Washington, D.C. (March 30, 2009)
By WebCPA staff
Senate Finance Committee Chairman Max Baucus, D-Mont., has announced legislation that would make existing tax breaks permanent for working families and individuals.
The measures would make permanent the 2009 exemption levels for the alternative minimum tax and index them for inflation, while permanently allowing personal credits against the AMT.
It would make permanent the 10, 25, and 28 percent individual tax rates (the 15 percent tax rate is already permanent), and make permanent the reduced threshold of $3,000 for the refundable portion of the child tax credit. The proposal would also make permanent the 2009 estate, gift, and generation-skipping transfer tax laws and index the exemption amount.
“Today we’re offering a piece of certainty during an uncertain time for millions of hardworking, honest Americans,” said Baucus. “These measures are not excessive or outrageous, but timely and targeted, and will build on earlier efforts to stabilize the economy,” he said.
Original co-sponsors of the Baucus legislation include Sens. Jay Rockefeller, D-W.Va., and Charles Schumer, D-N.Y.
Bringing in more revenue from corporations
One revenue raising idea is a reform of the deferral rule for U.S.-based multinationals. Currently, a U.S.-based company doesn't need to pay income tax on its foreign subsidiaries' profits unless and until the money is brought back to U.S. shores.
The provision makes it more attractive for companies to invest in countries with lower tax rates.
"Obama is serious about going after deferral," said Anne Mathias, director of research at Concept Capital.
The administration has said it wants to make a change but has yet to propose any specifics.
One idea discussed by lawmakers is to eliminate the deferral option so companies have to pay tax on their overseas profits when earned.
"The government doesn't want to subsidize U.S. companies to invest overseas," said tax policy expert Eric Toder, a senior fellow at the Urban Institute.
Another idea is to preserve the deferral option but prohibit companies that use it from deducting expenses incurred to support their overseas operations until they bring their profits back to U.S. shores.
The deduction measure would be "unwieldy," Mathias said. It would be hard for companies to separate deductible expenses from non-deductible ones when they stem from the same personnel or systems used to support U.S.-based and offshore operations. "It's simpler to just take away the deferral," she said.
Already corporations are lining up lobbyists to shoot down the idea. Kies, who served as the head of the Joint Committee on Taxation when Republicans controlled Congress, is one of them.
"This isn't a theory. We've tried this before and it ended disastrously," he said.
Kies noted that between 1986 and 2004, U.S.-based international shippers were denied deferral. The number of U.S.-based shippers shrank. When Congress reinstated deferral in 2004, the tax was cited as a cause of the decline for the U.S. shipping industry.
In other efforts to tax U.S. money abroad, Congress is trying to crack down on offshore tax havens, increasing enforcement both against the individuals who shelter their money in other countries and the banks that help them do so.
Extending tax cuts
Obama has proposed making permanent the income tax cuts put into place during the Bush administration for couples making less than $250,000 and for single filers making less than $200,000.
Senate Finance Chairman Max Baucus, D-Mont., has introduced legislation that would do just that.
On the other side of the debate are some tax experts and federal deficit hawks who worry about the effects tax cut permanency on the country's revenue and debt levels.
The Tax Policy Center estimates extending the cuts for middle and lower income families would reduce revenue by more than $2 trillion over 10 years relative to current law, which assumes the tax cuts would expire by 2011.
Reviving the estate tax
As things stand now, it would pay off mightily for heirs if their relatives die in 2010 -- the estate tax is slated to expire for that year and that year only. Come 2011, it's scheduled to revert to its 2001 level, where only the first $1 million of an estate would be exempt from the tax and the taxable portion of the estate would be taxed at rates up to 55%.
Obama has called for the estate tax to be made permanent at its 2009 levels adjusted for inflation going forward. That would mean the first $3.5 million of one's estate would be exempt from estate tax and taxable portions of the estate would be taxed at rates no higher than 45%.
Baucus included the provision in legislation he introduced last week.
Kies expects that lawmakers may pass a one-year extension of the 2009 estate tax parameters for 2010, and then include a more permanent extension in a broader piece of tax legislation next year.
The Tax Policy Center estimates making the 2009 levels permanent would reduce revenue by more than $300 billion over 10 years.
Curbing health insurance tax breaks
Health reform is one of the administration's leading agenda items that lawmakers are likely to take up in earnest this year. But many legislators favor paying for Obama's health reserve fund by limiting the tax break that employees receive when they buy their health insurance through work.
Right now the portion of premiums paid by employers is treated as tax-free compensation. And there is no limit on how much employers may contribute.
Lawmakers are considering capping the amount that would be treated as tax free.
Hiking taxes on carried interest
The president's 2010 budget calls for a portion of the profits paid to managers of hedge funds and private-equity funds to be taxed as ordinary income rather than as an investment gain. In other words, it would be subject to a much higher tax rate than the 15% long-term capital gains rate that the managers have been paying.
The administration estimated the provision could raise $24 billion over 10 years.
But the top tax writers in the Senate -- Baucus and Charles Grassley, R-Iowa -- indicated last week that change may not be coming in the near term.
"Private equity interests, I'm told, are not going to be paid in carried interest for the next several years," Baucus said, noting that it's less of an issue than it was when the money was flowing like water, according to Congress Daily.
But he allowed for the possibility that the proposal will be "in the mix" when international tax reform is considered in 2010.
Make permanent the Making Work Pay credit
The new tax credit for middle and low-income families, worth up to $400 per worker ($800 per working couple) is in place for 2009 and 2010.
The president proposed in his budget to make it permanent, but as of right now the idea is not likely to make it into lawmakers' budget resolution. That doesn't mean, however, it won't make it into future tax bills.
The Tax Policy Center estimates making the credit permanent would reduce revenue by $537 billion over 10 years. To top of page