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.
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.
President to Sign Fiscal Stimulus
The President is expected to sign the fiscal stimulus package on Wednesday. After two weeks of hand ringing and posturing, the Senate finally adopted a slightly modified version of the bill the House and the President originally had negotiated.
As sent to the President, the package would:
- Send checks of $600 per filer and $300 per child to families with joint incomes of less than $150,000. Actual amounts will be calculated based on income tax filings for 2007, so expect the actual checks to be in the mail by late spring and early summer.
- Encourage new business investment by increasing the limit on small business expensing from $100,000 to $250,000 as well as allow for 50-percent bonus depreciation. Both of these tax breaks are available for equipment placed in service in 2008 only.
- Allow for a temporary, 2-year increase, from $417,000 to $729,750, in the so-called conforming loan limit and limit on FHA-guaranteed loans.
Whether this package benefits the economy will have to be seen. Certainly the speed with which Congress and the Administration came together, even with the delay in the Senate, was impressive and should send a positive signal to families and businesses. The size of the package is significant as well. The short term cost of the family checks and increased expensing—not counting the mortgage relief—is about $150 billion in 2008, or slightly more than 1 percent of the economy.
The challenge, as always for fiscal stimulus, is how to get it done quickly enough to be effective. Under the current time frame, both the rebate checks and the mortgage relief will not be felt until well into the third and fourth quarter of 2008. The remaining question is whether the economy will still be in its mid-cycle slowdown or will be in a recession at that time.
Energy Tax Provisions Move Forward—Again
As expected, the introduction of the President’s budget for fiscal year 2009 fell flat last week, with few, if any, of its proposals getting serious attention.
A week later, in a bit of irony, the House is planning to take up a package of renewable energy tax provisions that were dropped from the President’s budget this year. Given the price of oil, why the Administration would pick this year to end its call for extending renewable energy tax incentives is slightly inexplicable.
The House action is curious as well, given the repeated failure of Congress and the Administration to agree how to pay for the extension of these and other tax items in 2007. Staff involved in the drafting expect the bill to look very similar to the House energy tax package from last year, despite the failure of that package to get past the Senate. As BNA noted this morning:
Democrats in both chambers produced energy tax packages in 2007 that were designed to encourage the use of alternative and clean energy at the expense of oil and gas producers. But resistance from Senate Republicans–and a firm stance by President Bush that he will not sign into law any bill that would raise taxes–killed Democratic efforts.
Absent the emergence of a new, non-controversial offset, the fate of this effort is likely to be similar to the energy tax packages considered late last year.
For S corporations, the lesson should be clear. The consensus that brought Congress and the President together on the stimulus package has vanished.
Tax extenders like the energy tax credits, AMT patch, and the R&E tax credit are considered to be “must-pass” items. To get them done, however, congressional leadership will need to bridge the competing interests of “pay-as-you-go” budgeting with the concerns of the President and others who oppose seeing the overall tax burden increase under their watch.
Moving the same energy tax package that failed previously suggests congressional leaders haven’t worked that out yet, and all the positive tax policy initiatives that benefit S corporations and other actors in the economy will have to wait until they do.
President’s Budget is Good for S Corporations—Too Bad Congress will Ignore It
The President’s fiscal year 2009 budget was released this morning together with the “Blue Book” describing his proposed tax policies. Here are a couple thoughts as Congress begins the process of putting together its tax and spending bills for the coming year.
First, the whole process of the President’s budget has a strong element of unfairness to it. For the past three decades, every President has put together a comprehensive annual budget and sent it up to the Hill. And every February, whoever runs the Congress immediately labels it DOA, or “Dead on Arrival.”
The unfairness is that Congress mandates that the President put together a budget each year—it’s required under the 1974 Budget Act. So Congress demands the President produce a budget and then promptly ignores it for the rest of the legislative session. Such is the life of the staff over at the Office of Budget and Management.
This routine is too bad for S corporations—this particular budget is decidedly pro-small business. It calls for extending tax relief, including the lower rates and estate tax repeal. It asks Congress to increase the Section 179 small business expensing limits. And it would extend the relief from the Alternative Minimum Tax that many S corporation shareholders pay for another year.
On the other hand, the new budget reveals a couple more macro trends that will be hard for Congress to ignore. First, the deficit picture has gotten decidedly bleaker. In recent years, the deficit peaked in 2004 at $412 billion dollars and declined in each of the succeeding years, falling to $162 billion in 2007. The weakening economy and lower corporate tax collections are expected to reverse that positive trend in 2008, resulting in a predicted $410 billion deficit.
Second, the cost of making the President’s tax relief permanent is growing. According to the budget, simply extending the lower tax rates on wages and investment will reduce revenues by over $1.3 trillion. Extending all the tax relief, including the repeal of the estate tax, would reduce revenues by nearly $2.2 trillion over the 10-year budget window.
For S corporations, neither is particularly good news. The rate relief is very much in the interest of our members, since all 3.8 million S corporations pay their taxes according to the individual, rather than corporate, tax rate schedules. As the cost of extending the lower rates rises, the likelihood that they expire or are pared back increases as well.
Second, rising deficits mean more focus on the so-called “tax gap” and those policies that promise to close it. Where is the Administration and Congress going to look? Of the $36 billion of proposals to “Improve Tax Compliance” in the President’s budget, nearly all are directed at individuals, small businesses, and independent contractors.
So, once again, the challenge for S corporations in 2008 will be to preserve our victories over the past decade and seek to improve the rules under which we operate, all while fighting off unfair tax increases put forward under the guise of closing the “tax gap.”
Stimulus Package and Other Tax Priorities The Senate will hold a series of votes on the stimulus package on Wednesday. While the ultimate outcome of those votes is unclear, we do expect the House and the Senate to agree to a stimulus package in short order—in the next week or so—and send something to the President that he will be willing to sign. The core components of a likely deal remain the same—checks to families, increased but temporary write-offs for businesses, and loosened restrictions for qualifying mortgages.
Once that bill is completed, congressional tax writers will need to turn their focus to a list of “must-do” items that will look eerily familiar to those of us who followed last year’s tortured process—tax extenders (including those like the R&E tax credit that expired last year), another AMT patch, and new and existing renewable energy tax provisions.
For the AMT and regular extenders, the outlook is as clear as mud. The same challenges that faced Congress last year remain. First, should Congress offset the revenue impact of extending these tax provisions and, second, if they do choose to offset them, where will the tax writers come up with $100 billion or so in tax increases that the House, the Senate, and the President (considering his State of the Union threat to veto all tax increases) can all agree to? Given the stalemate that confronted this question last year, another lame duck session to resolve this issue is looking increasingly likely.
On the energy front, the decision by the Senate Finance Committee to include the non-farm renewable energy tax provisions in the stimulus package indicates that they intend to include the farm-related tax provisions on the farm bill. These provisions—including the ethanol and biodiesel tax incentives—are being used as leverage to get the complicated agriculture bill out of conference and on to the President’s desk.
The challenge with that bill, as with so many legislative items, is the desire by congressional leadership to offset the cost of increasing farm payments by raising taxes. The current farm program’s authorization expires March 15th, so some sort of resolution to this issue will have to be attempted in the next six weeks. Otherwise, expect another short-term extension of existing farm programs.
Stimulus Boost to Senate Bill
The initial GDP estimate for the first quarter of 2008 (based on data from October, November and December 2007) came in yesterday at a very low 0.6%.
That’s a big reduction from the 4.9% increase in the 3rd quarter, and makes clear that the subprime and credit market problems that emerged beginning in August are reverberating through the broader economy.
Congress is responding. The House passed stimulus legislation on Tuesday by an overwhelming margin that would provide tax rebate checks to families of $1,200 per couple and $300 per child, as well as allowing businesses to write-off investments faster and banks to write larger conforming loans.
And the Senate? Well, it’s a different animal. As we noted previously, the Senate Finance Committee was considering a number of changes and additions. The markup ended last evening and, as adopted by the Committee, the Senate package added numerous provisions to the core package outlined last week, including:
- Higher income limits for the rebates of $150,000 for individuals and $300,000 for couples;
- Extended unemployment benefits;
- Energy tax credits;
- Mortgage Revenue Bonds;
- Five-year net operating loss carry-back for 2007 and 2008; and
- Reimbursements to coal companies for interest on certain unconstitutional excise taxes paid on exported coal.
Where does it go from here? Well, the Senate is currently considering FISA reauthorization and the Senate Democrats have their annual retreat beginning tomorrow, so it’ll either pass today or next week, with the smart money betting on next week.
Once the Senate passes its version, it’ll likely be different than the House bill and will have to be considered again by that body, so the earliest Congress could pass this package and get it to the President would be the end of next week.
We’ll keep you apprised of the progress of the bill.
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.
Senate Passes AMT
The United States Senate last evening passed a one-year extension of the so-called AMT patch—a higher AMT exemption to protect 20 million or so taxpayers from being subjected to the AMT on April 15th. This bill did not include any offsets and it did not include any additional extenders, either.
Senate Republicans, as well as some Democrats—including Finance Committee Chairman Max Baucus—have observed that, since much of the revenue collected by the AMT is accidental and was not intended by Congress, it is nonsensical to insist that protecting taxpayers from the tax should be offset at all. Apparently, those members prevailed in the Senate.
Leadership in the House, on the other hand, takes a very different view. They continue to insist that any change in the AMT be fully offset.
The expectation is the bill will now go back to the House, where the Ways and Means Committee staff are already at work trying to come up with new offsets that both are acceptable to the Senate and sufficient to cover the $50 billion revenue loss of the AMT patch. The most likely course of action is the House will attach those new offsets to the bill and send it back to the Senate.
What happens to the other tax items—the extender package, the energy tax package, and the technical corrections package also under consideration this fall—is very much up in the air.
What is clear is that if your business or industry has been targeted by a proposed tax increase in the past year, you should pay close attention to the activities in the House. They have to raise $50 billion in taxes on somebody. Just who will be the question.
IC-DISC Comments Posted by Ways and Means
For the second year in a row, the tax writers in the House and the Senate have proposed to raise taxes on small and closely held exporters as part of a technical corrections package. And, for the second year in a row, those exporters and the groups that represent them have sent a torrent of comments opposing that effort to both the Ways and Means and Finance Committees.
The Ways and Means Committee has posted their comments over the last couple of days, and while it does not appear that all the comments have actually been posted to the website (we are aware of many that do not appear), it is clear the IC-DISC issue still dominates the list, representing more than half of all the letters and statements received by the Committee.
If you submitted comments, please check the website to make sure they are posted. If you have an IC-DISC or are an exporter who would like to use an IC-DISC, make sure to contact your Representative and Senators and make them aware of this issue. It’s not too late.
Treasury Conference on Corporate Tax Policy
Your S-Corp Association friends attended the Treasury conference on corporate tax policy last week, rubbing shoulders with the Secretary of the Treasury, Alan Greenspan, and others. As expected, the bulk of the speakers focused on tax issues of most concern to Fortune 500 companies—the corporate rate, the treatment of foreign earnings, etc. There’s growing concern that our corporate tax rate is out of whack with the rest of the developed world and this forum served to highlight the benefits of a corporate tax rate cut.
One of the invited speakers, however, S-Corp ally John Satagaj from the Small Business Legislative Council, focused his comments entirely on the state of flow-through businesses and his concern that they not harm the small business community as they work to fix the corporate code.
Also of note was the very friendly attention flow-through businesses received in the background document Treasury prepared for the conference. Chapter 3 of the report exclusively addresses the role S corporations and other flow-through businesses play in our growing economy and it includes lots of helpful statistics on the state of small businesses structured as S corporations, partnerships, and sole proprietorships. A couple of the more compelling facts:
- “93 percent of all businesses in the United States pay their taxes at the individual income tax rates.”
- “The share of S corporation returns as a percentage of all business returns grew from 4 percent in 1980 to 12 percent in 2004.”
- “The number of taxpayers who receive more than half their income from their business was 11.9 million in 2006. Of those, more than a million were subject to the top two income tax rates.”
As the report notes, flow-through businesses are an increasingly important sector of the U.S. economy. Let’s hope the policies coming out of Washington in the next few years reflect that.
Tax Outlook Summary
With the August break upon us, here’s another quick look at all the tax activity on the legislative calendar. We have updated our tax chart, here.
Perhaps the most significant event in recent days was to see how quickly the farm bill managed to turn into a tax bill with the addition of a $4 billion offset for some food stamp additions — no hearings, no warning, and suddenly there’s a $4 billion tax increase on the House floor. Something to keep in mind as the session continues. Here are the current tax highlights:
AMT Reform: This broad, $500-750 billion package is now being discussed as a fall or winter bill in the House. In the Senate, the tax writers are increasingly making it clear they have little or no intention of doing anything permanent on the AMT this year. Smart observers are expecting that another so-called AMT patch—a temporary increase in the AMT exemption levels to restrain the growth in the number of AMT taxpayers—will be adopted late this session, likely just before everybody goes home for Christmas.
Energy Tax Incentives: The House plans to take up the energy bill this Friday, with a $15 billion energy tax package of renewable and conservation incentives included. Offsets to the incentives are targeted at the oil and natural gas industries. Oil Patch Democrats have insisted that the tax provisions be voted on separately, however, so they can support the broader energy bill while opposing the tax package. The total package is expected to pass, but similar concerns in the Senate derailed the Senate energy tax package.
SCHIP: The House and Senate are considering the bill right now. While the bill might succeed in passing the House and Senate, the President has promised a veto. Odds that the current proposal—including the $50 billion tax increase on tobacco—can survive a veto and becomes law are slim to none.
Technical Corrections: Look for this package to be introduced and open to comment in the fall. Last year’s technical corrections package included an IC-DISC provision that would have raised taxes on small and closely held exporters. This provision is likely to be part of the initial bill, but we’re working to keep it out.
Lessons from the Failed Senate Energy Tax Package
As reported in the press, last week the Senate failed to add a sizable energy tax package to its comprehensive energy bill prior to adoption.
The Senate voted 57-36 not to end debate (60 votes are needed) on the tax package that was offered as an amendment to the broader energy bill. This vote fell short despite the fact the Finance Committee reported the package out by a bipartisan vote of 15-5 vote just a few days earlier.
While the package itself has little directly affecting S corporations, there are a couple lessons to draw from the challenge Senate leadership is having getting the package adopted.
The first lesson is there’s no such thing as a free lunch, or in this case, a free revenue raiser. The Finance-reported package would have reduced revenues by $32 billion over ten years, and the Committee had paired the revenue losing provisions with tax increases — mostly targeted at the oil and gas industries — of $32 billion. Oil and gas companies are unpopular these days. The Solar, wind, ethanol, and other renewable fuels industries are very popular. Yet, when it came time to vote, the opposition to the revenue offsets was sufficient to overcome support for the renewable tax breaks.
The second lesson is this issue, and most of the revenue raisers in question, will be back. Senate Leader Harry Reid (D-N) has already indicated he plans to bring this package back up for a vote in July, possibly as part of the expected Agriculture authorization bill. The vote on the energy tax package was very close — three votes away from closing off debate — and with four healthy Senators absent from the original vote, there’s a good chance Senator Reid will find the necessary votes.
How the other tax bills on the agenda — education, housing, children’s health insurance, AMT relief, extenders, etc — manage to offset their revenue costs is still very much in the air and something we’ll be watching closely.
Senate AMT Hearing, House AMT Plans
The Senate held a hearing on the Alternative Minimum Tax Wednesday. For AMT junkies — and really, who isn’t one at this point — the Joint Committee on Taxation has just released a really nice summary of the issue, together with some revenue estimates of several solutions.
Meanwhile, House Democrats continue their efforts to produce a permanent AMT bill by the end of July, but their words suggest they may push that deadline back to this fall. Here’s a piece from yesterday’s CongressDaily:
“There is some consideration being given to doing it after August, only because the appropriations bills haven’t moved as quickly as we thought,” Neal said before entering a meeting with Rangel, Democratic Caucus Chairman Rahm Emanuel of Illinois and Rep. Xavier Becerra, D-Calif., to discuss the committee’s plans on AMT and other issues.
Also, the article suggests that the House Democrats’ plan may have narrowed its options on how to pay for AMT reform to the surtax idea we have discussed previously.
For S corporations, this surtax presents two challenges. First, a surtax of 4 percent or so applied to AGI above a certain threshold (they appear to be looking at $500,000) would raise marginal tax rates on S corporation business income, including capital gains, dividends, and interest. Second, since the underlying rates on ordinary income, dividends, and capital gains are scheduled to increase back to their pre-2001 levels beginning in 2011, the actual tax rates S corporations could expect to pay may rise to the mid-40 percent range within the next five years! S corporations haven’t paid this high of a marginal tax rate since 1981. Meanwhile, the top tax rate on C corporations remains at 35 percent.
On the Senate side, it appears there is little appetite for taking on a permanent AMT fix. Nonetheless, whatever action the House takes will set the stage for future discussions on the AMT. Obviously, S corporations have as much at stake on its resolution as anybody.
Small Business Tax Package Signed Into Law
Congress returns this week following its Memorial Day recess. As expected, the Small Business tax package was signed into law along with the Iraqi War funding just before they left. This package included a number of S corporation reforms that we have been working on for years, and represents a significant improvement to the rules governing how S corporations operate.
Key reforms included relief from the dreaded “sting tax” as well as allowing trusts that hold S corporation stock to deduct their interest expenses, something other trusts have long been allowed to do. And while we did not get everything we sought in the bill, these new provisions are extremely welcome and we appreciate the members and staff who worked to make them happen.
Tax Bills on the Horizon
With the Small Business tax package behind us, it’s time to focus on what comes next. As we have observed, there are lots of actual and potential tax bills on the agenda for this Congress, and keeping track of them is becoming a full time job. Fortunately for S Corp members, that’s what we do. Here’s a list of tax bills to watch:
AMT Reform: Ways and Mean Chairman Rangel previously announced his plans to introduce a permanent fix to the growth of the Alternative Minimum Tax sometime this month. As we’ve written in past Wires, the threat to S corporations is the potential pairing of AMT relief with an increase in individual tax rates, a reduction in the thresholds at which those rates apply, and the change in the tax treatment of capital gains and dividends.
Energy Tax Incentives: Ways and Means is planning to take up tax legislation next week to provide new and expanded incentives for renewable energy sources. Offsets reportedly include denying the manufacturing income tax deduction to oil and gas producers as well as lengthening certain energy depreciation lives. Significantly, the offsets do not appear to include changes to the LIFO inventory accounting method for oil companies or others, at least in the House version.
Extending Family Tax Relief: The budget adopted last month allows part of the tax relief enacted in 2001 and 2003 to be extended past its current December 31, 2010 sunset. Whether Congress actually acts on this issue prior to the 2008 elections is very much up in the air, but the budget gives Congress the ability to move legislation to retain the 10 percent tax bracket, the $1000 child credit, the higher standard deduction and income tax rate thresholds designed to reduce the marriage penalty, and some sort of permanent fix to the estate tax rules. The budget does not make room for extending the lower rates on capital gains and dividends, nor the reduced rates on income taxes above the 15 percent bracket.
SCHIP: The Finance Committee will also consider legislation to expand the Children’s Health Insurance Program. The Senate has already voted to offset the cost of this increase through a tobacco excise tax during debate over the budget resolution.
Technical Corrections: As S Corp readers know, last year’s technical corrections package did not move forward based, in part, on concerns raised about increasing tax rates on exporters who have an IC-DISC. Ways and Means is working on another version, and the most recent word is the IC-DISC provision is still in the package. No word on timing of this package just yet.
Education Incentives: The Senate Finance Committee has been working on legislation to increase and reform the tax incentives for education. A proposed markup on legislation prior to Memorial Day was postponed, but this is a priority for Chairman Baucus, so expect something soon. On the House side, Chairman Rangel joined other Ways and Means members to introduce legislation to fund public school construction and rehabilitation with tax-free bonds. And several House members introduced legislation to increase tax benefits tied to the Hope Scholarship and the Lifetime Learning Credit.
International Tax Reforms: Earlier this year, Congressman Richard Neal (D-MA) introduced legislation (H.R. 1672) to change the tax treatment of dividends for certain hybrid foreign stocks. In May, the Senate Finance Committee held hearings on offshore tax evasion. And this week the Finance Committee will hold hearings on the impact globalization has on the American workforce, with a particular focus on the tax incentives that make up part of our Trade Adjustment Assistance programs. We expect these mutual concerns to coalesce into a package of international tax provisions — mostly revenue raisers — to accompany other tax legislation.
Housing: The implosion of the sub-prime lending market and the general rise in housing and land prices suggest that a housing tax bill or tax title could be considered by this Congress. The House Revenue Measures subcommittee held hearings last month that focused on the Low Income Housing Tax Credit, private activity tax-exempt bonds, and the historic rehabilitation tax credit.
Bottom Line: The combination of lots of tax bills together with the desire to offset any tax decreases with tax increases should make all taxpayers wary, especially those that, like S corporations, have been the target of unwarranted criticism in the past couple years.
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