Senate Jobs Bill First Out of the Chute

Posted by admin on January 26, 2010 · Leave a Comment

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:

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.

Filed under Federal Budget, Job Creation, The Washington Wire · Tagged with COBRA, deficit, Economic Stimulus, employment tax credit, energy tax, estate tax, federal deficit, healthcare reform, Job Creation, jobs, Medicare, SBA lending, State of the Union, tax credit, tax extenders, tax relief

Health Care Update

Posted by admin on October 6, 2009 · Leave a Comment

The idea of taxing high cost plans is relatively new, and there are many outstanding questions about how it would work. For example, how exactly how would this excise tax raise revenue? The Senate plan imposes a 40 percent excise tax on high value plans with a cumulative cost of more than $21,000. But medical loss ratios for private health insurance plans easily exceed 60 percent of premiums, so insurance companies confronted with a 40 percent excise tax will simply stop issuing those plans.

At the employer level, that means if an employer used to offer his employees a $30,000 package of health benefits, he will now offer them a $21,000 plan and pay the remaining $9,000 to them in the form of wages and non-health benefits. These extra wages, in turn, are subject to income and payroll taxes, resulting in higher tax collections by the federal government. The revenues raised from the excise tax come from higher income and payroll taxes on employees, not from excise taxes on insurance companies.

It’s this aspect of the Senate plan that has unions united in opposition. The excise tax is coupled with a refundable tax credit available to families making less than 400 percent of the federal poverty level (about $88,000 for a family of four). But many union members make more than that while most union members enjoy health insurance benefits that exceed the Baucus threshold. So for many union members, the Baucus plan would reduce their health benefits and raise their income and payroll taxes, but exclude them from the refundable tax credit.

What about S Corporations? How would they be impacted? Here’s chart we put together:

	Earns More than 400% FPL	Earns Less Than 400% FPL
Has High Cost Plan	Taxes Are Higher	Mixed
Has Low Cost Plan	Not Affected*	Taxes Are Lower*

We put an asterisk by the “low cost plan” results because of another quirk in the excise tax that deserves review, the indexing for its thresholds. As we mentioned, the Baucus bill sets the initial threshold for a family’s high cost plan at $21,000. This threshold includes all forms of health care spending — premiums, preventive care, flexible spending accounts — and is indexed not to health care inflation (about 8 percent), but to regular inflation plus one percent (about 3-4 percent). That means over time, the value of your low cost insurance plan is going to catch up to the threshold and become subject to the tax.

This aspect of the Baucus plan would have been fixed had it not been essential to the procedural challenges facing health care reform. Simply put, both the House and the Senate are attempting to offset health care spending, which grows at 8 percent per year, with tax increases, which rise at five percent per year. The costs of the plans grow faster than the offsetting taxes, resulting in deficits in the out years.

By comparison, the Baucus tax, because of the indexing details, grows faster than health care spending and produces surplus revenues in the out years. As much as the unions complain, coming up with an offset that keeps the President’s and congressional leadership’s promise not to make the deficit picture worse is going to be hard to find.

Thus, the friction between the House and Senate tax offsets, and yet another obstacle between healthcare reform and a signing ceremony. The House surtax targets closely held businesses while the excise tax targets union workers. Nobody said raising taxes by half a trillion dollars would be easy.

Estate Tax Update

We expect Round 1 in the great estate tax battle to take place this fall/winter. The tax goes away in 2010, and then returns in full form in 2011, giving just about everybody a reason to come to the table.

In preparation for this debate, forty-six trade associations, including your S Corporation Association, the Chamber of Commerce, NIFB, and the National Association of Manufacturers sent a letter to Congress urging them to support a permanent estate tax fix that includes a 35 percent top rate and a $5 million per spouse exclusion.

As Martin Vaughn of Dow Jones reported:

The groups said they will support a permanent rate of 35%, with the first $5 million of wealth exempted, and up to $10 million in the case of married couples. Those are the terms that are being pushed in the Senate by Sens. Jon Kyl, R-Ariz., and Blanche Lincoln, D-Ark.

On timing, the expectation continues to be that Congress will take up legislation to extend certain expiring tax provisions before the end of the year, and that the estate tax fix will be made part of that bill.

Tax Reform Panel Report Update

Remember the President’s Economic Recovery Board headed by Paul Volcker? The President announced its creation at the beginning of the year but it’s been quiet since then. The principle reasons for this silence are federal sunshine laws that require any gathering to be open to the public. It is hard to provide the President with critical insights into how to fix the economy when the whole world’s watching.

One offshoot of the Board that has been active is the White House Tax Reform Panel. They had their first (and last?) public meeting last week, chaired by CEA Member Austan Goolsbee. During the meeting, Goolsbee made clear that the Panel was not seeking to create a new tax system but rather would focus its recommendations on three specific areas — tax simplification, enforcement and corporate tax reform. The panel is accepting public comments through October 15^th and then will make its own recommendations known to Treasury Secretary Geithner by December 4th.

In the past, it has been easy to dismiss the work of presidential or congressional tax reform panels. They tend to come and go, after all, with little to show for their efforts. This time, however, the combination of huge deficits and an expiring tax code make some sort of dramatic changes to the tax code almost a certainty. Given the landscape, we intend to follow the efforts of this group closely.

Filed under Tax Policy, The Washington Wire · Tagged with corporate tax reform, estate tax, excise tax, health benefits, health care, healthcare reform, income tax, payroll tax, tax code, tax credit, tax enforcement, tax simplification

House Releases Health Care Legislation

Posted by admin on July 15, 2009 · Leave a Comment

As expected, House Leadership released its health care reform plan yesterday — America’s Affordable Health Choices Act of 2009 (H.R. 3200). As you can imagine, there are any number of provisions to explore in a 1000-page health care bill, but for S corporations, the big four items appear to be:

The new health insurance exchange;

The surtax on high income individuals;

The health insurance tax credit for smaller firms; and

The payroll tax penalty for non-participating firms.

Supporters of the plan argue that the combination of the health care exchange and the small business tax credit will provide a net benefit to S corporations and other small businesses. Opponents point to the higher taxes and penalties for firms that choose not to offer health care plans to their employees.

They also question whether the overall plan will actually save money. The CBO estimates it will cost money after all – more than $1 trillion dollars. Of particular importance is the response of the moderate Democratic Blue Dog Coalition. As BNA reported this morning:

Rep. Mike Ross (D-Ark.), chairman of the Blue Dog Health Care Task Force, said his group was committed to passing health care reform. He also said that “reform that does not meet the president’s goal of substantially bringing down costs is not an option.”

We are not in a position to judge how successful the exchange will be. The only example is the one in Massachusetts and that one has both supporters and detractors. As for the other three provisions, here’s our best summary:

Surtax: Starting in 2011, a surtax of 1, 1.5 and 5.4 percent will be applied on “modified” AGI exceeding $350,000, $500,000 and $1 million respectively (joint filers). Unless OMB certifies that the bill’s changes to Medicare and Medicaid result in an additional $150 billion in cost savings, the surtax will rise to 2, 3, and 5.4 percent starting in 2012. If OMB certifies these savings exceed $175 billion, then the lower two surtaxes go away.

Small Business Tax Credit: For employers with fewer than 25 employees and who offer them qualified coverage, they are eligible for a tax credit equal to a percentage of their health care costs. The credit starts at 50 percent for employers with fewer than 11 employees and average annual compensation of less than $20,000. It phases out for more employees and higher salaries. A firm with 25 employees and/or average compensation of more than $40,000 gets no credit.

Payroll Tax Penalty: Firms that do not pay for at least 65 percent of their employees’ qualified coverage are subject to a payroll tax penalty. The tax starts at 2 percent of payroll for firms whose payroll exceeds $250,000 and rises to 8 percent for firms with payrolls exceeding $400,000. It is unclear whether the payroll tax applies to all payroll or just the amount exceeding the threshold.

Suffice to say that the complexity of each provision is worth its own white paper. Trying to gauge the interaction between them is simply impossible. Here are some observations and questions:

How does the payroll tax penalty work? If an employer does not offer qualified coverage to his/her employees, does the tax apply to all payroll or just the amount above the threshold? How does the bill define firm? By entity or by establishment?

The plan penalizes employers for expanding their payroll. If the employer offers qualified coverage, raising wages would reduce their credit. If they don’t, increased wages will increase their penalty. Either way, the plan raises the marginal cost of hiring new employees and offering them higher wages.

The higher surtax rates can be avoided if OMB finds additional savings from Division B in the bill. How is OMB supposed to measure these savings and attribute them to the Division B? If the CBO failed to measure these savings, how will OMB?

The bill appears to add to the deficit, especially in later years. Is this the plan, or will additional cost savings be offered to make it budget neutral?

What about the need to balance the budget, reform the Alternative Minimum Tax, extend some or all of the expiring tax relief, or make the corporate tax code more competitive? How will Congress accomplish all these things if it spends $1 trillion on health care reform?

The House Ways and Means, Labor, and Energy and Commerce committees will begin marking up their respective portions of the bill tomorrow. Expect these markups to be extremely contentious. The Speaker’s goal is to get the bill through the full House before the August recess. Given the primary importance both the Speaker and the President have placed on health care reform, we expect this goal will be met. Exactly what changes are necessary to get the plan through the House, however, remains to be seen.

The Surtax and Small Business

The fight over who will pay the surtax has begun. The Ways and Means Committee published its estimates that only 1.2 percent of all taxpayers will pay the tax, and only 4.1 percent of all small business owners.

Our immediate reaction was that small business owners are 3.5 times more likely than the average taxpayer to pay the tax, but even that observation misses the larger point. It’s not the number of taxpayers affected that counts, but rather the amount of economic activity subject to the higher rates.

As we’ve pointed out previously, about two thirds of all small business income is taxed at the top two rates, so any surtax applied to upper incomes is likely to tax a majority of small business income. Moreover, those rates are already scheduled to rise, resulting in a double hit on upper income business owners in 2011 and beyond.

Marginal Tax Rates Under HR 3200 (Joint Filers)
AGI	Marginal Rate (2009)	Marginal Rate (2011)	Marginal Rate (2012)
$350,000	33%	34.00%	35%
$500,000	35%	41.10%	42.60%
$1,000,000	35%	45%	45%

This chart requires several caveats, including pointing out that the surtax applies to “modified” AGI rather than taxable income, but the general point is valid — HR 3200 will return marginal tax rates back to where they were before we started cutting rates in the 1980s.

In addition, this chart doesn’t include the HI tax that now applies to wage income, it doesn’t adjust for taxing “modified” AGI, which includes income from capital as well as labor, it doesn’t include the impact of restoring PEP and Pease, and it doesn’t include state and local taxes. All told, the effective marginal rates on higher incomes will easily exceed 50 percent under this plan.

One last point. When taxing the rich is debated, the discussion usually ignores the actual amount of taxes being paid. Your S-CORP team thinks that’s a mistake.

For example, the CBO reports that the top fifth of taxpayers pay, on average, $64,000 in federal taxes every year. The top one percent pay over half a million.

How much more will HR 3200 add to this burden? And at what level of tax do taxpayers, including small business owners, stop being productive and choose to do something else with their time?

Filed under Health Care Reform · Tagged with AGI, AMT, deficit, healthcare reform, marginal tax rates, Medicaid, Medicare, payroll tax, surtax, tax credit

Congress to Consider Lame Duck Session Stimulus

Posted by admin on October 20, 2008 · Leave a Comment

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 29^th. 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 17^th. 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:

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.

Filed under Economic Stimulus, The Washington Wire · Tagged with BIG, capital gains, capital gains tax, Economic Stimulus, tax credit, tax cut, tax rate, tax revenue, unemployment benefits

Congressional Overview

Posted by admin on September 26, 2008 · Leave a Comment

We are nearing the finish line for the 110^th Congress with more on the table than when we started nearly two years ago.

None of the 12 bills to fund the government have been adopted. Tax provisions that expired at the end of 2007 remain to be extended. And the collapse of the subprime mortgage market that began a year ago with the failure of several hedge funds has grown into a full fledged credit crisis that, according to the Administration, threatens to harm the entire economy.

It appears Congress will stay in through next week and will have to address the following major items:

A Continuing Resolution to fund the entire government through next March;
A tax bill to extend expired and expiring provisions through 2009 and beyond; and
Some form of relief to the credit markets, perhaps along the lines of what Secretary Paulson proposed last week.

Nothing like waiting until the last moment to start that really big term paper.

Extenders

Some people believe you are not a real player in Washington tax circles until you have your own tax extender to worry over. If that’s the case, then your S Corporation Association has hit the big-time.

The S-Corp extender would extend for one year a provision that allows shareholders to deduct the full value of S corporation property they donate to charity. This provision, like all the other extenders, is caught in a battle of wills, with the House Democrats on one side and everybody else on the other.

Earlier this week, the Senate adopted a $150 billion package that included extensions of the AMT patch, the R&E tax credit, and the assorted energy tax provisions designed to encourage renewable energy. Over the last couple days, the House responded by passing separate bills to do the same thing.

The biggest difference in the two approaches is that the Senate package is offset with $25 billion in tax increases, while the House bills are offset by a total of $60 billion in tax increases. The horse traders in the room are probably thinking, “The Senate is at 25, the House is at 60. Let’s split the difference, pass the bill, and go home.”

But our intelligence is that both the Senate Republicans and the White House have made it clear that $25 billion in revenue raisers is as high as they are willing to go in this process — they would have preferred zero — and the House will have to take the Senate-passed bill or there will be no bill.

The Administration issued a veto threat against the House energy package, suggesting the House take up and pass the Senate bill instead. Whether House Democrats take the suggestion of a departing President remains to be seen.

Bailout Keeping Congress In D.C.

As we forecasted, the legislative wrangling over the bailout has been about as ugly as it gets. While we still expect a deal to get passed and sent to the President, there are several huge obstacles in the way and, while a deal this weekend is possible, action later next week is more likely.

The core of the plan being drafted in Congress is to give the Treasury the authority to purchase up to $700 billion in distressed assets over the next couple years. These assets are backed by subprime and Alt-A mortgages, are primarily held by banks and other financial institutions, and have undermined the ability of these institutions to continue their lending and other operations. Credit measures like Libor are signaling the threat Paulson outlined last week is becoming increasingly real.

If it works the way Paulson and Fed Chairman Bernanke suggest, the Treasury would purchase these assets at reverse auction for a competitive price, inject liquidity into the financial system while removing a considerable amount of risk and uncertainty, hold the assets until the housing market stabilizes, and then sell them back to the private sector. Observers much smarter than your intrepid S-Corp team — including Bill Gross and Warren Buffett — believe a properly executed plan would return a profit to the taxpayer.

The biggest obstacle to the bailout is the stand-off between Speaker Pelosi and House Republicans. The Speaker has made clear she will not move the bailout package unless a majority of House Republicans support it. But House Republicans — including their leadership and a substantial portion of their conference — have made it clear they oppose the current plan.

The solution is either that the plan changes enough to attract more House Republicans, or the Speaker moves the package without them.

Here’s the latest Democratic draft reflecting the core proposal with numerous additions.
Here’s the House Republican bailout principles released yesterday.

As you can see, there’s not a whole lot of common ground here. Republican Leader John Boehner just appointed the Republican Whip, Roy Blunt from , to represent House Republicans in future discussions, so talks will resume this afternoon and go into the weekend.

The question for S corporations is whether the dire predictions of the credit markets seizing up — affecting lines of credit, payrolls, etc — are realized before these talks result in some type of agreement.

Filed under Economic Stimulus, Tax Policy, The Washington Wire · Tagged with AMT, bailout, charitable donation, credit crisis, tax credit, tax extenders, tax increases, tax provisions

Tax Policy and Small Business

Posted by admin on September 12, 2008 · Leave a Comment

Earlier this week, the Wall Street Journal reviewed the most recent comments by Senator Barack Obama regarding his plans for tax policy.

As we noted in the past, the bias is for higher tax rates beginning sometime in the next Congress. This bias stems from the make-up of Congress and the scheduled expiration of the 2001 and 2003 tax cuts and exists regardless of who becomes President.

That said, the S corporation community should pay particular attention to some of the proposals put forward by the Obama campaign – specifically, his plan to raise marginal tax rates on households with incomes above $250,000.

Just how would this hurt S corporations? Critics argue that the number of businesses affected, and the potential economic impact by extension, is small.

But our friends over at American’s for Tax Reform have pointed out that the actual percentage of affected business income is quite large. According to IRS statistics, 80 to 90 percent of all S corporation and partnership income is reported by households with incomes above $200,000.

Combine that statistic with the fact that most business income is taxed at the individual rates, and the potential damage to the economy of raising taxes on these households becomes clear. As the WSJ concludes:

The reality is that the creators of new jobs in the economy are more likely to be rising entrepreneurs or filers under Subchapter S, who typically pay taxes at individual rates. Hanging three or four tax millstones around their productive necks in January if the economy is weak will likely produce unimpressive growth and job numbers in the first year of the new Obama Presidency, and likely beyond. That in turn could drag down the Democrats in Congress who will get credit for voting these higher taxes into law.

So Much to Do, So Little Time

Congress returned this week to a long list of must-pass items, but only a few weeks to get them done and little consensus on how to do them. The list includes:

Energy
Tax Extenders
Appropriations
Continuing Resolution
American with Disabilities Act
Second Stimulus
Media Shield 1^st Amendment Legislation

Given the length and composition of this list — the Media Shield bill alone is worthy of several constitutional conventions — the odds of a lame duck session are growing by the minute.

On the tax front, the stalemate over whether to offset tax relief or not continues. Early this week, House Majority Leader Steny Hoyer (D-MD) took the Senate to task for failing to move on extenders, especially those targeting at renewable energies.

About the same time, Senator Baucus indicated that the Congress may leave for good this year without extending many of the tax provisions that make up the extender package, including the R&E tax credit. He did say that a one-year extension of the AMT patch will likely pass, perhaps as part of the continuing resolution.

Senator Baucus then joined Senator Grassley in introducing a comprehensive, $40 billion package of energy tax provisions, including a three-year extension of the Production Tax Credit.

The plan for both the House and the Senate is to consider comprehensive energy bills early next week, but it’s unclear anything will pass.

All this focus on energy means there’s less time and less attention being paid to the broader tax challenges faced by S corporations and other businesses. If Congress does adjourn permanently prior to the elections, these issues will be waiting for the new Congress when it organizes in January.

Filed under Tax Policy, The Washington Wire · Tagged with alternative minimum tax, AMT, economc stimulus, marginal tax rates, tax credit, tax extenders, Tax Policy, tax rates, tax relief

More Details, Little Clarity on the Tax Front

Posted by admin on May 8, 2008 · Leave a Comment

Just to keep everybody up to speed, there are a couple recent tax items of note.

First, CongressDaily reports the House may take up yet another extender package prior to the Memorial Day recess. This package reportedly includes energy provisions as well as the expired extenders like R&E and the state and local sales tax deduction. An extension of the Alternative Minimum Tax “patch” does not appear to be under consideration.

Regarding the central issue of whether the revenue impact of the package will be offset by accompanying tax increases, Majority Leader Steny Hoyer is quoted saying, “We want it paid for and it will be paid for.”

If that remains the case, then this exercise is similar to those that preceded it—the House passes a tax package with revenue raisers and the Senate rejects them. A similar stalemate kept Congress in session right up until Christmas last year.

As further evidence of the divide, on Tuesday the White House issued a veto threat against a housing stimulus package to be considered by the House yesterday. The veto is tied to both a new first-time buyer tax credit included in the package as well as the tax increase offset used to pay for the package.

With the Senate and Administration drawing a hard line against offsets on the one side, and the House digging in its heels for offsets on the other, we could be in for a long, post-election ride on tax policy.

On a related note, Senate Democrats are working on a package of provisions to provide relief from rising energy prices. At first glance, the package introduced this afternoon is heavy on taxing and regulating oil companies and light on actual relief for consumers from rising energy prices. The bill:

Repeals the manufacturing deduction for large oil and gas companies;
Imposes a 25 percent windfall profits tax on certain oil companies;
Suspends filling the Strategic Petroleum Reserve; and
Increases certain government regulatory authority over energy pricing and related securities.

Notably absent from the package is the gas tax holiday proposed by the Clinton campaign. It is also unclear what all the revenues from the windfall profits tax and Section 199 repeal would be used for.

As with so many tax bills being considered by either the House or Senate these days, prospects for this legislation moving beyond the Senate appear to be slim to none. Candidates and Capital Gains CNBC had a nice segment Tuesday morning on the Presidential candidates and the capital gains tax rate. Which candidate has the best plan?

The current rate is 15 percent. Candidate Obama would to raise it to 28 percent, Clinton to 20, and McCain would hold it at 15.

Here at the S Corporation Association, we believe the bias in the next couple years is towards higher rates, regardless of who is President. Current law has the rate reverting to 20 percent in 2011 unless Congress proactively passes a different rate. That means 41 Senators opposed to lower capital gains rates (or rates higher than 20 percent for that matter) can block any effort to legislate something different.

So if Obama is President and wants to raise the tax on capital gains up to 28 percent, Senate Republicans will want to block that effort in defense of a 20 percent rate instead. If McCain is President and wants to keep the rate at the current 15 percent, Senate Democrats should have the ability to block that effort and preserve the 20 percent rate instead. If Senator Clinton is President, Congress can just sit on its hands and the rate will revert to her preferred level.

This analysis applies to several other tax items as well, including the lower individual tax rates, the rate on dividend income, and the estate tax. Absent consensus for a particular change, current law has these items reverting back to their pre-2001 levels in 2011.

All of which suggests the any deviation from current law will require Republicans and Democrats to reach some consensus on a compromise package.

What motivation do they have? Lots. Bi-partisan challenges like the growth of the AMT, $1000 child credit, and the on-going challenge of paying for tax extenders should give the leadership of both parties sufficient incentive to work something out.

Filed under Tax Policy, The Washington Wire · Tagged with alternative minimum tax, AMT, capital gains, capital gains tax, estate tax, sales tax, tax credit, tax extenders, tax rates, windfall profits tax

Finance Reports Out Small Business Tax Relief

Posted by admin on January 17, 2007 · Leave a Comment

In a bit of potential good news for small businesses, the Senate Finance Committee today adopted by voice vote an $8 billion package of small business tax incentives to accompany a planned increase in the minimum wage. Included in the package is a one year extension of the current Section 179 small business expensing limits, an extension of the Work Opportunity Tax Credit through 2012, and an extension of the shorter, 15-year depreciation lives for certain owner-occupied buildings. For S Corps, the package includes an entire title of big and small changes to the rules governing how S corporations operate, including:

Easing the rules regarding passive investment income under the “Sting Tax”;
Addressing concerns of S corporation banks; and
Expanding qualifying beneficiaries of an Electing Small Business Trust

This title reflects lots of advocacy work on the part of the S-Corp Association and other interested groups in town. As S-Corp readers know, two top priorities of the Association are to eliminate the dreaded Sting Tax while allowing non-resident aliens to become S corporation shareholders. With a couple technical challenges, the Finance-passed provisions represent a significant step forward for achieving our goal of parity with LLCs. As our Chairman wrote to Senator Max Baucus today:

Provisions to reduce the impact of the so-called “sting tax” and to expand the eligible population of S corporation shareholders are two priorities for our group and they represent positive steps in the long road towards establishing parity between S corporations and LLC’s. We appreciate your work in including these priorities, and look forward to working with you in the future to address our Association’s other important challenges.

In addition to providing these much needed improvements to the S corporation rules, I would strongly encourage you to establish a uniform effective date for the S corporation provisions — beginning after December 31, 2006 — to ensure that this relief reaches our members in the same year as the minimum wage is increased.

Just where does the package go from here? The House minimum wage bill does not include any tax provisions, and careful readers of the Constitution understand that revenue bills must originate in the House. Meanwhile, a minimum wage increase without any small business tax relief is unlikely to pass the Senate… so, how do small business advocates get around the Constitution and enact much needed tax relief for America’s employers? As CongressDailye reports earlier today:

But Finance Chairman Baucus said it is now up to House and Senate Democratic leaders to resolve a dispute between the two chambers over whether the small business tax breaks should be linked to the minimum wage. “The Senate has made it clear: There aren’t 60 senators who will vote for the minimum wage [increase] unless it includes small business provisions,” Baucus told reporters after the markup. “But at this point, it’s up to Speaker Pelosi and [Majority Leader] Reid as to how they want to work this out.” The House passed a straight minimum wage bill, and House Ways and Means Chairman Rangel has indicated he intends to enforce the House’s constitutional prerogative to initiate tax legislation. “The Senate as a whole still has the opportunity to pass a clean minimum wage bill,” a Rangel spokesman said today.

One possible solution is for the Senate to wait for the energy tax bill scheduled to be considered by the House this week, attach the Senate minimum wage and tax package, and send it back. Under the rules, a tax bill is a tax bill, and there would be no constitutional challenge to the resulting package.

Filed under Tax Policy, The Washington Wire · Tagged with depreciation, energy tax, minimum wage, passive income, sting tax, tax credit, tax incentives, tax provisions, tax relief

TAX BILL IN LAME DUCK?

Posted by admin on December 1, 2006 · Leave a Comment

Real quick, here’s what we’re hearing on the prospects of tax legislation moving when Congress returns next week:

Congressmen Hastert, Boehner, and Thomas are gathering today to decide what the House tax bill should look like. As we’ve previously reported, the best guess is a narrow bill that extends for a couple years expiring tax provisions like the R&D tax credit, together with some non-controversial trade proposals. Targeted provisions outside the usual extenders may get included, but that’s not clear right now.

On the Senate side, the limiting factor appears to be whatever can get adopted by voice vote. With the Senate leadership eager to finish the Lame Duck session next week, they just don’t have time for an extended debate over a tax bill. If that’s correct, then it’s likely the proposed technical corrections and any revenue offsets (read tax increases) are extremely unlikely.

WSJ ON FUTURE PAYROLL TAX HIKES

Among the many threats facing America’s S Corp community in the coming Congress, yesterday’s Wall Street Journal highlighted yet another — a possible deal on Social Security that would include a payroll tax increase.

As the Journal notes, “The Bush Administration has been around long enough that by now we can smell a retreat in the making. To wit, the White House is getting ready to throw personal retirement accounts over the side in an attempt to cut a Social Security deal with the new Democratic Congress. Will a tax increase be the next concession?”

There are a couple ways Congress could raise Social Security taxes, and both would adversely affect S corporations.

They could widen the Social Security tax base by increasing the types of income that pay Social Security taxes — like applying payroll taxes to all S Corp income regardless of whether its paid in wages or not.

Or they could eliminate the Social Security wage cap. This cap limits the application of the 12.4 percent Social Security tax to the first $97,500 (in 2007) in wages a worker earns.

Or they could do both, presenting S Corps with a double whammy of eliminating the wage cap while applying payroll taxes to all S Corp income. The result of this combined tax hit would be to raise federal marginal rates for S Corps making over $97,500 from 37.9 percent (income tax rates plus the 2.9 percent Medicare tax) to over 50 percent!

Such an increase would not only eliminate the tax relief of 2001 and 2003, it would fully offset all the tax relief dating back to the Tax Reform Act of 1986 – and pretty much eliminate the whole reason S Corps were created in the first place.

As you can imagine, your friends here at S Corp are extremely worried about any potential deal on Social Security that includes tax increases, and we’ll keep on the lookout to make sure you’re fully apprised of any developments.

S CORP AUDITS INCREASE – TAX GAP GROUP CONVENES

Finally, INC Online reports that the IRS increased audits of S Corporations by 34 percent this year, while audits of corporations with more than $10 million in assets declined. With the increased emphasis on the Tax Gap, particularly in the Senate, we’re expecting more of the same for 2007. As INC reports:

“We have placed more emphasis in the growing area of these flow-through returns involving S corporations and partnerships,” IRS Commissioner Mark Everson said in a statement, noting that S corporation audits are at their highest level since 2000, and audits of partnerships are now at their highest level since 1998.

In a related development, concerned business associations are gathering next week to convene a new coalition to ensure fairness in the on-going Tax Gap discussion. With Congress, especially the Senate, displaying an increased focus on the Tax Gap and possible proposals to close it, the business community needs to ensure that its concerns are heard as the legislative process moves along. S Corp promises to be an active part of this new group.

Filed under Tax Policy, The Washington Wire · Tagged with Medicare, payroll taxes, revenue offsets, Social Security, tax bill, tax credit, tax extenders, tax gap, tax increases, tax relief

KEY NEW SENATE POSITIONS ANNOUNCED

Posted by admin on November 15, 2006 · Leave a Comment

The “Lame Duck” session of Congress convened this week to tackle a number of organizational and legislative priorities. The 109th Congress must wrap up the remaining 2007 fiscal year spending bills or at least pass a “continuing resolution” to fund the government through the rest of the fiscal year while also preparing for the 110th Congress with leadership elections and committee assignments.

Yesterday Senate Democrats voted for leadership positions electing Senator Harry Reid (D-NV) as the new Majority Leader and Senator Dick Durbin (D-IL) as Assistant Majority Leader. The Senate Democratic Steering Committee also tentatively announced which Democrats will serve on key committees. For S corps, new members on the critical Senate Finance Committee – which has oversight of the S corp tax structure and other tax matters – will be Senators Debbie Stabenow (D-MI), Ken Salazar (D-CO), and Maria Cantwell (D-WA).

Meanwhile, Senate Republicans today announced their new leadership team. As expected, Senator Mitch McConnell (R-KY) will be the new Republican Leader, while Senator Trent Lott (R-MS) survived a one-vote victory over Senator Lamar Alexander (R-TN) to be the Whip.

On the other side of the Capitol, House Democrats will elect new leaders on Thursday, while House Republicans are scheduled to do the same on Friday. No challenges are expected to Congresswoman Nancy Pelosi’s (D-CA) bid to be Speaker of the House. The Republican race for House Minority Leader is still led by current House Majority Leader John Boehner (R-OH), but he is being challenged by Reps. Mike Pence (R-IN) and Energy and Commerce Committee Chairman Joe Barton (R-TX). Once House leaders are named, new House committee assignments will be made.

LAME DUCK TAX BILL?

Will a tax bill pass in the last weeks of the 109th Congress? That’s the question on the minds of many affected businesses right now. The news over the last couple of days is that Senators Grassley and Baucus would like to pursue a wrap-up package that includes tax extenders (like the R&D tax credit), some miscellaneious trade provisions, tax technical corrections, and some agreed-to extra items. While this list sounds a little long to squeak through in the waning days of this Congress, S-Corp readers know there is pent up demand to get some of these tax provisions done, so anything is possible.

Just to make things more complicated, we’re also hearing there may be an effort to pass a minimum wage increase coupled with small business tax provisions as well.

For S corps, we are presented with both a challenge and an opportunity. We’ve been assured that any tax package moving before the new year will NOT have any revenue raisers (like the S corp payroll tax hike or LIFO repeal, or higher taxes on exporters who use IC-DISCs), but we’re still planning to keep a close eye on any talks to make sure these unfair tax increases don’t sneak into a bill at the last minute. That’s the challenge. The opportunity is to get some of our priorities included, like built-in gains relief, sting tax relief, and allowing IRAs and non-resident aliens to be S corp shareholders. The larger the tax package, the better the odds we will succeed. We will keep you apprised of any new developments.

Filed under Tax Policy, The Washington Wire · Tagged with committee assignments, IC-DISC, LIFO, payroll tax, spending bills, tax bill, tax credit, tax extenders, tax provisions, trade provisions

The S Corporation Association