Legislative Issue Update - June 2008
[updated June 2008]
Although tax issues were on the front burner throughout most of last year, legislative action on tax policy faces an uncertain future in the remainder of this election-year dominated Congress. The debate today is strongly influenced by the political reality of a slowing economy and the very real economic anxiety felt by many Americans.
The economic slump prompted action early this year on an economic stimulus bill with incentives for consumers to spend and businesses to invest. The legislation included a tax rebate to individual taxpayers with incomes below a specific level, an expansion of the small business Section 179 expensing to $250,000 for investments of up to $800,000, and 50% bonus depreciation for many new investment expenditures. Any business planning to take advantage of the expensing or depreciation provisions should note that they apply only to new equipment put into service in calendar year 2008.
There has been significant dialogue in Congress since enactment of that bipartisan stimulus bill on the need for a second bill, but it is unclear whether such a second bill will be enacted or, if passed by Congress, become law. Clearly a second bill would not have the bipartisan support that Speaker Pelosi, the White House and the bipartisan Congressional leadership provided the first bill. Democrat House leaders and presumptive Democrat Presidential nominee Barack Obama have called for a new bill that would include another round of rebate checks, extension of unemployment insurance, money to address mortgage foreclosures, infrastructure spending and aid to state governments. There is no indication as of this writing that Republicans in Congress or President Bush would support a bill which focused more on expanded federal spending that on tax incentives or rebates.
While rhetorical debate continues on stimulus proposals, other tax measures dominate in the legislative process. The measure of immediate concern is the so-called “extenders” bill, legislation to extend a couple dozen tax incentive measures set to expire this year. The extenders legislation passed by the House conforms with the House “pay-go” rules, raising taxes by an amount of revenue equal to the tax cuts being extended. However, the Senate has refused to even debate the House bill, voting twice against “invoking cloture,” or shutting down the Senate filibuster. While it is likely that an extenders bill will continue to be debated, and probably eventually enacted, the inclusion of “offset” tax increases remains an obstacle to immediate action.
Alternative Minimum Tax (AMT) [updated June 2008]
The AMT is an insidious tax originally enacted more than 35 years ago to reach 155 wealthy individuals who had successfully used tax deductions to avoid all taxation. But Congress failed to “index” the AMT to adjust for inflation, and the tax now reaches middle-class taxpayers who were never intended to be ensnared in the AMT parallel tax universe. Subsequent Congresses have failed to consider or defeated legislation that would have permanently corrected or repealed this flawed tax. Rather, each year they pass yet another AMT “patch” to protect additional taxpayers from its reach for one tax year.
Last year Congress debated the AMT as usual, with an intense argument over whether it should be repealed, and/or whether repeal or a one-year “patch” should be offset with significant tax increases. The House passed legislation to “patch” the AMT for one year, raising other taxes to offset their “patch” bill. The Senate rejected the “offsets” arguing that some taxpayers should not have to pay other taxes so the government could continue to receive revenue equal to what it was collecting from a tax everyone agrees should never have been imposed.
The debate continued virtually until Christmas, when the House finally conceded the battle, abandoned “pay-go” and passed the Senate’s bill – a one-year AMT patch without offsetting tax increases.
This seemingly endless battle continues this year, with the Senate already insisting on an AMT “patch” that is not paid for, and the House Ways and Means Committee recycling many of the same “offsets” they proposed last year and insisting on a “paid-for” AMT measure. While the outcome of this yearly fight is not certain, there is a certain “Groundhog Day” sense to the battle.
“Mother of all Tax Reforms” [updated June 2008]
The “mother-of-all-tax-reforms” bill was introduced last October by House Ways and Means Committee Chairman Charlie Rangel (D-NY). The Chairman’s measure would repeal the Alternative Minimum Tax (AMT), reduce the corporate tax rate to 30.5% percent, make permanent the increase in small business expensing, and expand some “refundable” tax credits and other tax deductions for middle- and lower-income earners. But the cost to taxpayers of these reforms would be a $1.3 trillion tax hike to offset the proposed revenue loss. Moreover, the legislation assumes that the tax rate cuts enacted in 2001 and 2003 and set to expire in 2010 will NOT be extended and will be allowed to expire, resulting in additional $2.2 trillion in tax increases.
The tax increases that would result from the expiration of the `01 and `03 tax cuts:
- Dividends would again be taxed as ordinary income rather than at 15%;
- The top capital gains would rise to 20% from 15%;
- The death tax rate would go from zero to 55% with a $1million exemption; and
- Marginal personal income tax rates would increase at all income levels with the top marginal rate going from 35% to 39.6%.
These taxes alone would severely impact the economy, but Chairman Rangel has proposed additional tax hikes that do another $1.3 trillion of damage:
- A surcharge of up to 4.6% on upper income earners – including the millions of businesses which file as individuals – bringing the top effective tax rate to 44%;
- Applying the surcharge to Adjusted Gross Income, not taxable income, negating the effect of deductions and exemptions; and
- Complete and permanent repeal LIFO
NAW and the Tax Relief Coalition voiced strong opposition to Rangel’s “mother” bill, and TRC met with House and Senate Republican Leaders in December to discuss strategies for 2008. At this point it is unlikely that either House of Congress will act on the “mother” bill, setting the stage for a major fight over broad tax policy and the expiring tax provisions in the next Congress.
LIFO (last-in, first-out) Repeal [Updated June 2008]
LIFO repeal was first considered in the Senate two years ago when then-Majority Leader Bill Frist (R-TN) proposed repeal to raise new tax revenue to offset, or “pay for,” a one-time tax rebate of $100 to some taxpayers in response to the very high gas prices at the time.
Although the Senate Finance Committee held hearings on the issue in 2006, no action was taken on the legislation. However, the threat to LIFO was raised again last year when House Ways and Means Committee Chairman Charlie Rangel (D-NY) included full repeal as one of the “offsets” – tax increases – in his “mother-of-all-tax-reforms” which he introduced last October. No action was taken on the “mother” bill last year, nor is action expected in 2008.
This year, however, threat to the use of LIFO is coming from the regulatory rather than legislative front. Both the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) are moving to eliminate use of LIFO as part of the process of “convergence” – making US financial accounting standards consistent with the International Financial Reporting Standards (IFRS).
The NAW-led LIFO Coalition has changed its focus from Capitol Hill to the regulatory agencies to respond to this new threat. We met earlier this year with the Deputy Chief Accountant at the SEC to make argument that eliminating the use of LIFO as part of the accounting standards convergence would have dramatic tax consequences for American businesses because of the requirement that LIFO be used for both “book and tax.”
Following up on the SEC meeting, a small group of LIFO Coalition leaders will be meeting in late June with the Assistant Secretary of Treasury for Tax Policy, and we plan to follow that meeting with a meeting on the issue with Treasury Secretary Paulson.
While the convergence process is moving forward unabated, it seems that the effort of the Coalition and others to raise the tax issue with the regulators has had an impact, as there is now discussion of making it optional rather than mandatory for publicly-traded US companies to use the international standards in filing their financial reports.
NAW continues to manage the business coalition on this issue, and protecting the use of LIFO for wholesaler-distributors remains one of our top priorities.
Death Tax [updated June 2008]
Gradual repeal of the Estate (or “Death”) tax was included in the tax relief bill enacted in 2001, but under the arcane filibuster-proof reconciliation rules of the Congress, the repeal will last for only one year – 2010 – after which the tax recurs at the original 55% tax rate. Because all tax provisions enacted in Reconciliation bills expire within ten years, permanent repeal of the death tax will have to be considered outside of Reconciliation and therefore supporters will have to garner the 60 votes in the Senate necessary to overcome a filibuster.
The House of Representatives has passed death tax repeal legislation repeatedly since 2001, but unfortunately efforts to repeal and then to reform the tax both failed in the Senate, each time falling three votes short of the 60 necessary to cut off a filibuster.
While no floor action on death tax was expected under the new Majority in 2007 – and none occurred – it was brought back to life last November when the Senate Finance Committee held hearings on the issue in preparation for possible floor action in 2008. However, at this point there does not seem to be any active consideration of death tax legislation in either House of Congress.