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White House drops capital gains indexing

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Tax Hot Topics newsletterThe White House stated last week that the Trump administration will not seek to take executive action to index capital gains to inflation, but President Donald Trump’s history of flip-flopping on the issue means it could always be resurrected.

The White House announcement comes after Trump praised the idea in August, then seemed to completely dismiss it a day later, only to reopen the debate in a tweet a week later. The announcement followed a White House meeting meant to finally resolve the question.

The idea first surfaced last fall, but quickly faded after questions emerged over Treasury’s authority to enact such a policy through rulemaking. With the 2020 election drawing closer, the opportunity to deliver another tax break without having to go through Congress appeared to rekindle Trump’s interest. His administration was split on the issue, which may explain Trump’s wavering. Although the White House announcement appears to put the idea to bed, enough supporters remain that is seems possible Trump could consider it again in the future.

Twenty-one Republican senators have sought to give Trump cover on the issue, urging Treasury Secretary Steven Mnuchin to move forward with the proposal in a letter sent on July 29. Democrats have been just as vocal in opposition. Forty-two Democratic senators also signed a letter to Mnuchin in August expressing disapproval for the idea. They argued it would be a $100 billion handout to wealthy taxpayers. They also asserted that Treasury does not have the authority to index capital gains to inflation through regulation, citing the conclusion on the issue by the George H.W. Bush administration in 1992.

Under the Bush proposal, Treasury would have issued regulations interpreting “cost” under Section 1012 to mean the price paid adjusted for inflation. The administration analyzed whether the definition of the term “cost” in the statute was ambiguous enough to grant judicial deference to regulations on the issue. Treasury and the Department of Justice ultimately agreed that it was not and Treasury did not have the authority to make the ruling.

Proponents of indexing capital gains to inflation argue that legal developments in the years since, including Supreme Court decisions on the deference for tax regulations, would now allow Treasury to implement the policy.

It’s uncertain whether the regulations could be drafted and finalized through the formal rulemaking process in time to take effect before the election, especially if there are legal challenges to Treasury’s authority to write them. Using the rulemaking process also raises the possibility that a new administration could repeal the regulations just as easily as they were implemented.


Contacts:
Dustin Stamper
Managing Director
Washington National Tax Office
T +1 202 861 4144

Omair Taher
Senior Associate
Washington National Tax Office
T +1 202 861 4143


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