2004 Legislative Update

This is an important year for elected federal officials: The U.S. presidency, every seat in the House of Representatives, and one third of Senate seats are on the ballot and being hotly contested. And that’s affecting what’s being done—or not done—in Congress this year.

“Everything Congress does is thought of in Washington, D.C., in terms of the political implications,” says J. Craig Shearman, vice president for government affairs, public relations, for the National Retail Federation (NRF), the world’s largest retail trade association. “Those concerns get magnified 100 times in election years and get more intense as you get closer to Election Day.”

According to Washington insiders, that means important business legislation left unresolved at the end of 2003—including some with wide business support, such as making estate tax repeal permanent—will, at best, probably be put on hold until next year and, at worst, become campaign issues in the fall elections.

In addition, the logistics of electioneering in primaries and campaigning for the general election is slowing down the legislative process. As early as last fall, some crucial votes in the Senate—where Republicans have a razor-thin majority—had to be delayed because Democratic presidential hopefuls were away campaigning.

Possible passage. Still, Congress isn’t grinding to a halt. It’s possible a few business-related bills—such as the Association Health Plans bill—might finally pass simply because this is an election year, and politicians are courting various voter blocks, including business. And some bills Congress must pass this year, including ones with business-oriented provisions—for example, reforms of the U.S. corporate tax code to avoid international sanctions.

But local and national campaigning and election rhetoric will only escalate as the year goes on, especially after this summer’s party conventions. Washington insiders predict that if Congress acts on any major legislation, it will do so before summer, before issues become seriously politicized and campaign schedules take over.

Here’s a look at some major bills and regulations affecting jewelers that will probably come up this year—and others with little chance of action until after the elections.

Association Health Plans (AHP). More than 60% of America’s uninsured are small-business owners and their families and employees. AHPs would let them band together across state lines to buy health insurance as a group for themselves and their employees.

“A larger beneficiary group reduces health insurance costs up to 30% for small businesses,” says Matthew Runci, president and chief executive officer of Jewelers of America (JA). “In a time when health insurance costs are skyrocketing, this would provide the economies of scale to small businesses and [trade] associations that exist for large companies and also remove many regulatory burdens, making health insurance coverage more affordable.”

This issue is supported by 120 groups representing 12 million employers and 80 million workers. A 2003 report by the American Small Business Association (representing businesses with fewer than 10 employees) notes that AHP legislation “has the backing of virtually every business lobby in Washington,” plus the White House and members of both parties in Congress. “The No. 1 concern of small-business owners, says our monthly survey, is the rising cost of insurance and health care,” adds Ianthe Jackson, spokesperson for the National Federation of Independent Businesses (NFIB), the largest small-business advocacy group. “They’re seeing double-digit premium increases, which they must eat or pass on to employees. So, AHPs have top priority for them and us.”

But insurers, many states, some consumer groups, and the National Association of Attorneys General all oppose AHPs, and that has slowed AHP legislation. It passed the House last June by a large margin but stalled in the Senate, and 2003 ended without congressional action. Yet some Washington insiders say this could be the year AHP legislation is finally enacted. “There’s enormous financial pressure on businesses to cope with skyrocketing health care costs,” says NRF’s Shearman. “Passing this would be a major political help to legislators seeking business support.”

Tax issues. Significant changes and cuts in various taxes since 2000—such as “marriage penalty” relief and income tax rate reductions—are temporary measures that will end in the next few years unless they’re made permanent. The best known and most controversial is the estate tax, which will be phased out by 2010—and return in full force Jan. 1, 2011.

“Uncertainty about the death tax requires small-business owners to continue estate-planning strategies that are costly, cumbersome, and time-consuming,” says a 2003 NFIB report. Adds Shearman wryly, “It puts small business owners in an awkward position in estate planning: If they’re going to die, they’d better do it by 2010!”

Many business groups—including JA, NRF, NFIB, and the Family Business Estate Tax Coalition—have pushed hard to make the repeal permanent. But Congress didn’t do so in 2003 and probably won’t this year, say observers. The rising federal deficit and urgent need for more federal money—for reconstruction in Iraq and Afghanistan, anti-terrorism, national health care demands, etc.—make permanency for temporary tax relief less popular. “We favor permanent repeal,” says NRF’s Shearman, “but there’ve been so many tax cuts recently, their costs may keep it from happening.” Indeed, some campaigning legislators are urging repeal of tax cuts.

Politics make substantial new tax cuts unlikely in 2004. (JA’s 2004 Legislative Outlook notes, “Congress is divided” over whether to avoid further tax cuts because of their effect on the deficit or to cut more taxes despite “the cost to the [U.S.] treasury.”) There will, however, be some smaller tax cuts for businesses. Since Congress must change the U.S. corporate tax code to comply with World Trade Organization rules or face sanctions, that legislation (in The American Jobs Creation Act) “could move quickly and early in 2004,” says Shearman. If so, it’ll extend higher business expensing to 2007; give a 3% tax cut to firms with under $20 million of taxable income; and lower depreciation on leasehold improvements.

Leasehold improvements. Congress might finally act on this issue, which is of long-standing concern to jewelers and other small businesses. At present, such improvements are depreciated over 39 years. But federal rules don’t differentiate between the economic lifespan of building improvements—usually the length of a tenant’s lease (on average, three to five years for retail space, seven to 10 for offices)—and the depreciation lifetime of the entire building.

“Any jeweler knows that doesn’t meet real life’s test,” says Shearman. “They must update or remodel their stores much more frequently.” A shorter depreciation period would more accurately reflect the real time span and the costs of such improvements, argue proponents like JA.

Such proposals were introduced regularly in recent Congresses by small business supporters, but budget constraints and other priorities blocked action. Last October, however, a proposal to reduce depreciation to 15 years was added to The American Jobs Creation Act. With passage of this act a top priority for Congress, “leasehold improvement relief stands a greater likelihood of enactment, if it remains a part of this ‘must-pass’ legislation,” says JA’s Matt Runci.

Taxing sales. Taxing Internet purchases is a hot issue that gets hotter with each online sale. Currently, thanks to a congressional moratorium since 1998, Internet retailers don’t have to collect taxes on sales to purchasers in states where they don’t have a physical presence. (The ban was extended Nov. 1, for two more years, by Congress and the president.)

Some in Congress want to make the ban permanent but are opposed by states and retail groups. “States don’t want to lose tax revenue, and we see it as a fairness issue,” says NRF’s Shearman. “When one group of retailers has to collect sales taxes, while the other doesn’t, it gives the one that doesn’t an unfair advantage.”

Thirty-four states have formed the “Streamlined Sales Tax Project,” which proposes a simplified, uniform system to collect tax on sales (including online, mail-order, and telephone sales) across multi-state boundaries. Supporting it are bills introduced last year in the House and Senate that would let states make out-of-state retailers collect sales taxes, with the system applied equally to local, Internet, mail-order and telephone merchants.

The Senate Finance Committee will review the bills in February. However, in this election year, say Washington insiders, the issue could be politicized if opponents paint this as a “new” tax, instead of one long deferred, to the detriment of tax-funded public services and hometown retailers.

Consumer bankruptcy. Personal bankruptcy reform is long overdue, according to JA, NRF, NFIB, ASBA, the American Bankers Association, and other business groups. Consumer bankruptcy filings doubled in the past decade, reaching a record 1.5 million last year with more than $44 billion in discharged debt. Retailers have lost billions of dollars in recent years, and consumers, billions more. (Each person who files for bankruptcy costs each U.S. household more than $400.)

Bankruptcy reform has bipartisan support. It has passed both chambers of Congress three times in the past six years but for various reasons has failed to reach a full vote on the final compromise bill. In the 107th Congress at the end of 2002, for example, a consensus bill didn’t pass because of controversial provisions (barring legally convicted abortion foes from filing for bankruptcy) added by some senators.

Bankruptcy reform was reintroduced in this Congress without the additions, and it passed the House last spring. It stalled in the Senate, which adjourned in December without acting on it. (There was talk that reform supporters in the Senate might attach it to the omnibus appropriations bill, which funds government operations and which Congress must pass, but at press time, that didn’t appear likely.)

Now, congressional action, if any, on bankruptcy reform must come during this year’s first months, says Shearman. “But it could get tied up again in an unrelated battle,” he warns. “This is an election year. Anything can happen.”