Penny wise and pound foolish. To cover the costs of certain provisions of the recently passed IRS reform bill, the Senate included an amendment that will raise a small amount of money over the short-term but will then lose $13 billion between 2008-2017. Because Senate rules only require budget projections for the next 10 years, the Senate can turn a blind eye to future loses.

The amendment included in the IRS reform bill that passed the Senate May 7 will make it easier for wealthy retirees to switch money into a new type of individual retirement account (IRA). Beginning in 2005, the amendment would allow some elderly taxpayers (age 70½ and above) with annual incomes in excess of $100,000 to convert their existing IRA’s into so-called Roth IRAs. People with lower income are currently able to switch. The new type of Roth IRAs, created by the Taxpayer Relief Act of 1997, differs in ways that would afford some relatively well-off senior citizens a way either to lower taxes on their IRAs or to pass funds remaining in IRAs to their heirs free of tax, according to the Center on Budget and Policy Priorities.

The amendment would raise money in the short term because taxes are paid up front on deposits into Roth IRAs, but then the principal and interests are never taxed again. Under conventional IRAs, deposits are tax-free, but withdrawal of interest and the principal upon retirement is taxed. Because of this up-front taxation, the amendment would raise revenue only during its first three years of existence, after that it would drain the Treasury.

The House IRS reform bill passed last year does not contain such an amendment, setting up a showdown during conference committee negotiations.

Because of increasing costs combined with declining revenues – in large part due to the IRA amendment – the entire Senate bill would cost almost $50 billion over the next 20 years according to Joint Committee on Taxation figures. But, the entire bill is able to remain “revenue neutral” through 2007 because the gimmicky IRA amendment would not allow wealthy seniors to switch IRAs until 2005. The delay allows the bill to save money during the Senate’s 10-year budget forecasting window, though huge losses would occur from 2008 to 2017 and likely into the future.

Senators Tom Daschle (D-SD) and Robert Kerrey (D-NE) have been outspoken critics of the amendment.

Taxpayers would get hit with the bill’s costs at the worst time – as baby boomers are retiring and huge Social Security bills are due. Even without the added costs of the Senate IRS reform bill, Congressional Budget Director, June O’Neill, has testified that she expects budget deficits beginning in 2015.