Exit taxes are bad---bolt from the blue causes rapid renunciation of citizenship which the aff can’t solve and hurts dual-nationalists.

The exit tax is a bad idea for policy and technical reasons. It has been considered in the past and rejected. The Joint Committee on Taxation, in its comprehensive February 2003 study, did not embrace the approach.2 Not only should it not be enacted into law, but it should also be dropped once and for all. (For the JCT report, see 2003 WTD 31-18 or Doc 2003-3954.)

This discussion is summary in nature. Renunciation of citizenship or relinquishment of permanent residency status (both commonly referred to as expatriation) is a very serious step and should only be undertaken after the most careful consideration of all the legal and personal consequences.3 It is unfortunate that individuals and families must worry about developments like this. They should not have to arrange their lives on short notice around U.S. tax legislative proposals.

Where Do Things Stand?

The exit tax provisions are in the Senate-passed version of H.R. 4297. In the form of S. 2020, they were approved on November 18, 2005. They were added to H.R. 4297 when that bill was taken up and approved by the Senate on February 14. (The bill was labeled the Tax Relief Extension Reconciliation Act of 2005 when it passed the House; the name was changed to the Tax Relief Act of 2005 when it was amended and approved by the Senate.) A conference committee will decide in the coming weeks whether those provisions stay in the bill or are cut out.

There is some chance that the bill, even though reported out by the conference committee, will not become law because the committee’s handiwork could be rejected by either or both houses, which would be highly unlikely, or could be vetoed by the president, which again would be highly unlikely. With the Republican Party controlling both houses of Congress and the White House, it is hard to imagine the conference committee’s version of the bill not becoming law.

The exit tax is a bad idea for policy and technical reasons. Not only should it not be enacted into law, but it should also be dropped once and for all.

The bill is approximately 400 pages in length and contains roughly 150-200 provisions. The exit tax provisions are included alongside a number of other ‘‘revenue offset provisions,’’ meaning provisions that pick up rather than lose revenue. The total revenue raised by the exit tax is estimated to be US $251 million over five years, a pittance in the scheme of things. If something is enacted, this will be the third time in the last decade that Congress has rewritten the rules in the antiexpatriation area.4

Who Cares?

That subject is of interest to U.S. nationals (citizens) that may wish to renounce their U.S. citizenship and to U.S. long-term residents (individuals that are lawful permanent residents — typically ‘‘green card’’ holders — in 8 out of the most recent 15 years) that may wish to terminate their permanent residence status. It is also of interest to companies and individuals that are interested in attracting highly skilled immigrants to work in the United States, ‘‘accidental Americans’’ that happen to be U.S. citizens by virtue of birth in the country or birth to a U.S. parent, and immigrants who possess a green card but who might one day want to return, say, to their country of birth.

The provisions affect more than just wealthy Americans that want to stop paying tax in the United States, which is a very small group consisting of perhaps two dozen millionaires per year. Those provisions also affect tens of thousands of individuals who are dual nationals — that is, of U.S. and some other nationality — because they were born in the United States or were born to a U.S. parent.5 Many of those individuals live outside the United States. Also, those provisions also affect many thousands of long-term residents (that is, individuals who came to the United States and ended up staying for one reason or another). Surprisingly, there are large numbers of green card holders living in places like London, Paris, Geneva, Hong Kong, and Taipei.

Dual nationals and long-term residents must be concerned because the existing rules for taxation of expatriating individuals would be changed by the exit tax provisions. If they were to renounce or relinquish their residency status after the effective date of the new law, they would be penalized. The effective date, as drafted now, is the date of enactment — that is, the date the president signs the bill into law.

The effective date is anyone’s guess; it could be March 15 or April 15 or any other date in the not-too-distant future. Indeed, it is entirely possible that those new rules will not be enacted during this Congress.

Obviously, the dilemma for individuals who might be affected is: Should I do something now? Complicating the matter is the fact that it is very difficult to complete a renunciation in less than several weeks, and that period can be significantly longer if it is necessary to ‘‘catch up’’ with past due filings. A renunciation will not be effective for U.S. income tax purposes until the individual can attest that he or she is fully compliant with all tax filings. Relinquishment of a green card can proceed much quicker.