Congress is back for the week, but we do not expect much to
get done. House and Senate Democrats support allocating $25 billion from
the Troubled Asset Relief Program to bailout the Big Three automakers, while
the White House, Treasury and Congressional Republicans oppose expanding the
program.
The auto
bailout could be considered as part of a set of a broader economic stimulus package
introduced by Senate Majority Leader Harry Reid (D-NV). We expect the
Senate to take up some or all of the Reid
Economic Recovery Act in the next couple days, with the House of
Representatives stepping aside to see how the Senate debate proceeds.
Combined, the Reid package includes:
An
extension of unemployment benefits for seven weeks;
$38
billion in Medicaid assistance to states;
$25
billion in loans from the TARP to the Detroit Three;
An
above the line deduction for families who purchase new cars;
Increased
Food Stamp, WIC, and food bank funding;
Weatherization
assistance and subsidies for clean car technologies;
$5
billion for environmental cleanup;
$13
billion for highways and other transportation;
$4
billion or so for housing programs;
$250
million for military housing;
$2.5
billion for education and job training;
$2
billion for NIH, CDC, and pandemic preparedness;
An
expansion of the SBA small business loan program;
$1
billion for border security and homeland security;
$675
million for federal science programs;
Disaster
assistance for farmers and communities; and
Increased
funding for consumer protection.
In addition to this long list, Senate Finance Committee Chairman
Max Baucus would like to add several tax provisions, including extending
bonus depreciation, suspending required IRA dispersals for account holders over 70
½ years old, and easing pension funding requirements for companies.
While there’s a small chance something might get passed, we
believe the stalemate over the auto bailout as well as other funding items is
unlikely to get resolved in the next couple days and, as a result, readers
should view this broad package as a precursor to Congressional action early
next year.
TARP and S Corp Banks
As readers know, Treasury has now officially focused the
entire $700 billion TARP fund to be used to inject capital directly into
financial institutions under its voluntary Capital Purchase Program. Secretary Paulson has made clear the previously announced Whole Loan and Distressed Asset
purchase programs will not be pursued.
For financial institutions organized as S corporations, this
new focus presents a particular challenge. As structured, S corporation
banks do not qualify for the CPP. According to our friends at the Independent
Community Bankers of America, the terms of the CPP require the bank to
issue special “preferred” shares in exchange for Treasury’s direct investment.
But S corporations are precluded by the tax code from issuing preferred shares
and thus are unable to access the CCP.
The Treasury is aware of this issue and is working on new
rules that would apply to S corporation and other non-public banks. Part
of this failure is simply the result of Treasury’s need to move quickly to
restore confidence in the banking system. With 2,500 S corporation banks
out there, however, it is an oversight that needs to be fixed.
Washington Wire Monday, November 10, 2008
Second Stimulus on the Horizon
A second stimulus package is being formulated up on the
Hill, but is by no means a done deal at this point. Just before
adjourning for the election, the House passed a $61 billion bill containing infrastructure
spending, aid to state governments and increased unemployment benefits, which
will likely serve as a starting point for second stimulus discussion.
That package included:
o $30
billion for infrastructure projects including highways, bridges, transit and
water projects;
o
$1
billion for public housing;
o
$2.6
billion for food stamp program;
o
A
temporary increase in Federal Medicaid assistance to states; and
o
An
extension inunemployment benefits.
Other items that could be contained in a second stimulus
package include the Columbia
Free Trade Agreement, middle class tax relief, and changes to the TARP
program. Emily Barrett from the Wall
Street Journalreports
that Treasury is “under pressure to broaden eligibility for assistance to
smaller banks, as well as the cash-strapped autos sector.” Other actions
related to the stimulus include:
o
Speaker
of the House Nancy Pelosi and Senate Majority Leader Harry Reid met with the
CEO’s of America’s
automakers last week to discuss billions of dollars of additional assistance to
the industry. The two leaders subsequently asked Treasury to make relief
to the automakers part of the $700 billion TARP plan.
o
President-elect
Obama made an economic stimulus his top priority at last week’s press
conference. He indicated if one was
not enacted during next week’s lame duck session, he would make it the first
order of business in 2009. He also
indicated that the package needed to focus on assisting the middle class with
job creation and an extension of unemployment benefits.
o
RollCall reports
that Majority Leader Hoyer (D-MD) is suggesting that, absent an agreement with
the Bush administration -- which he described as “elusive” -- the House might
not ask rank-and-file members to come back next week.
All this activity suggests that, while the odds of a package
getting enacted are extremely high, it will probably be early next year before
anything moves.
Endangered Tax
Species -- LIFO
Your S-CORP staff
is tempted to create an Endangered Species List for tax provisions.
Deferral and Section 199 would top the list as the most likely to be extinct
before the end of the next Congress.
LIFO accounting is another. A subset of accounting and
tax professionals have been pursuing LIFO for years, and they are closing
in. The Joint Committee on Taxation -- the tax professionals that
Congress uses to help them assess changes to the tax code -- fired another shot
last week.
In its annual “Tax Expenditures” report, the Committee has for
the first time (to our knowledge) listed LIFO. For those of you who don’t
follow such things, a tax expenditure is a congressional concept identifying
tax provisions that divert from the basic approach to taxing income and
measuring the revenue lost by those provisions -- tax credits, certain
deductions, and lower rates on investment income all qualify as tax
expenditures. The concept was first introduced into budget speak in the
1960s and has been highly controversial ever since.
Conservatives especially dislike
the idea since it implies that all your income is the government’s and if the
government chooses not to take it from you, then that’s the equivalent of
giving you a subsidy. Supporters argue that the point is to give policy
makers better information on how much certain tax policies reduce revenues so
they can make better decisions.
Either way, getting LIFO listed as a tax expenditure gives
LIFO opponents one more argument to make in attempting to repeal it.
We will write more on this in the future, but suffice to say
that LIFO does not belong on the tax expenditures list anymore than FIFO does. Moreover, while
the JCT states its goal in revising the methodology of the expenditure report
was to create a more neutral approach, we’re not sure they succeeded.
Capital Gains and
Dividends
We’ve written about the likelihood that the capital gains
rate is going up in the next couple years.
Lots of our members would like to know just when that is going to occur
so they can plan accordingly.
The economic distress of the last year and the rising
deficit opens the possibility that Congress could enact a rate hike next year
but make it effective January 1, 2010.
The outcome of the prospective effective date would be to stimulate
economic activity -- and federal revenues -- in 2009. A similar rate increase adopted in 1986 (made
effective January 1, 1987) resulted in an enormous increase in federal tax
revenues in 1986 as taxpayers rushed to sell their assets and qualify for the
lower rates.
As S-CORP readers
know, we favor lower rates over higher ones, especially when the higher rates
only apply to S corporations and not C corporations. That said, encouraging asset sales at a time
when many investors and companies are being forced into asset fire sales
already might not be the best policy.
Encouraging sales of appreciated property into a bear market may have
the opposite of the intended economic effect by further driving down asset
prices for everyone.
Washington Wire Wednesday, November 05, 2008
Election Impact on S Corporations
We’ll
write more about the election in coming months, but wanted to send out a quick summary
of how the elections yesterday affect the S corporation community.
We’ve
noted several times that President-elect Obama’s tax policies are not friendly
to flow-through businesses. The
combination of higher tax rates and a broader base has the potential to
significantly increase the marginal and effective tax rates paid by S
corporations.
One
factor that may retard the push towards higher rates is the weakening
economy. Now that the credit crisis
appears to be under control, investors and businesses are faced with a classic
cyclical slowdown that is likely to extend well into next year. Several Obama advisors have noted that
raising taxes in such an environment is unwise, suggesting that the expected broad
increase in taxes may be put off for a year or two.
One
area where we expect quick action will be the estate tax. Several highly placed tax experts have
indicated they have little intention of allowing the scheduled repeal to take
place in 2010 followed by the Lazarus-like reemergence of the tax in 2011. Action on the estate tax should take place
next year, and may include extending the 2009 rules into 2010 or swapping the
estate tax with an inheritance tax.
In
the Senate, the Democratic majority has 56 seats, with an additional four seats
very much up in the air. As of this
writing, S-Corp ally Senator Gordon
Smith (R-OR) leads his Democratic opponent, Oregon Speaker of the House
Jeff Merkley. However, his lead has decreased over the course of the day with
a sizable number of precincts in Democratic-leaning Portland remaining to be counted.
In Minnesota,
Senator Norm Coleman leads his Democratic challenger Al Franken by 690 votes
with 100% of the precincts reporting. This razor-thin margin sets the
stage for a mandatory recount that could take up to a month.
In Georgia,
Republican Senator Saxby Chambliss has not yet secured over 50% of the vote,
which is necessary under
law to avoid a runoff on December 2nd. Senator Chambliss is
the likely favorite if there is a runoff, given his Democratic opponent likely
benefited from high turnout for Obama voters.
Finally, in Alaska,
incumbent Senator Ted Stevens beat Anchorage Mayer Mark Begich (D) by just over
3,000 votes despite being convicted of several felonies last week. Senator
Stevens now has the difficult choice of resigning his seat or face possible
expulsion. It takes 67 votes to expel a Senator. Unlike many other
states,
Alaska requires a special election, rather than give the governor the power, to fill a
vacant Senate seat. Thus, despite rumors,
Governor Sarah Palin cannot appoint herself to the Senate, but she could run if
she was so inclined. This seat might be vacant for several months.
Depending on how these four states break, Democratic
Majority Leader Harry Reid could control anywhere from 56 to 60 votes when
Congress returns in January.
In the tax-writing Finance Committee, the three Democrats
who were up for re-election won easily -- Chairman Max Baucus (MT), John
Rockefeller (WV), and John Kerry (MA). Of the three Senate Finance
Committee Republicans who were up, Senator Pat Roberts (KS) was re-elected with
a solid margin, Senator John Sununu (NH) was defeated, and Senator Smith’s race
has not yet been called.
The current ratio on Finance is 11 to 10. Given the new make-up of the Senate, expect a
new Committee ratio of 12-10 or 12-9, suggesting that one new Democrat will be
appointed while the Republican ranks will hold steady or, if Smith loses, add
one. Senators Claire McCaskill (D-MO),
Ben Cardin (D-MD), George Voinovich (R-OH) and Mike Enzi (R-WY) lead the list
of likely additions.
In the House, Speaker Nancy Pelosi has at least 255 votes in
her party, with a handful of seats still undecided. If those seats split evenly, then the
Democratic-controlled House will have around 40 votes more than the majority of
218, giving them a very strong majority from which to move legislation. For some issues, they may need those extra
votes, as the number of moderate Democrats representing conservative districts
has grown dramatically. The centrist
Blue Dog coalition has 47 current members, and will likely grow to more than 50
before the new Congress arrives.
On the House
Ways and Means Committee, all 22 House Democrats
running for re-election won. Today, Committee member Rahm Emanuel (D-IL)
accepted an offer to serve as President-elect Obama’s Chief of Staff.
There are two other vacancies to fill on the Democratic side due to the
retirement of Rep. Michael McNulty (NY) and the death of Rep. Stephanie Tubbs
Jones (OH) earlier this year. Meanwhile, two Ways and Means Republicans
were not re-elected: Reps. Phil English (PA) and Jon Porter (NV).
Additionally, six Republican Members of the Committee are retiring at the end
of this Congress.
As for the Committee’s makeup, expect the ratio to move from
24-17 to something closer to two-thirds/one-third. Any combination is possible, but 26-13 sounds
about right. Despite losing three
Committee seats with the new ratio, Republicans still would need to fill four
seats while Democrats would have five seats to fill.
Quick Stimulus Update
More on the possible lame-duck stimulus package courtesy of CongressDaily:
House Speaker Pelosi
said this afternoon that the economy will be the major topic of discussion when
congressional leaders meet with President-elect Obama, but that "even
before that we have an economic stimulus package on the table that I hope
Republicans in the Senate will allow to be taken up in a lame-duck
session." Pelosi said "those conversations are still taking place
with the White House." When asked whether two separate stimulus packages
may be passed, Pelosi said "it depends on what the White House is willing
to do."
Washington Wire Wednesday, October 29, 2008
S Corp Champions Push BIG Relief
As Congress moves forward on the stimulus bill, the S
Corporation Association continues to push Built-In Gains tax relief as a vital part
of the package. If the economy is suffering
from a lack of capital, BIG relief can help S corporations access capital
currently locked-in by punitive tax rates.
As part of that effort, S-Corp
allies Senators Lincoln (D-AR), Hatch (R-UT), Cardin (D-MD), and Snowe (R-ME) sent Senate leadership a
letter today advocating for including BIG relief in the stimulus package. Their letter states:
Our proposal, as
included in the S Corporation Modernization Act of 2008 (S. 3063), would
provide timely relief for many businesses that have converted to S corporation
tax status by reducing the BIG tax holding period from 10 to 7 years. This modest reduction preserves the original
policy intent of the holding period, while allowing many businesses that have
long been S corporations to immediately access their own capital without
penalty.
In the meantime, S Corporation Association Chairman Richard
Rodrick submitted a letter to Ways and Means Committee Chairman Rangel (D-NY)
advocating for BIG’s inclusion, arguing that the benefits of BIG relief would
be significant and widespread:
According to
government statistics, hundreds of thousands of S corporations nationwide may
be sitting on “locked-up” capital that they cannot access or redeploy due to
the prohibitive tax implications of BIG.
This “lock-in effect” is widespread and results in these businesses
unable to access billions of dollars in assets that could be used to grow the
business and hire new employees.
Forcing companies to hold on to appreciated assets for a
decade is harmful to their businesses and harmful to the communities in which
they operate. Congress is coming back in
mid-November. Your S-Corp team will work between now and then to build the case for
Built-In Gains relief and get it enacted.
Ways and Means Looks
at Another Stimulus
So where is the stimulus in the process? With the elections less than a week away, a
large number of House members took a break from campaigning today to consider the
struggling economy and a possible fiscal stimulus package.
The House Ways and Means Committee held a hearing
this morning (and afternoon -- it was a very long hearing) on the need for a
new fiscal stimulus package as well as exactly how large and what provisions
should be in that plan.
Comments by the Chairman
and others suggest the Committee is looking at a $150 billion package made up
of extended unemployment insurance benefits, expanded food stamp payments,
increased spending on highways and other infrastructure, and select tax
provisions.
In the meantime, House Minority Leader John Boehner
preemptively put forward an alternative package more focused on tax relief, including doubling the $1000
child tax credit, suspending the capital gains tax, and reducing the corporate
tax rate from 35 to 25 percent.
As to the timing of congressional action, it appears the
Ways and Means Committee intends to act on a package when Congress returns in
mid-November, with the full House taking up the Committee-passed package
shortly thereafter.
What happens next is unclear. Whether the Senate can take up and pass
something depends very much on the content as well as whether the bill has a
chance of getting signed into law. The
more spending and less tax relief the package includes, the less likely
the President will sign it.
Press Secretary Dana Perino suggested last week that the
White House would not propose its own stimulus package and, while it remained
open to suggestions by Congress, they were not engaged in discussions and would
take a critical view of any package put forward.
We remain open to
listening to all good ideas that people want to put forward. What we've seen so
far in regards to what's been called a second stimulus package is a series of
proposals that actually would not stimulate the economy that are being talked
about as something that would assist people -- but we actually don't think it
would help the economy.
Another possibility is for the Democratic leadership to wait
until the new year and the new president to move a sizeable package through
both chambers. A President Obama would
be more friendly to many of the spending provisions under consideration than the current President. He would also benefit from the timing of
coming into office and immediately signing something into law that is designed
to help the economy.
Either way, the content, the size, and the timing of a
second stimulus are all on the table right now.
More on Marginal
Rates and Small Business
S-Corp allies over
at the Tax Foundation have done some more work on the impact raising marginal tax
rates will have on America’s small business community. Just to rehash our major points outlined in
the past:
One
half of all business income is taxed under the individual rather than corporate tax codes;
Two thirds
of businessincome subject to the individual tax code is subject to the
top two marginal tax rates; and
40 percent of all
small businesseswith between 20 and 250 employees pay the top two
rates.
The Tax Foundation paper emphasizes the
adverse impact raising marginal tax rates will have on small businesses. As scholar Bob Carroll writes:
The top individual tax
rates are particularly important because a disproportionate share of the
flow-through income reported by small business owners is taxed at those rates.
Among the small share of tax returns that are subject to the top two tax rates,
most receive small business income.
Perhaps the most important finding of the new Tax Foundation
paper is that of the higher revenues collected by raising the top two
individual tax rates, more than one half comes from raising rates on small
businesses.
In other words, the core provision in proposals by Senator
Obama, Ways and Means Chairman Charlie Rangel, and others is to increase the top
two tax rates back to their pre-2001 levels -- or even higher -- despite the
fact that half of that tax increase will be shouldered by small business
owners.
Washington Wire Monday, October 20, 2008
Congress to Consider Lame Duck Session Stimulus
What time is it when the market is
down, unemployment is up, personal consumption is falling and manufacturing
activity is contracting? Time for
another economic stimulus package.
Last week, the Ways and Means
Committee confirmed it will hold a hearing on the economic stimulus package on
October 29th. The specifics have
yet to be worked out and several House and Senate Committees are expected to have
a hand in crafting the bill. Politico lists the
most likely contenders:
It could include a permanent tax cut for
lower- and middle-income families, in addition to the expected extension of
unemployment benefits, increased money for food stamps and the states and more federal funds
for bridges and other transportation projects.
House Speaker Nancy Pelosi and
Senate Leader Harry Reid have made clear in recent days that both the House and
the Senate will come back for a lame-duck session. The Senate is scheduled to come back for the
week of November 17th.
Earlier reports from the House indicated they may convene before the
elections, but Speaker Pelosi has refused to put a timeline
on consideration of a second stimulus package.
Regardless of the timing, Congress is
set to consider another stimulus package following the elections and your S-CORP
team is committed to ensure our Built-in Gains (BIG) reforms are included. If the business community needs access to
capital, BIG reform can help. Here’s some more on Built-in Gains reform:
In response to the continuing economic
crisis, Senators Obama and McCain have put forward new additions to their
economic proposals. Here is a quick summary
of each of the candidate’s plans.
Obama’s plan would:
Create
a new temporary tax credit for companies that add domestic jobs. Through 2009and 2010, existing businesses will receive a$3,000
refundable tax credit for each additional full-time employee
hired; eliminate all capital gains taxes on investments made in small
businesses and start-ups;
Create
a $25 billion Jobs and Growth Fund for infrastructure projects and
schools; $25 billion in aid to states, and $25 billion in loanguarantees for
auto companies to retool their plants;
Instruct
the Treasury Department to allow those 70 and ½ and older to delay requiredwithdrawals from their 401(k)s
and IRAs and allow others penalty free withdrawals of 15% up to $10,000 from
IRAs and 401(k)s (although subject to the normal taxes);
Direct
the Secretaries of Treasury and Housing and Urban Development to
aggressivelymodify mortgages; 10%
refundable tax credit on mortgage interest for those who don’t itemize
their taxes; Reform bankruptcy code to allow for broader mortgage
restructuring; Put in place a 90 day foreclosure moratorium for homeowners
who are trying to pay mortgages; and
Extend
Treasury’s authority to purchase assets aside from mortgage backed
securities tounfreeze other
markets for student loans, car loans and other types of loans.
McCain’s plan would:
Increase
the amount of capital losses which can be used in tax years 2008 and 2009
to offset ordinary income from $3,000 to $15,000;
Reduce
the maximum tax rate on long term capital gains to 7.5 percent in 2009 and
2010;
Allow
up to $50,000 to be withdrawn from IRAs and 401(k)s at a tax rate of 10% through
2008 and 2009; Suspend required withdrawals from IRAs and 401(k)s for
seniors over 70 ½;
Purchase
mortgages directly from homeowners and mortgage servicers and replace them
with an FHA-guaranteed fixed-rate mortgage.
Whichever plan moves forward – Congressional, Obama, or
McCain – will add to the deficit in fiscal year 2009 and put additional pressure
on Congress to raise overall tax revenues.
As the Washington Post reported
Saturday (about two weeks after your intrepid S-Corp team alerted its readers),
the federal budget deficit is currently projected at $650 billion in 2009, and
is likely to go up from there -- to $1 trillion or more.
Washington Wire Tuesday, October 14, 2008
Bailout Update
The Treasury Department announced over the weekend that it
would infuse $250 billion directly into the banking system, starting with
approximately $125 billion targeted at nine major institutions including
Goldman Sachs and Citigroup.
Combined with the coordinated efforts of central banks
around the world, the announcement appears to have successfully staunched the
record erosion of equity prices over the past two weeks. Interest rates
and other indicators are moving in a positive direction as well, indicating
that the credit markets may finally loosen up.
If you are keeping track, the latest move by Treasury is
just the last in a remarkable and unprecedented list of actions by Treasury and
the Fed to respond to the ongoing credit crisis. These actions include:
$250 billion to
recapitalized banks;
$40 billion per month to
purchase troubled assets;
FDIC insurance raised to
$250,000;
Coordinated rate cuts
around world;
Inter-bank loan
guarantees;
$100 billion Fed
intervention in repurchase agreement markets;
Fed pays interest on
balances;
$300 billion to insure
mortgages;
Mark-to-market
accounting changes; and
Fiscal stimulus.
All told, it is about $2 trillion worth of liquidity,
capital, and insurance backstops for the markets! Assuming it works and
restores function to the credit markets -- and we certainly hope it does -- how
all this will unwind is wholly unclear. It took a year for the Treasury
and the Fed to reach this level of intervention. It will likely take
several times that to get back to square one.
Another Stimulus Package Considered
There is more talk of a potential stimulus package.
The most recent NFIB
survey released today signals continued recession levels in America’s small
business community. Meanwhile, today’s Politico
outlines the possible response for Congress when they return November 17th:
A post-election session of Congress seems all but certain
next month with House Democrats beginning to focus on more permanent tax breaks
for middle- and working-class families, along with shorter-term spending
proposals to stimulate the economy.
Treasury’s action this weekend reaffirmed what economists
have been saying for months -- the economy suffers from a lack of
capital. Banks and businesses alike have seen their capital reserves
dwindle in the past year to the point where investors worried about their
solvency.
It is not $700 billion, but changing the rules governing the
Built-in Gains tax would free up billions in locked up capital that could be
used to build new plants, buy new equipment, and hire new workers -- exactly
what the economy needs right now. As S Corporation Association Chairman
Richard Roderick wrote back in May:
According to government statistics, hundreds of thousands
of S corporations nationwide may be sitting on “locked-up” capital that they
cannot access or redeploy due to the prohibitive tax implications of BIG. This
“lock-in effect” is widespread and results in these businesses unable to access
billions of dollars in assets that could be used to grow the business and hire
new employees.
If Congress does take up another stimulus package in
November, we will be in there pushing for BIG reforms.
Washington Wire Friday, October 03, 2008
Congress Passes Bailout -- Goes Home for Elections
The House reversed course today and voted
to adopt the expanded Treasury bailout package by a vote of 263-171.
As S-Corp readers know, the Senate took the original Treasury
plan, added the tax extender package, some hurricane relief, and a temporary
boost in FDIC insurance levels, and passed the broader legislation 74-25 on
Wednesday.
Fifty-seven members of the House switched from Noe to Yea
today. The package is now law. The President signed it as soon as the bill traveled
sixteen blocks up Pennsylvania
Avenue.
So how will this impact S corporations? While we prefer to give our readers frank,
direct answers to tough questions, the reality is we don’t know. Here’s how it breaks down:
S Corp Charitable Provision: Positive.
This provision was part of the extender package, and is now extended
through the end of 2009.
Deficit Impact:
Negative. Deficits are going
up. Next year’s deficit will likely be
in the $600 billion range, or about 4 times the deficit in 2007. Higher deficits mean increased pressure on
Congress to raise taxes. The Treasury
plan will likely make the deficit worse.
How much? A CBO summary
of the plan concludes, “That net cost is likely to be substantially less than
$700 billion but is more likely than not to be greater than zero.” So somewhere between $700 billion and
zero. Great.
It’s hard to blame the CBO, though. The challenge of valuing these assets is one
of the reasons for the bailout. New
analysis of the Bear Stearns acquisition does a nice job of highlighting the
challenge of valuing these troubled mortgages and the securities based on
them. As Bloomberg reports:
The valuation of the
$12 billion of Alt-A mortgages varies by as much as $5.4 billion depending on
whether the analysts use estimates that Goldman Sachs Group Inc., Lehman
Brothers Holdings Inc. or Morgan Stanley apply to their own portfolios, the analysts
wrote.
The Treasury plan should help clarify the value of these
assets, but it does so by shifting risk from the financial community to the
taxpayer. Just how much that risk will
cost us is the $700 billion question.
Economic Impact:
Positive. The Treasury plan is
viewed by the credit markets as necessary, but insufficient by itself, to
reverse the declining economy. We were
facing a cyclical slow-down coupled with a credit crisis. The Treasury plan helps address the latter,
and to the extent it’s successful, it will help make the pending recession less
severe and less lengthy.
So the net impact on S corporations and the small business
community is mixed. Higher deficits mean
higher taxes, while healthier credit markets mean a shorter, shallower
recession.
Congress returns November 17th to consider
several smaller items. Depending on how
the economy fares, it may need to consider additional provisions to help the
economy. We are confident that a $700
billion plan drafted and enacted in 14 days will need some refinements. Hopefully, that’s all Congress needs to
do.
Washington Wire Wednesday, October 01, 2008
Bailout and Extenders Combined
As equity markets continue their wild swings while the
credit markets signal distress, Congress will make another run at the financial
sector bailout this evening.
This time the Senate will try. The new package retains
the core of the bailout -- authority for Treasury to purchase hundreds of
billions of dollars worth of troubled mortgages and other assets -- while
adding an increase in FDIC insurance levels from $100,000 to $250,000,
hurricane relief, and the Senate-passed tax extender package.
The Senate will take up the package this evening, voting
around 8:00 pm Eastern Time. If it passes, the House will take it up
tomorrow. Here’s the new package
plus the timeline
for Senate action.
The goal is for the Senate to pass this package with a
strong vote and put new pressure on House members of both parties to support
the bailout. The House needs at least 12 members to change their vote and
support the package.
We are hearing that a significant number of House
Republicans are prepared to support the bailout this time around. Those votes will be needed. The Senate extender package that passed the
Senate 93-2 has focused opposition on the House side, including the caucus of
moderate Democrats known as the “Blue Dog” coalition.
Blue Dogs oppose passing tax provisions without offsets, but
they voted 26-21 for the failed bailout on Monday. How many of those 26
will switch and vote against this expanded package? Will increased Republican support be
sufficient to offset Blue Dog defections?
House Leadership thinks it will, but then, House Leadership
thought they had the votes on Monday too.
Effective Tax Rates
The Tax Policy Center
has a new study
comparing the effective tax rates under the Obama and McCain tax plans. According to the Center, the effective tax
rate for taxpayers making more than $1 million stays the same under McCain (34
percent) but rises dramatically under Obama (45 percent if you include his payroll
tax proposal).
We have pointed out in the past that fully one-third of all
business income in this country is subject to the top two individual tax
rates. Raising the effective tax rate on
that income from 34 to 45 percent is going to harm small business creation and
growth.
As Economist Greg Mankiw points out in his blog, higher tax rates also mean
more dead weight loss to the economy, even if lower income taxpayers see their
effective tax burden decline.
The deadweight loss of
taxation rises roughly with the square of the tax rate. As a result, if one
person sees the marginal tax rate fall from 20 to 15, while another sees it
rise from 30 to 35, the average marginal tax rate is unchanged, but the
deadweight loss increases.
In non-economist speak, that means a revenue neutral plan to
balance tax cuts and higher government payments for low-income families with
rate hikes on upper income families will result in less economic activity
overall. That means less capital for
investment and fewer jobs for workers.
Signs of recession are every where right now. The last thing Congress should consider is a
hike in tax rates.
Washington Wire Monday, September 29, 2008
Financial Bailout Package Fails in House
If you are following the markets, you might have noticed the
financial sector bailout plan failed in the House, 216 to 206. Here’s the vote tally. When it become apparent the vote was going to
fail, the Dow fell by more than 700 points (6%) and continues to trade in that
range.
Your S-Corp team expects the House Leadership to work with
the Administration to alter the plan and bring it back up on Wednesday. Possible changes include additional
conditions for firms selling assets to the Treasury, a smaller cap on those
purchases, etc.
Perhaps more to the point, changes will include anything and
everything necessary to get 10 members of the House to change their votes. Expect another nail biter in a couple
days. And then the Senate gets its
shot.
Washington Wire Monday, September 29, 2008
Bailout Votes This Week
The House is scheduled to vote on the financial sector
bailout package later today. If it
passes, the Senate will take it up on Wednesday.
The package itself retains the core Paulson proposal to give
Treasury the authority to purchase $700 billion in problem mortgages held by
banks and other financial institutions.
The goal of the plan is to restore confidence in these institutions by
eliminating this source of fear and uncertainty for the next two years. The ultimate cost of this plan to taxpayers will
depend on how much further home prices fall.
Some observers believe the taxpayer will be made whole when Treasury
resells the securities.
In the past few months, we have seen the entire American investment
banking industry disappear, the world’s largest insurance company fail, the
largest failure of a bank in
history, and Wachovia sold at a fire sale.
Meanwhile, banks overseas are experiencing runs as well. Belgian giant Fortis was bailed out by
European authorities this morning.
Opposition to the plan is now focused on questioning whether
this plan will address the underlying problem -- the lack of capital for our
lending institutions and the pending run on our banks. One challenge for the plan as negotiated is
it will take time for Treasury to begin buying these assets. Getting these assets off the banks’ books may
help, but will it arrive in time?
Here’s some background material for those interested.
Observers expect the plan to pass both bodies, but it is
going to be close. In the meantime, the
world’s credit markets are watching very closely.
Extenders on Hold
At the beginning of the year, we would have bet money --
serious money -- that there is no way Congress would leave for the year without
addressing the expiration of tax provisions like the AMT patch, R&E tax
credits, and a long list of credits and deductions designed to encourage
renewable energies.
The House is scheduled to take up yet another version of the
energy extenders later today, and expects to adjourn for the elections shortly
thereafter. The pending House action
marks the six or seventh time this year that body has considered extender
packages that include offsetting tax increases to cover the revenue loss.
The Senate has demonstrated repeatedly that it does not have
the votes to adopt fully-offset extender packages, so why the House is taking
yet another vote on this issue is unclear.
Last week, the Senate passed a $150 billion package of extenders that
included $25 billion in offsets. Both
the Senate Leadership and the White House have communicated to the House that
$25 billion is as high as they are willing or able to go.
The House action today suggests that if there is going
to be an extension of these tax provisions before the end of the year, it’ll
have to take place in a lame duck session.
Now the question becomes, is there going to be a lame duck?
Washington Wire Friday, September 26, 2008
Congressional Overview
We are nearing the finish line for the 110th
Congress with more on the table than when we started nearly two years ago.
None of the 12 bills to fund the government have been
adopted. Tax provisions that expired at
the end of 2007 remain to be extended.
And the collapse of the subprime mortgage market that began a year ago
with the failure of several hedge funds has grown into a full fledged credit
crisis that, according to the Administration, threatens to harm the entire
economy.
It appears Congress will stay in through next week and will
have to address the following major items:
