What time is it when the market is down, unemployment is up, personal consumption is falling and manufacturing activity is contracting? Time for another economic stimulus package.
Last week, the Ways and Means Committee confirmed it will hold a hearing on the economic stimulus package on October 29th. The specifics have yet to be worked out and several House and Senate Committees are expected to have a hand in crafting the bill. Politico lists the most likely contenders:
It could include a permanent tax cut for lower- and middle-income families, in addition to the expected extension of unemployment benefits, increased money for food stamps and the states and more federal funds for bridges and other transportation projects.
House Speaker Nancy Pelosi and Senate Leader Harry Reid have made clear in recent days that both the House and the Senate will come back for a lame-duck session. The Senate is scheduled to come back for the week of November 17th. Earlier reports from the House indicated they may convene before the elections, but Speaker Pelosi has refused to put a timeline on consideration of a second stimulus package.
Regardless of the timing, Congress is set to consider another stimulus package following the elections and your S-CORP team is committed to ensure our Built-in Gains (BIG) reforms are included. If the business community needs access to capital, BIG reform can help. Here’s some more on Built-in Gains reform:
- Letter from Associations Supporting for BIG Reform
- Letter from S-Corp Chairman Supporting BIG Reform
- Background on “Small Business Growth & Opportunity Act” — H.R. 3874
- Section by section summary of “S-CORP Modernization Act” – S. 3063
Presidential Candidates Revise Economic Plans
In response to the continuing economic crisis, Senators Obama and McCain have put forward new additions to their economic proposals. Here is a quick summary of each of the candidate’s plans.
Obama’s plan would:
- Create a new temporary tax credit for companies that add domestic jobs. Through 2009 and 2010, existing businesses will receive a $3,000 refundable tax credit for each additional full-time employee hired; eliminate all capital gains taxes on investments made in small businesses and start-ups;
- Create a $25 billion Jobs and Growth Fund for infrastructure projects and schools; $25 billion in aid to states, and $25 billion in loan guarantees for auto companies to retool their plants;
- Instruct the Treasury Department to allow those 70 and ½ and older to delay required withdrawals from their 401(k)s and IRAs and allow others penalty free withdrawals of 15% up to $10,000 from IRAs and 401(k)s (although subject to the normal taxes);
- Direct the Secretaries of Treasury and Housing and Urban Development to aggressively modify mortgages; 10% refundable tax credit on mortgage interest for those who don’t itemize their taxes; Reform bankruptcy code to allow for broader mortgage restructuring; Put in place a 90 day foreclosure moratorium for homeowners who are trying to pay mortgages; and
- Extend Treasury’s authority to purchase assets aside from mortgage backed securities to unfreeze other markets for student loans, car loans and other types of loans.
McCain’s plan would:
- Increase the amount of capital losses which can be used in tax years 2008 and 2009 to offset ordinary income from $3,000 to $15,000;
- Reduce the maximum tax rate on long term capital gains to 7.5 percent in 2009 and 2010;
- Allow up to $50,000 to be withdrawn from IRAs and 401(k)s at a tax rate of 10% through 2008 and 2009; Suspend required withdrawals from IRAs and 401(k)s for seniors over 70 ½;
- Purchase mortgages directly from homeowners and mortgage servicers and replace them with an FHA-guaranteed fixed-rate mortgage.
Whichever plan moves forward – Congressional, Obama, or McCain – will add to the deficit in fiscal year 2009 and put additional pressure on Congress to raise overall tax revenues. As the Washington Post reported Saturday (about two weeks after your intrepid S-Corp team alerted its readers), the federal budget deficit is currently projected at $650 billion in 2009, and is likely to go up from there — to $1 trillion or more.
As the news reported over the last couple of days, Administration and House leaders have agreed to a package of temporary tax relief to provide the economy with fiscal stimulus. As reported, the package would reduce revenues by about $150 billion over ten years. The major provisions are:
- Rebate checks (tied to a temporary cut in the 10% tax bracket) to families—$600 for singles making less than $75,000 and $1,200 for couples earning less than $150,000.
- Fifty percent bonus depreciation for business investment through the end of 2008.
- An increase in small business expensing (section 179) from $125,000 to $250,000.
- A temporary increase in the conforming mortgage limit from $417,000 to $729,750.
Hill leadership has pledged to take up the agreement quickly and get something to the President in the next four weeks.
Couple of observations: the negotiations took place between the Secretary of Treasury and House Leadership. Senate Leadership chose not to be part of the mix. Apparently, in an effort to encourage a conclusion to the discussions, Senators Reid and McConnell removed themselves from the room and pledged to take up whatever the remaining negotiators could agree to.
Pledging to take up the House-passed package, however, is the not the same as guaranteeing its adoption without changes. We expect to see considerable effort on the Senate side to amend the agreement. Republicans will likely attempt to strike the income caps for families receiving checks while Democrats will push to add extended unemployment insurance benefits (UI) to the mix. The Senate Finance Committee has scheduled a markup of its own stimulus plan—details uncertain—for next week.
One challenge facing advocates of extending UI is that unemployment continues to be historically low at just 5 percent. Two decades ago, that was considered full employment. And while the percentage of long-term unemployed workers is higher than in the past—meaning those workers who have lost their jobs are having a more difficult time finding a suitable replacement—weekly jobless claims are hovering around 300,000 for the past couple weeks, nowhere near the 400,000 to 450,000 level usually associated with a deteriorating job market and recession.
Nonetheless, expect the UI issue to be fully debated in the Senate, and if history is any guide, an extension of UI benefits is likely to be part of the package that goes to the President. Perhaps a trade combining the UI extension with the elimination of the income caps is in the cards.
Built-In Gains and Stimulus
As the Senate considers what else should go into the stimulus agreement worked out this week, the S Corporation Association and its allies have been pushing to add relief from the built-in gains tax (BIG) as a means of freeing up much needed capital.
According to government statistics, hundreds of thousands of S corporations nationwide are potentially sitting on assets that they would like to sell in order to grow their businesses and create jobs, but they can’t because of the prohibitive tax implications of BIG.
This “lock-in effect” results in billions of dollars in assets being used at less than their full potential. This can have a particularly adverse impact on S corporations since, as closely-held businesses without access to the public markets; they have fewer options for raising capital. In an economy where a one or two percent decline in growth can mean the difference between a recession and a moderate, mid-term slowdown, eliminating that lock-in effect and allowing those assets to become fully productive again could be significant.
Bipartisan legislation to reduce the harmful impact of the built-in gains tax has been introduced on the House side by Congressman Steve Kagen (D-WI) and Ways and Means Members Ron Kind (D-WI), Jim Ramstad (R-MN) and Phil English (R-PA). The bill, H.R. 3874 would reduce from 10 to 7 years the holding period required for built-in capital gains.
On the Senate side, Finance Committee Members Lincoln, Hatch, and Smith all have a history of supporting this reform, and we expect to see legislation introduced in that body in the near future. If the Senate is intent on attaching additional items to the stimulus deal, this is one provision that promises big benefits to the economy and job creation relative to its revenue impact.