Extenders – The Post-Thanksgiving Update

Lots of noise on the extender front, but is there progress being made?  Hard to tell.  Last week, a list of potential items made the rounds that would have made some provisions permanent, some extended for 5 years, and some extended for 2 years. Specifically, the list included:

  • Permanent: All the House passed permanent provisions, including small business expensing and the shorter built-in gains recognition period but not bonus depreciation, plus changes to the American Opportunity tax credit, child tax credit, the earned income tax credit.
  • 5-Year: Bonus depreciation, the Production Tax Credit and Investment Tax Credit, and the Work Opportunity Tax Credit.
  • 2-Year: All the other extender provisions that were previously included in the Senate Finance Committee-report bill.

In other words, the package looked a lot like the starting point Ways & Means Republicans would choose for negotiations.  Then this week a competing list was circulated that kept the basic structure but added some extraneous provisions, including:

  • Indexing the refundable tax credits;
  • A 2-year delay on the Affordable Care Act “Cadillac Tax”; and
  • A 2-year holiday from the medical device tax in exchange for additional funding for the ACA risk corridors.

These items, in particular the risk corridor proposal, are highly controversial and would require concessions on the part of Republicans to move.  In other words, this package looks like something the House Democrats might put together in response to the initial list.

Regardless of who put the lists together, they give outsiders like S-Corp a sense of where the sides line up.  What’s unclear is how active these talks are, and who’s involved.  At various times in the past couple days, we’ve heard that that the real talks have yet to begin, that a proposed deal was already submitted to the White House, and that the tax writers had taken it as far as they could and it was up to congressional leaders now. Finally, Bloomberg reported yesterday that talks between congressional leaders have stalled, at least for the moment, over the indexing issues.

The big picture here is that Congress may (finally) be getting serious about ending the multi-year roller coaster ride of extenders.  These provisions expired at the end of last year, and while we’re running right up against the end of the tax year for most families and businesses, it’s gratifying that at the very least “permanence” and “multi-year extensions” are still on the table.  Let’s hope they get off the table and on to the President’s desk.

 

Treasury’s Move to Stop Inversions

The recent wave of Inversions and related corporate buyouts are yet another reminder that the US tax code is broken. The Pfizer and Allergan announced deal is the largest buyout in pharmaceutical history and, as the Wall Street Journal notes, the US corporate tax rate was a leading motivator:

[Pfizer CEO] Mr. Read has railed against high U.S. corporate tax rates, which he says puts American-based companies like Pfizer at a competitive disadvantage to their overseas rivals. Pfizer’s tax rate is about 25%, the highest among its Big Pharma peers, according to Evercore ISI.

Of course, many pass throughs and domestic corporations pay effective tax rates exceeding 30 percent, so 25 percent looks pretty good to them.  But we digress.  In an attempt to stem the tide, Secretary Lew announced new Treasury guidance last week. According to Politico and the Financial Times, these rules won’t do much:

Treasury officials think the third country rule is likely to have the most teeth. And administration officials swear up and down that Pfizer’s talks with Allergan aren’t why we’re seeing the new rules now. “We’re really not focused on particular companies or particular transactions,” one Treasury official said.

Fair enough, because experts like Steve Rosenthal at the Tax Policy Center say the new rules wouldn’t be much of an impediment to a Pfizer deal. “These measures are technical changes around the edges,” Rosenthal told The Financial Times. “It’s a welcome mat for Pfizer to combine with Allergan and strip its earnings.”

In fairness, Secretary Lew conceded that the limited scope of the rules comes from the fact that Congress, not the Treasury Department, is in the best position to curb inversions by reforming how we tax businesses.  That’s true, but it’s also true that the largest obstacle to tax reform continues to be the White House, which refuses to consider lowering the rate for individuals and pass-through businesses.  Did we mention that many of these businesses already pay higher rates than Pfizer?

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