Democrats warn Trump not to index capital gains to inflation for tax purposes

Senate Democrats are warning the Trump administration not to take regulatory steps to index capital gains to inflation for tax purposes, asserting authority for such a change lies with Congress.

In recent weeks, published reports have suggested the Trump Treasury Department is considering such a move, which the Democratic lawmakers also criticized as primarily benefiting high-net-worth investors.

“We remain concerned by this administration’s relentless preoccupation with cutting taxes for our country’s wealthiest taxpayers while leaving behind middle-class families and working people — even to the extent that it would consider exceeding its legal authority to do so,” wrote Sens. Sherrod Brown, D-Ohio, and Ron Wyden, D-Oregon, in a letter last Thursday to Treasury Secretary Steven Mnuchin.

In addition to Mr. Brown and Mr. Wyden, the highest-ranking Democrats on the Senate finance and banking committees, the letter was signed by 12 other Senate Democrats, including two who are running for president: Amy Klobuchar of Minnesota and Michael Bennet of Colorado.

The Trump administration likely wants to bypass Congress and make the capital gains changes through regulation because Democrats control the House and have enough Senate members to sustain a Senate filibuster.

But taking that path will be difficult, according to Marc Gerson, member at Miller & Chevalier.

“Congress traditionally and zealously guards its jurisdiction,” said Mr. Gerson, a former Republican tax counsel on the House Ways and Means Committee. “I would anticipate there would be a legal challenge [to a regulatory change]. This is a constitutional issue.”

In their letter, the Senate Democrats said the George W. Bush administration considered taking administrative steps to index capital gains to inflation but abandoned the idea.

In 1992, the Department of Justice issued a memo saying the Treasury Department doesn’t have the legal authority to index capital gains to inflation.

“On its face, the Democrats would look to have a strong argument before the court,” said Dean Zerbe, managing director at AlliantGroup and a former Republican tax counsel on the Senate Finance Committee.

Even if it could institute capital gains indexing by fiat, the Trump administration should consider whether it’s a good policy, said Timothy Steffen, director of advanced planning at Baird Private Wealth Management.

“It’s opening a Pandora’s Box,” he said. “What’s the next thing that gets indexed for inflation?”

Mr. Steffen said implementing the policy would be complicated. Among the policy questions: Which inflation rate would be used: annual, monthly or some other period? Where does indexing begin for shares that are bought and sold frequently? Does indexing for a mutual fund happen at the fund level or with specific positions?

It’s unclear whether the debate will get to that level of detail.

“If there’s an administration that colors outside the lines, it’s this one,” Mr. Zerbe said. But he added, “I don’t know I’d be on the edge of your seat waiting for this to happen.”

Mr. Steffen’s clients aren’t clamoring for the change.

“Nobody has come to me and said, ‘I can’t believe I have to pay taxes on growth based on inflation,’” he said.