updated July 2009
- July 2009
[updated July 2009]
In 1984, Democrat presidential candidate Walter Mondale boldly proclaimed in his campaign that, if elected, he would raise taxes. President Reagan was re-elected that fall in a landslide. Not in the intervening decades has a candidate for president run so openly on a platform of tax increases until last year, and then with a very different outcome. While Presidential candidate Obama promised that no family earning less than $250,000 would pay a “single dime” in additional taxes, he called for tax hikes for everyone and everything else. His promise not to raise taxes on the middle class is certain to be broken, but he is making a concerted effort to keep his promise of tax increases on upper income earners and business.
Among the tax hikes that President Obama, in his campaign and/or in his budget proposal to Congress, called for:
Reinstating the 36% and 39.6% rates for those taxpayers earning over $250,000 (married) and $200,000 (single);
Full repeal of last-in, first-out (LIFO) inventory valuation;
A “cap and trade” tax estimated to raise at least $646 billion with some estimates putting the cost at two- or three- times that amount;
More than $350 billion in tax increases on the oil and gas industry;
Payroll taxes on incomes over $250,000;
Re-imposing the phase-out of itemized deductions and personal exemption;
Capping the value of itemized deductions at 28% despite raising the top marginal tax rate to 39%;
Increasing the tax rate on capital gains and dividends for taxpayers earning over $250,000 (married) and $200,000 (single) from 15 percent to 20 percent;
Eliminating the ability of multinational corporations to deter taxes on income earned abroad and other international tax law changes.
And now, as health care reform takes center stage, the President has indicated he may be open to taxing employer-provided health care benefits – a position he openly ridiculed Senator McCain for advocating during the campaign.
The current consideration of healthcare reform in the Senate Finance and House Ways & Means Committees has put tax increases on the front burner today. As noted in the separate Health Care staff report, the reforms being considered in Congress have been “scored” by the Congressional Budget Office (CBO) to cost more than $1 trillion – and that’s a trillion dollars in new spending which the Committees need to offset with a similar amount in savings or new Federal revenue.
The Senate Finance Committee issued a revenue report in May outlining all the options that they might consider to offset the cost of their healthcare reform proposal. The Committees will attempt to offset a significant amount of the new Federal spending with savings in the health care system itself, but even the most generous estimates of possible cost savings fall way short of the amount needed to cover the new spending. As a result, tax increases are also on the table.
The Committee included in its revenue report a number of health and life style- related revenue increases, notably a modification or elimination of the exclusion from taxable income of employer-provided healthcare benefits and a new excise tax on sugar-sweetened beverages. But non health- and life style tax hikes are also on the table, including the controversial proposal to cap the value of itemized deductions at 28%. Further, the report also enumerates all of the tax increases included in the President’s budget proposal, including LIFO repeal.
There is obviously a wide array of tax options on the table from which the Committee can choose, but most of the significant tax hikes – those which would generate the large amounts of revenue needed – have significant opposition. For example, the beverage and retail industries are fighting the sugar tax; realtors, home builders, the construction industry and charitable organizations pose formidable opposition to a limitation on itemized deductions for mortgage interest and charitable donations; most in the business community oppose taxation of health insurance benefits because of the payroll tax implications of having to declare those benefits as wages; and there is a highly motivated coalition fighting LIFO repeal (covered separately in this report).
Obviously, tax policy will remain on the front burner when Congress reconvenes after the 4th of July as healthcare reform is debated, but will also be on the menu for Congress this fall or into next year if and when major tax reform legislation moves to the top of the legislative wish list.
Since President Obama and a number of Congressional leaders have advocated repeal of the 2001 and 2003 income tax rate reductions for the two upper brackets, an analysis of the current and proposed tax rates and the current distribution of the income tax burden are worth review.
Upper income earners already pay a disproportionate share of Federal income taxes. According to IRS data (2006 data):
the top 1 percent of income earners pay 39.89 percent of income taxes;
the top 5 percent of earners pay more than 60 percent of income taxes,
the top 10 percent of earners pay an incredible 70.70 percent; and
the bottom half of all taxpayers pay only 2.9 percent of the income tax collected.
Given those tax distribution numbers, it is difficult to imagine how the upper income earners can pay a greater share of the tax burden; nonetheless, if the tax rate reductions set to expire at the end of 2010 are not extended – in other words, if Congress does not take any action – the 33 percent tax rate will increase to 36 percent, and the 35 percent rate will increase to 39.9 percent. If you add to that the President’s proposal to cap the value of itemized deductions at 28 percent, the tax increases are obviously significant, and cannot help but have a negative impact on the economy.
Impact on small business: President Obama and his allies in Congress claim that they are protecting the middle class from tax increases and raising taxes only on upper income earners who can afford to pay it – payment which Vice President Biden called “patriotic” during the campaign last fall. This class warfare rhetoric is shallow, divisive and deceptive. According to data produced for Senator Grassley by the Congressional Joint Tax Committee, more than half of the proposed tax increase on wealthy Americans—55 percent – will be paid by small business owners. And that statistic counts only households earning more than $250,000. If they also counted the individuals making more than $200,000, the percentage of the tax burden imposed on small business would probably be much larger. And according to data from the National Federation of Independent Business and the Small Business Administration, half of the small businesses with 20-239 employees pay income taxes at the top two bracket rates; and these are the small businesses which create the vast majority – as high as 85 percent – of the new jobs each year. Clearly, these massive tax increases will cost jobs and impede economic recovery.
How can the President claim that these tax increases affect only the wealthiest Americans and have no impact on the middle class, when the tax hikes disproportionately hurt the small employers who pay the wages and provide the benefits to those middle class workers? That class warfare argument simply does not pass the straight face test.
LIFO (last-in, first-out) Repeal:
Updated July 2009 (see end of report for detailed summary of past LIFO activity):
After three years with little legislative activity, LIFO repeal moved back to the front burner in February when President Obama included repeal in the budget he submitted to Congress. His repeal proposal was “scored” as a $61 billion revenue increase. The proposal was later re-scored by the Joint Tax Committee with a price tag $18 billion higher, for a revenue increase of $79 billion
The budget adopted by Congress is silent on the LIFO issue, and no legislation has been introduced at this point. However, as noted in the general Tax staff report above, repeal of LIFO was included by the Finance Committee in its health care reform proposal as a possible source of new tax revenue to pay for their health care reform proposals.
It is expected that the Finance Committee will begin its “markup” of healthcare reform in July.
Although we believe that the Committee will NOT include LIFO repeal as a committee-recommended tax increase, any member of the Committee can propose repeal as a means to raise new tax revenue to offset spending increases that they propose adding by amendment to the Committee legislation. Further, if we do dodge the bullet at this point in the Congressional calendar, we fully expect major tax reform to be a topic for debate and possible legislative action either later this year or early next, and LIFO repeal will again be among the tax increases considered.
The members of the NAW-led LIFO coalition have pursued an aggressive lobbying effort this year, including meetings with Members of the House Ways & Means Committees and their staffs both here in DC and in their states and districts, and plan to continue that activity throughout the year.
For a more detailed summary of recent meetings on the Hill and the NAW response, please go to:
LIFO Background Summary:
LIFO repeal was first considered in the Senate in 2006 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 in 2007 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-reform” legislation. Again, no legislative action was taken on the proposal.
LIFO has also been threatened from the regulatory front. Last November the Securities and Exchange Commission (SEC) published proposed regulations (their “roadmap”) to require all U.S. publicly-traded companies to file their financial statements using the International Financial Reporting Standards (IFRS) by 2014, and the international standards do not permit the use of LIFO. The Financial Accounting Standards Board (FASB) would likely follow the SEC’s lead and apply the same rules to privately-held companies. Because of the Federal “conformity” statute requiring companies to use LIFO for both “book and tax” if they use it at all, eliminating LIFO as an acceptable accounting standard de facto repeals its use for tax purposes as well.
Last year a small group of leaders of the NAW-led LIFO Coalition met with officials at the SEC, with the Assistant Secretary of the Treasury for Tax Policy, and finally with Treasury Secretary Henry Paulson, asking the Treasury Department to use its statutory authority to create an exception to the “book-tax” conformity requirement and permit companies to continue to use LIFO for tax purposes even if it is removed as an acceptable accounting standard. While we were cautiously optimistic that Treasury would at least consider acting, the collapse of the mortgage and financial markets last fall put all other issues on a back burner with the Administration so no action was taken.
While the Wall Street collapse eliminated our chances of getting the LIFO issue remedied by regulation, the collapse also seems to have stalled the SEC’s efforts to move U.S. companies onto IFRS. The international standards are “principles-based” rather than “rules-based” like the U.S. standards (Generally Accepted Accounting Principles – GAAP), and are therefore seen as much less strict and transparent than GAAP. Given the collapse of the U.S. financial markets and the billions of dollars of taxpayers’ money being spent to bail out failed companies, serious doubts are being expressed about the wisdom of moving to the more opaque and looser financial accounting standards. In addition, the International Financial Standards Board (IFSB) capitulated to political pressure last year to make changes to some of the IFRS rules, raising further doubts in the U.S. about the wisdom of moving U.S. multinational companies onto the international standards.
The belief that US adoption of IFRS was inevitable was a strong catalyst in the legislative move to repeal LIFO. If LIFO use was to be eliminated, Congress wanted the repeal to be legislative so that they could “score” the new tax revenue and have it available to them to spend. Elimination of the use of LIFO through the SEC’s regulatory action would not be “scored” by the Joint Tax Committee so Congress would be denied access to that new tax revenue for other purposes. The growing doubts about the certainty – even the likelihood – that the SEC will adopt IFRS and abolish the use of LIFO has removed the pressure on Congress to act on LIFO quickly. And that has, in turn, given us the opportunity to continue to make the case for the appropriateness of the use of LIFO and in opposition to its repeal – an opportunity that NAW and the LIFO Coalition are aggressively pursuing.
Death Tax [updated July 2009]
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 percent 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 would have to garner the 60 votes in the Senate necessary to overcome a filibuster.
It is almost certain that permanent repeal of the death tax will not be enacted in this Congress, or signed into law by President Obama. However, there are increasing indications that a permanent reform of the tax will be enacted this year. Opponents of repeal are concern that if the tax is fully repealed, even for just the one year in 2010, it will be politically very difficult to reinstate the tax in 2011, and that permanent law must be enacted. The debate on permanent reform is likely to be focused on the necessary trade-off between the top death tax rate – most important to wealthy individuals – and the amount of estate to be exempt from tax – important to small business.
One of the most frequently discussed proposals is to freeze the law permanently at its 2009 status: a 45 percent tax rate with an exempt exclusion of $3.5 million. Death tax repeal advocates in Congress are arguing for a smaller tax: A 35 percent rate with exemption of $5 million per spouse.