence.

One of the most important things about transition rules is that Congress spends time negotiating in committee and on the floor, the revenue effect of those rules. They are complex and interwoven with the law and focus on the effects of implementing that law. An example might be for Congress to consider whether to make the pain of the law spread out over time, or implemented all at once.

It is absolutely irregular for President Obama to insert himself into law and play with the transition rules willy-nilly. As a CPA, I would demand to see his detailed analysis of the revenue effects of these changes. I am not confident that such an analysis exists.

It is absolutely critical to understand the problem that Obama creates: only Congress is allowed to appropriate revenue, not the President. Therefore, any transition rules changes made by Obama that wreak havoc on the budget lack the proper authority to appropriate extra revenue to cover the effect of such changes.