Senate Finance Committee Shakeup

Yesterday we got word that Senate Finance Committee Chairman Max Baucus is headed to Beijing to serve as the next Ambassador to China. For tax policy, the move changes our outlook in the following ways.

First, it increases the focus on a possible extenders package early in 2014. Baucus made clear in his comments yesterday that he plans to spend the rest of his time as Finance Chair seeking to move an extenders package. It shouldn’t take more than a month or two for his nomination to move through the Senate, but that should give him time to get something started on that front. It’ll still be an uphill effort, but movement in the Senate would invariably increase the odds that something gets adopted.

Second, Baucus’ early departure has implications for the tax reform discussion. Baucus had committed to taking up reform in 2014 and was in the middle of rolling out a series of discussion drafts outlining his approach. Changing Captains mid-stream can only as a set-back, at least in the short term. But a closer review suggests the move could enhance reform’s long-term prospects. As Roll Call observed yesterday:

The expected nomination of Sen. Max Baucus as ambassador to China will almost certainly diminish the near-term prospects for overhauling the tax code by removing one of the strongest proponents of a tax rewrite from the Senate. But the potential elevation of Sen. Ron Wyden to replace Baucus as chairman of the Senate Finance Committee may bring new impetus to the effort over the long haul.

Roll Call goes on to note that Senator Wyden of Oregon has a long history of producing bipartisan reform plans on big topics like health care and tax policy. He also has more support within his conference generally, and with Majority Reid in particular.

Attached is the Wyden-Coats plan he introduced last Congress, as well as a video of their rollout here. (It was the Wyden-Gregg plan two congresses ago.) We reviewed the plan back in 2011 and found it to be a mixed bag for S corporations. Eliminating the individual AMT is helpful, but separating the top rates on pass through businesses and corporate income is not. For now, however, our key takeaway is less about the details and more about the fact that Wyden has the ability to craft plans that are both bipartisan and interesting conceptually. It’ll take something like that to see any progress in the Senate.

Finally, the move increases the odds Democrats retain the Senate next year. If Wyden does take over Finance, then Senator Mary Landrieu would take his place as Chair of the Energy & Natural Resources, which can’t hurt her reelect effort in Louisiana, while Senator Mark Pryor (D-AR) likely would take over the Small Business Committee leadership, which can’t hurt his reelection efforts in Arkansas. These are marginal items no doubt, but with the Senate majority in play next November, every little adjustment makes a difference.

Built-In Gains Introduced in the Senate

Finally, many thanks to our S-CORP Senate allies Ben Cardin (D-MD) and Pat Roberts (R-KS) for an early holiday present! They’ve reintroduced their bipartisan legislation, S. 1855, to retain the shorter holding period for built-in gains (BIG).

As many of our readers know, the 5-year holding period for built-in gains expires at the end of the year along with the rest of the tax extenders, so that beginning next year, S corporations would need to hold onto appreciated assets for 10 years before selling them, or face a punitive level of tax.B S. 1855 would retain the more reasonable 5-year holding period and make it permanent.

Senators Cardin and Roberts have been instrumental in moving this important reform forward throughout the years, and we hope the introduction of this legislation will help build momentum for the provision to get extended again early next year.

By our estimate, the expiration of the 5-year holding period will lock up the assets of thousands of S corps across the country next year – resulting in them having less liquidity to make new investments and create jobs. Under the rules, if they do sell these appreciated assets within the 10 year window next year, they will face a punitive tax of around 60 percent of any gain they realize. Most companies in this position choose to simply hold on to the asset, resulting in the locked-in effect which is particularly detrimental to privately-held businesses like S corporations with limited access to the public markets.

So thanks for the holiday treat! We’ll be pressing hard for this important reform to get considered in the New Year!

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