Three cheers for Sen. Olympia Snowe (R-ME) and Sen. Mary Landrieu (D-LA) for fighting to move extensions of expired tax provisions benefiting Main Street businesses! Senators Snowe and Landrieu introduced the Small Business Tax Extenders Act of 2012 (S. 2050) this week to extend through 2012 those tax provisions benefiting Main Street businesses that were allowed to expire last year – including, an S-CORP priority, built-in gains (BIG) relief. Other provisions include extensions of the:
- Temporary 100 percent exclusion of gains on certain small business stock;
- 5-year carryback of general business credits of eligible small businesses;
- AMT rules for general business credits of eligible small businesses;
- Increased Section 179 expensing limitations and treatment of certain real property;
- Special rule for long-term contract accounting;
- Increased amount allowed as a deduction for start-up expenditures; and,
- Allowance of the deduction for health insurance in computing self-employment taxes.
We appreciate Senators Snowe and Landrieu for recognizing the importance of protecting Main Street businesses and in particular for supporting BIG relief. Senator Snoweb�s floor statement gives a great explanation of the importance of this relief measure:
Additionally, the Small Business Jobs Act of 2010 provided for a temporary reduction in the recognition period for S corporation built-in gains tax. When businesses convert from a C corporation to an S corporation, they have been required to hold their appreciated assets for a full decade or face a punitive level of double taxation. In such instances, first the built-in gain corporate tax rate of 35 percent is applied and then all other applicable federal, state and local shareholder tax rates are applied, often totaling near 60 percent in most states, including Maine. In effect, the built-in gain tax locks-up businesses’ own capital and forces them to look elsewhere–a particular challenge for S corporations since closely-held businesses have limited access to the public markets and therefore fewer options for raising needed capital.
Recent law changes temporarily shortened this holding period to 7 years, but that is still too long. By infusing capital–that is, releasing their own capital–this provision in the Small Business Jobs Act, reducing the holding period from 7 years to 5 years, enabled companies that have long been S corporations to redeploy this capital to invest in and grow their businesses. Extending this provision also underscores how vital access to capital is for small businesses, while preserving the original policy intent of the holding period and making it more reflective of the shorter business planning cycles of the 21st century.
We couldn’t agree more, and will continue to work with them and our other congressional allies to advocate for immediate relief.
So the question remains, when is Congress going to deal with the tax extenders that have expired? Will it be during the payroll tax conference? There doesn’t appear to be a clear path on that train quite yet - but the entire business community is with us trying. Or will the issue be saved for broader tax reform? Let’s hope not, as we don’t see real action on comprehensive tax reform coming prior to the end of 2012. As Caroline Harris from the U.S. Chamber testified before the Senate Finance Committee hearing entitled “ Extenders and Tax Reform: Seeking Long-Term Solutions.”
The Chamber believes that this Committee and Congress need to act immediately to prevent the negative impact on jobs and the fragile economy that is likely to result from inaction on these annual extenders.
The Chamber applauds this Committee’s continuing work towards comprehensive fundamental tax reform. However, we believe that the extension of these annual extender provisions cannot be delayed until work on comprehensive tax reform is complete. Taxpayers need stable and predictable rules they can rely upon while that important process is completed.
“ Buffett Rule” Bill Introduced
Legislation to enact the so-called “ Buffett Rule” has been introduced in the United States Senate. The bill, entitled the “ The Paying a Fair Share Act” was introduced by Senators Sheldon Whitehouse (D-RI), Tom Harkin (D-IA), Bernie Sanders (I-VT) and others. According to the authors:
Whitehouse’s legislation would apply only to taxpayers with income over $1 million, including capital gains and dividends. Taxpayers earning over $2 million would be subject to a 30% minimum federal tax rate. The tax would be phased in for incomes between $1 million and $2 million, with those taxpayers paying a portion of the extra tax required to get them to a 30% effective tax rate. The bill also includes language to preserve the incentive for charitable giving.
The Wall Street Journal has a few more details:
The legislation introduced Wednesday by Sen. Sheldon Whitehouse (D., R.I.) would ensure that anyone earning more than $2 million in income each year, including from capital gains, would pay a minimum 30% federal tax rate, Mr. Whitehouse said on the Senate floor Wednesday morning. Wealthy taxpayers who face a tax rate above 30% would still pay the higher rate.
The “fair share tax” would be gradually phased in for those earning between $1 million and $2 million in annual income. They would pay a portion of the extra tax needed to get them to the 30% rate, the lawmaker said.
“This way, we make sure that no taxpayer is ever in a situation where earning an additional dollar of income will increase his or her taxes by more than that dollar,” Mr. Whitehouse said in his remarks prepared for the Senate floor. The new tax would not affect anyone making less than $1 million.
We have several complaints with this effort. First, as we’ve pointed out before, the Warren Buffett’s of the world don’t pay a lower effective tax than their secretaries. Congressional Budget Office estimates make clear that the existing tax code is strongly progressive, with wealthy taxpayers paying significantly higher levels of tax – both in absolute terms and as a percentage of their overall income – than middle-class and low-income Americans.
Second, if enacted, this new legislation would impose a third tax code (and calculation) on individual taxpayers. We already have two codes, the regular income tax and the Alternative Minimum Tax. Now we would have three:
- Regular Income Tax
- Alternative Minimum Tax
- Fair Share Tax
Third, the author takes pains to point out that no taxpayer will face marginal rates of more than 100 percent on additional earnings, but exactly how high would the effective marginal rates reach as a taxpayer’s income rises above $1 million? The dead weight economic loss imposed by a tax increases by the square of the rate hike, so the potential cost to the economy is significant.
Nor is it clear the Fair Share tax would successfully target the rich. The AMT was created four decades ago to ensure that the same taxpayers targeted by the Fair Share tax pay at least a “ minimum” amount of tax. Over the years, however, the tax has morphed into a burden on middle- and upper-middle income taxpayers. Actual millionaires are less likely to pay the AMT than a middle-class family with three children living in a high tax state. What’s the guarantee that the Fair Share bill will not make the same progression into the middle class?
Finally, you’ll notice the bill contains an exemption for charitable donations. Think of it as the “ Buffett Loophole” to the “ Buffett Rule” since one of the more glaring ironies of the whole debate is that Warren Buffett has aggressively planned his estate to avoid paying any tax on most of his accumulated wealth. According to press accounts, he’s given most of his money away to foundations run by his children and Bill Gates. This new “ Buffett Tax” won’t touch those transfers.
So we now have legislation to fix a problem that doesn’t exist in order to impose a new tax on a billionaire who’s already figured out how to avoid paying it. In the meantime, real taxpayers with real companies and real employees who aren’t in a position to hide all their wealth inside a foundation will be stuck paying the bill. Not helpful.