On Thursday, the Senate Finance Committee will mark up a bill to spend taxpayer dollars on highways through the end of 2014.

In order to pay for this new half-year of federal spending, the chairman’s mark puts into place $9 billion of permanent tax increases on the American people. ATR has said that we oppose tax increases for highway reauthorization, and we have made suggestions on where to cut spending instead.

The largest of these tax hikes is by far the most damaging.  In a move to raise nearly $4 billion from savers, the chairman’s mark changes the rules for distributions on inherited 401(k)s and IRAs.  

Under current law, those who inherit an IRA can elect to “stretch” distributions from the IRA over the remainder of their lifetime, which could obviously be decades.  This allows IRA money to continue to largely grow tax-free, creating an even bigger nest egg than if the IRA was simply distributed upon the death of the original owner.  This is the proper tax treatment of savings under a consumption base, and should actually apply to all types of savings, not just IRAs.

Under the chairman’s mark, this “stretch IRA” concept, which is a conventional estate planning tool used by middle class families, would be abolished.  In its place would be a requirement in most cases (surviving spouses being the biggest exception) that an inherited IRA be distributed over just five years.  Thus, the tax deferral advantages of a stretch IRA are almost completely obliterated.

Unlike the type of estate planning tools used by rich Americans like Bill and Hillary Clinton, a “stretch IRA” is used by normal, middle class Americans and their financial planners (except maybe Vice President Joe Biden).  This is the stuff of PBS pledge drive specials and walk in bank advertisements, and should not be confused with the complex estate planning that the uber-wealthy use.

To put it bluntly, this IRA tax increase is an income tax increase on the middle class.  Because the entire bill is a net income tax increase, it also violates the Taxpayer Protection Pledge.  ATR urges senators to oppose and vote against the chairman’s mark on Thursday, and on the floor if necessary.