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.
Bailout Watch
The ongoing soap opera of the auto bailout continues, with Congress failing to find a means of balancing the needs of Detroit with the concerns of taxpayers and Senate Republicans. As a result, the bailout stalled in the Senate last week and the Administration appears poised to step in and use whatever authority it has — TARP, Treasury, Fed — to provide the companies with the liquidity necessary to survive into the New Year and the next Administration. A nice little Christmas present for the Obama economic team, indeed.
Whatever happens, what is clear is that the plight of Detroit will continue into next year and will provide yet another catalyst for a major stimulus package early next Congress. Just how early may surprise folks.
The Senate Finance Committee reportedly plans to begin formal consideration of a stimulus package January 8th, twelve days before President-elect Obama is sworn in. According to our friends at Dow Jones:
The package is expected to include between $600 billion and $700 billion to jump-start the economy, and congressional leaders say they want to pass it before President-elect Barack Obama takes office Jan. 20.
For those of us focused on the tax code, that means the next vehicle for tax provisions will be drafted over the next couple weeks. How much of the package will be devoted to tax relief?
The panel’s chairman, Sen. Max Baucus, D-Mont., said in a news conference last week that tax cuts for businesses and individuals could comprise as much as half of the package. U.S. House Speaker Nancy Pelosi on Monday estimated the tax portion of the package at closer to one-third.
With that time table in mind and with tax policies on the table, we’re working with our allies on the Hill to ensure that S corporation changes to the built-in gains rules are considered as part of this package. If the economy needs capital, S corporations are sitting on lots of it, and BIG relief would help put it to work. Our Hill champions are working the issue, armed with a letter from our association allies as well as a statement of support from four Senators to their leadership.
New Taxwriters Selected
The combination of Democratic gains and lots of retirees means the Ways and Means Committee will be welcoming at least eleven new faces when it reconvenes for the 111th Congress. Democratic gains shifted the ratio of the overall House close to two-thirds/one third, so Democrats last week set the new ratio of Members on the Committee at 26 Democrats to 15 Republicans — up from 24-17 in the 110th Congress — and selected four of the five new members necessary to fill the seats. New Democratic Members include:
Rep. Danny Davis (IL)
Rep. Bob Etheridge (NC)
Rep. John Yarmuth (KY)
Rep. Brian Higgins (NY)
Note: One of the seats was offered to Rep. Raul Grijalva (AZ) but apparently he turned it down, so an additional name will have to be selected. On the Republican side, Representative Dave Camp (R-MI) was selected Ranking Member following the retirement of current Ranking Member Jim McCrery (R-LA). Republicans did not make any other committee membership decisions but rather put off the appointment of six new members to fill the vacancies when Congress returns in January.
On the Senate side, the report is the same as just after the election, with leadership waiting to see how the election in Minnesota goes before setting committee ratios and picking new members. One new development is President Obama’s selection of Senator Ken Salazar (D-CO) to be Secretary of Interior. His departure from the Finance Committee means Democrats will likely have two new members on the committee next year rather than just one.
Estate Tax Update
We’ve forecast that one of the few tax challenges likely to get addressed in 2009 will be some sort of deal on the estate tax. As readers know, the estate tax is scheduled to go out of existence in 2010 only to return from the grave the following year, looking very much like the youthful and hungry estate tax of the year 2000. This repeal and restoration routine gives both sides a strong incentive to come to a compromise — estate tax apologists don’t want to face its repeal in 2010 and estate tax critics don’t want to see its resurrection in 2011.
We noticed that Len Burman over at the left-leaning Tax Policy Center agrees. In an open letter to President-elect Obama, he raises the red flag over the pending estate tax repeal from the pro-estate tax perspective:
One more thing. You probably want to fix the estate tax before the end of 2009. Otherwise, the tax disappears for only a year in 2010, returning in full force in 2011. We just don’t want to see how greedy potential heirs would respond to the incentives created by a one-year “death tax” holiday…
Yeah, Len just wants to make the world safe from greedy heirs. Thanks. Setting aside the obvious question of who’s greedier — individuals with money or policy makers who want to take it from them — his point just reinforces our notion that the estate tax is going to be front and center of policymakers come next summer.
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.
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:
- $30 billion for infrastructure projects including highways, bridges, transit and water projects;
- $1 billion for public housing;
- $2.6 billion for food stamp program;
- A temporary increase in Federal Medicaid assistance to states; and
- An extension in unemployment 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 Journal reports 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:
- 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.
- 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.
- 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.
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.
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