Senate Jobs Bill First Out of the Chute
With health care reform in a state of political limbo, Senate leadership is busy assembling a job-creation package that is likely to be the chamber’s next significant legislative effort.
Just before Christmas recess, the House hastily assembled and adopted a $154 billion spending package. In response, the Senate Finance Committee is working on a package that focuses more on tax relief than the House counterpart. As reported by Dow Jones:
The package would be paid for largely by re-directing funds that were available for the government’s bank bailout program, according to an outline dated Friday of possible measures being considered for inclusion in the bill.
The Senate document put the total cost of economic stimulus measures in the bill at $82.5 billion. A Senate Democratic aide cautioned that the document doesn’t reflect the most recent conversations among leaders about the plan, and some elements may change considerably.
A broad outline pitched to the Democratic conference today included pension relief, SBA lending provisions, energy efficiency tax credits, export promotion (IC-DISC users take note) and a proposal that would “provide a tax credit for between 10%-20% of increased payroll—to encompass both hiring of new workers and increasing part-time workers to full-time status.”
Tax policy veterans should recognize the employment tax credit idea from years past. Among others, Senator Kerry offered something similar as part of his Presidential platform in 2004. The proposal has been always been viewed skeptically, however, over concerns that it is poorly-targeted and only rewards those businesses that would hire new workers anyway.
Regarding timing, it’s still up in the air but we anticipate a Finance Committee markup in the next two weeks followed by floor consideration after the President’s Day holiday.
So what are your S-CORP takeaways? First, there’s an incredible amount of pent-up demand for tax policy in the Senate, and we expect this legislation to open the floodgates. It’s a tax vehicle, after all, so how can Chairman Max Baucus and Majority Harry Leader Reid keep extenders, energy tax incentives, and (perhaps less so) an estate tax fix on the sidelines once it starts moving?
Second, lots of other items are likely to catch a ride as well. Extended UI and Cobra benefits expire at the end of February, as does the temporary Doc Fix for Medicare payments. The timing of this package suggests those provisions stand a good chance of being included.
Finally, expect lots of message amendments regarding the expiring Bush tax relief. It all goes away at the end the year, after all, and none of the provisions listed above address this underlying policy challenge.
CBO Updates Budget Outlook
The CBO issued its outlook for 2010-20 today. Here’s the CBO on the short-term outlook:
CBO projects, that if current laws and policies remained unchanged, the federal budget would show a deficit of $1.3 trillion for fiscal year 2010. At 9.2 percent of gross domestic product (GDP), that deficit would be slightly smaller than the shortfall of 9.9 percent of GDP ($1.4 trillion) posted in 2009. Last year’s deficit was the largest as a share of GDP since the end of World War II, and the deficit expected for 2010 would be the second largest. Moreover, if legislation is enacted in the next several months that either boosts spending or reduces revenues, the 2010 deficit could equal or exceed last year’s shortfall.
And the longer term outlook:
Under current law, the federal fiscal outlook beyond this year is daunting: Projected deficits average about $600 billion per year over the 2011–2020 period. As a share of GDP, deficits drop markedly in the next few years but remain high—at 6.5 percent of GDP in 2011 and 4.1 percent in 2012, the first full fiscal year after certain tax provisions originally enacted in 2001, 2003, and 2009 are scheduled to expire. Thereafter, deficits are projected to range between 2.6 percent and 3.2 percent of GDP through 2020.
And the impact on debt:
Under current law, the federal fiscal outlook beyond this year is daunting: Projected deficits average about $600 billion per year over the 2011–2020 period. As a share of GDP, deficits drop markedly in the next few years but remain high—at 6.5 percent of GDP in 2011 and 4.1 percent in 2012, the first full fiscal year after certain tax provisions originally enacted in 2001, 2003, and 2009 are scheduled to expire. Thereafter, deficits are projected to range between 2.6 percent and 3.2 percent of GDP through 2020.
And none of this includes the cost of health care reform, the so-called Medicare Doc fix, extending some or all of the Bush tax relief, the new stimulus provisions, or any of the other expiring provisions. Ouch.
With a deficit outlook like this, the Obama Administration is being pushed in two directions these days. They face demands to increase federal spending in the short run to help the economy while also being told they need to cut spending in the long-term to address the deficit and debt.
One way to deal with this conflict is to substitute smaller, less expensive proposals for the broad, macro reforms that have characterized the Administration’s agenda. President Clinton adopted this approach for many of his State of the Union addresses. As CNN reported after his 1999 address:
President Bill Clinton’s 1999 State of the Union address was classic Clinton. It was another long laundry list of proposals, some conservative, some liberal… Clinton’s 77-minute speech was so overflowing with proposals that by the time it ended it was almost hard to remember that Social Security was the first and most important proposal of the evening. In previous years, commentators criticized Clinton for this approach, complaining that the State of the Union should be more focused. But this year, most commentators simply gushed.
So did viewers, who typically gave Clinton’s annual State of the Union speeches higher marks than professional commentators.
President Obama’s proposal to increase the child credit is a worthy successor to the Clinton approach. The proposal would increase the value of the credit, but not as much as one might expect. It’s not going to be refundable, which means most families with children would not benefit until their incomes rise above $40,000 or so. And it’s capped, so families above a certain income level don’t get it either. Nonetheless, offering middle class families extra child care assistance sounds great in a speech.
Given the current economic and deficit picture, we expect tomorrow’s State of the Union address to place more emphasis on proposals like the child care credit expansion, and less on health care reform and cap and trade.
Congress Reaches Deal on Stimulus
Sometimes, Congress meets a deadline. Six weeks ago, congressional leadership and the new Obama Administration had set out the Presidents’ Day recess as the deadline for getting the economic stimulus package to the President’s desk.
With the House’s vote on final passage today and the Senate expected to consider the bill as early as this evening, all indications are they’ll make it. Here’s a quick summary of the $789 billion package as outlined by the conferees:
- $301 billion in family and business tax relief (down from $350 billion in the Senate bill).
- $70 billion in renewable and energy efficiency provisions.
- $140 billion in higher payments to states through Medicaid and a new State Fiscal Stabilization Fund.
- Extended unemployment and increased food stamp benefits.
- $45 billion in highway and transit funding.
- $35 billion in Health IT, basic scientific research, and comparative effectiveness.
Here’s a full summary of the Ways and Means and Finance Committee portions of the package and the final JCT table.
Built-In Gains Relief in Final Stimulus Package!
A provision to provide built-in gains relief to hundreds of thousands of S corporations is part of the final stimulus package moving through Congress. The President is expected to sign the package into law early next week.
Once he does, firms that converted to S corporation or existing S corporations that acquired other businesses in the years 2000, 2001, 2002 and — beginning next year — 2003 will be able to dispose of built-in gains assets without paying the punitive level of tax.
This provision, which originated in the Senate and was championed by Senators Blanche Lincoln (D-AR), Orrin Hatch (R-UT), Olympia Snowe (R-ME), Mike Enzi (R-WY) and Ben Cardin (D-MD), survived the conference process between the House and Senate due in large part to our S-CORP Champions in Congress including key House advocates Representatives Ron Kind (D-WI), Steve Kagen (D-WI), Nydia Velazquez (D-NY), Allyson Schwartz (D-PA), and Danny Davis (D-IL). Our House allies sent a letter to House Leadership this week urging for the inclusion of the Senate’s BIG relief provision.
S-CORP Chairman Dick Roderick noted, “Built-in gains relief has been a priority of the S Corporation Association for years. Congress’ adoption of this provision is the result of lots of hard work educating policymakers on the importance of allowing closely-held businesses access to their own capital.”
Roderick also had words of praise for Senator Lincoln and Representative Kind. “Senator Lincoln and Representative Kind have worked tirelessly to improve S corporation rules. They really understand the important role closely-held businesses play in economic growth and job creation.”
Stimulus Update
The Washington Post reports that the Senate Stimulus bill is short of the 60 votes needed for it to move through the chamber. As the Post noted:
Senate Democratic leaders conceded yesterday that they do not have the votes to pass the stimulus bill as currently written and said that to gain bipartisan support, they will seek to cut provisions that would not provide an immediate boost to the economy.
The vote in the House did not help, with all Republicans and 11 Democrats opposing the House version of the package. The unified Republican opposition in the House will likely empower Republicans in the Senate to stand together as well.
But the opposition rests not just with Republicans. Some Democratic members have expressed opposition as well. $800 billion in new spending and tax relief is a huge package, especially with the deficit already projected to exceed $1.1 trillion in 2009.
So what’s likely to happen? Look for moderates in both parties to put together a list of spending items that need to be cut in order for them to support the remaining package. As the Post reports:
Nelson said he and Collins have agreed to “tens of billions” in cuts, although he said he is skeptical that the effort will reach Collins’s target of $200 billion in reductions. The pair has counted up to 20 allies in their effort, with more Democrats than Republicans at this point.
Whether Senators Susan Collins (R-ME) and Ben Nelson (D-NE) find the right balance, or another group of Senators come to the table, we expect a compromise to be worked out over the next couple days. The Senate may be in this weekend, but it’s unlikely to leave without passing some form of the package first.
S Corps Lose an Ally
The S corporation community lost one of its greatest advocates the other day with the passing of Don Alexander. As our friend Martin Vaughn with Dow Jones reports:
Donald C. Alexander, who served as Internal Revenue Service Commissioner from 1973 to 1977, died Monday night at 87. Besides leading the IRS, Alexander held a wide range of other public service positions, including serving on the Commission on Federal Paperwork and as commissioner of the Martin Luther King Jr. Federal Holiday Commission. He was director of the U.S. Chamber of Commerce for five years in the 1980s. Most recently, Alexander was a partner at the law firm of Akin Gump Strauss Hauer and Feld LLP, from 1993 until his death. He was awarded the Silver Star and the Bronze Star for service in the 14th Armored Division during World War II.
Don was always a southern gentleman, and he was always focused on improving the rules for S corporations. He testified on behalf of the community before Congress many times. Here is just one sample of his views.
BIG Reform Included in Finance Committee Mark!
Big news for S corporations! S-CORP champions Senator Blanche Lincoln (D-AR) and Orrin Hatch (R-UT) have succeeded in securing BIG reform in Senator Baucus’ (D-MT) version of a stimulus package! As S-CORP readers know, BIG reform has been a top priority for S-CORP. BIG reform could potentially free up billions in locked-up capital that could be used to buy new equipment, build more plants and hire new workers – exactly what the economy needs during this economic crisis. As the Joint Committee on Taxation describes the provision:
“The proposal would reduce temporarily the S corporation built-in gains holding period from the current 10 year period to a seven-year period for taxable years that begin in 2009 and 2010.”
The Senate Finance Committee is debating the legislation today with the full Senate expected to take up the bill early next week, after which the House and Senate stimulus packages will have to be reconciled. Securing this provision in the Finance Committee mark is a great beginning, and your S-CORP team will be working with our House champions to ensure this provision survives into the final package passed by Congress.
More on Stimulus
One hurdle facing the stimulus package moving through the House is the perception that the fiscal help doesn’t occur rapidly enough. According to the Congressional Budget Office analysis, much of the bill’s $825 billion price tag would not actually get spent or returned to taxpayers until after 2011.
That’s just one more reason to include the BIG relief. As included in the Finance Committee mark, the provision would last for two years, so thousands of companies who converted to S corporation status or acquired another company would be eligible to divest themselves of underutilized assets in the next two years and put those resources to better use immediately. If the economy is suffering from a lack of capital, BIG is a small but important solution.
How many companies would benefit? Analysis from our friends at the Statistic of Income suggests that more than 350,000 firms could be freed to divest themselves of locked in assets. Also potentially benefiting would be those existing S corporations that acquired another company during those years.
| Year | Total S Corps | New S Corps | Newly Formed | Conversions |
| 2003 | 3.3 | 343000 | 253000 | 90000 |
| 2002 | 3.2 | 334000 | 243000 | 91000 |
| 2001 | 3 | 299000 | 206000 | 93000 |
| 2000 | 2.9 | 293000 | 211000 | 82000 |
Even taking into account business failures and other subtractions, the net result is that hundreds of thousands of small and closely-held businesses will potentially benefit from BIG relief in the next two years.
Stimulus Introduced in House
The House Leadership released an outline of its proposed stimulus package yesterday with few surprises. The total package is $825 billion with $550 billion in new spending and $275 billion in tax relief. On the spending side, the package includes $550 billion in spending, and $275 billion for tax cuts. Some of the tax highlights include:
- Making Work Pay Credit - offsets payroll taxes on the first $8,100 of earnings
- Expanded Earned Income Tax Credit
- Bonus depreciation
- A five year carry-back of net operating losses (excluding companies receiving TARP benefits, Fannie Mae, Freddie Mac)
- Extension of increased small business expensing
- Tax-exempt bond provisions to help state and local governments
- Energy tax incentives
As our conversations with folks in both the House and the Senate indicated, the House deferred mostly to the incoming President’s priorities for the stimulus package, while the Senate is likely to take a more critical view of both the size and the content of the package. Fiscal conservatives in the House are already bracing themselves to fight additional tax and spending items added in the Senate.
For example, Obama’s “Make Work Pay” tax credit is still included in the House package although it continues to be the focus of Congressional scrutiny, as economists and policymakers on both sides of the aisle have questioned its efficacy. It’s possible the House included the provision with the expectation that the Senate would replace it with other priorities.
As far as process goes, the Ways and Means Committee is expected to mark-up the legislation next week and have it on the House floor for a vote the week of the 26th. The Senate is expected to mark-up its version of the legislation late next week or more likely, the following week. Their goal is to get the bill finished and signed into law prior to the February recess.
Treasury Helps S Corp Banks as Congress “Approves” New TARP Money
Those watching President Bush’s press conference Monday might have caught this give-and-take:
Q. I’m wondering if you plan to ask Congress for the remaining $350 billion in bailout money. And in terms of the timing, if you do that before you leave office, sir, are you motivated in part to make life a little easier for President-Elect Obama?
THE PRESIDENT: I have talked to the President-elect about this subject. And I told him that if he felt that he needed the $350 billion, I would be willing to ask for it. In other words, if he felt it needed to happen on my watch.
The best course of action, of course, is to convince enough members of the Senate to vote positively for the — for the request. And, you know, that’s all I can share with you, because that’s all I know.
Q. So you haven’t made the request yet?
THE PRESIDENT: Well, he hasn’t asked me to make the request yet. And I don’t intend to make the request unless he specifically asks me to make it.
About thirty minutes later, the Obama team asked the President to make the request and he passed it on to Congress. Three days later, the Senate ratified the request by voting down a motion of disapproval 42-52. The House is expected to do the same next week, after which Treasury will have another $350 billion to invest (or waste if that’s your point of view) in shoring up the financial sector.
For S corporations, that’s important since Treasury also announced this week that it had worked out a plan to allow S corporation banks to access the TARP funds. As we reported earlier, the original construction of the Capital Purchase Program under TARP was for Treasury to inject capital into financial institutions in exchange for shares of preferred stock. Because S corporations are prohibited from issuing preferred shares, they couldn’t participate.
Our friends at the Independent Community Bankers of America made Treasury aware of this oversight and this week, just in time to take advantage of the extra $350 billion, Treasury issued a new term sheet that applies to S corporation banks.
S corporation banks wishing to take advantage of the Capital Purchase Program have until February 13th to apply.
Stimulus Package Discussed
Following a closed-door planning session today of members of the Senate Finance Committee, we expect the Committee will mark-up the tax portions of a stimulus package as early as January 22nd. As we indicated previously, committee members are committed to exerting their jurisdiction over the tax portions of the package. Moreover, there appears to be a growing debate over certain provisions in the Obama plans. As Dow Jones reports this afternoon:
“When asked about specific tax cut proposals made by Obama, Kerry said, “I think there are cuts that are not going to stand the test of whether they will create jobs. Coming in for specific criticism were an Obama plan to give companies a $3,000 tax credit to offset the cost of new hires, and a $500 tax credit for workers that would be spread out over a period of time in take-home pay. “Is a $3,000 tax credit going to get you to hire somebody to build cars that nobody’s buying?” asked Sen. Kent Conrad, D-N.D., speaking to reporters after the committee meeting.”
Exactly what replaces those unpopular tax cuts — more tax relief or more spending — is an open question. Let’s hope it’s more tax relief for businesses. Having both the Ways and Means and Finance Committee members weigh in on the stimulus package, however, gives our S corporation allies a better chance to make the package more small business friendly, especially with regard to built-in gains reform. We expect the Ways and Means Committee to also hold a mark-up as early as the week of the inauguration. S-CORP In the News
Speaking of small business tax relief, the Baltimore Sun published an op-ed by S-CORP Executive Director Brian Reardon highlighting the history of the small business corporation and outlining how Congress can best help ensure the small business community is adequately armed to respond to the on-going economic recession:
What should Congress do? First, follow President-elect Obama’s lead and make small business tax relief the center of any economic stimulus plan. Relief that increases small business’ access to capital would be especially timely. For S corporations, the tax code forces many of them to sit on appreciated assets rather than sell them and put the money to better use. Another rule prohibits them from accepting direct foreign investment. Changing these out-of-date rules would free up capital and encourage new business formation.
Second, keep the rates on small business income low – certainly no higher than what large corporations pay. Actions like these would signal to millions of small businesses that they will not be punished to pay for the excesses of Wall Street, which should make it easier for them to grow their businesses and create jobs.
New Members on Ways and Means
The House Ways and Means Committee for the 111th Congress is now complete, with both Democrats and Republicans announcing their final additions to the committee. House Republicans had six seats to fill and announced their selections yesterday. New members include:
Rep. Charles Boustany (LA-07)
Rep. Ginny Brown-Waite (FL-05)
Rep. Geoff Davis (KY-04)
Rep. Dean Heller (NV-02)
Rep. David Reichert (WA-08)
Rep. Pete Roskam (IL-06)
Earlier this week House Democrats filled their one remaining spot on the Ways and Means Committee with the selection of Linda Sanchez (D-CA), after Representative Raul Grijalva (D-AZ) turned down the position in December. Combined with the Democrats’ earlier additions, that’s a total of 11 new members for the tax-writing Committee.
You can bet your S-CORP team will be reaching out to new and old members alike in coming weeks. Small business tax relief is on the table, and we need to get the message out.
Auto Bailout Stalls Stimulus
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.
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.”
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 business income subject to the individual tax code is subject to the top two marginal tax rates; and
- 40 percent of all small businesses with 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.
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:
- Letter from Associations Supporting for BIG Reform
- Letter from S-Corp Chairman Supporting BIG Reform
- Background on “Small Business Growth & Opportunity Act” — H.R. 3874
- Section by section summary of “S-CORP Modernization Act” – S. 3063
Presidential Candidates Revise Economic Plans
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 2009 and 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 loan guarantees for auto companies to retool their plants;
- Instruct the Treasury Department to allow those 70 and ½ and older to delay required withdrawals 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 aggressively modify 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 to unfreeze 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.
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