The pending debate over highway spending has tax implications and the pass-through business community should pay attention.
The Highway Trust Fund will run out of money in the next couple weeks and both the Senate and the House are planning a two-step response — a short-term patch that will keep highway projects funded into next year and then longer bills that would establish highway policy for the next couple years.
How to allocate all those dollars for roads and bridges is always a complicated and politically charged affair. So is how to pay for it. Finance and Ways and Means both are expected to hold markups tomorrow on their respective plans. Here are the offsets for each:
- Ways and Means: $11 billion in offsets from pension smoothing ($6.4 billion), customs user fees ($3.5 billion), and transferring funds from the Leaking Underground Storage Tank fund ($1 billion)
- Finance: No final deal yet, but it looks like they are shooting for $10 billion in offsets including mortgage reporting ($2.2 billion), extending the statute of limitations on overstatement of basis ($1.3 billion), and a host of other items.
Considering the alternatives — gas tax hike, tolls on interstate highways — this set seems pretty tame. That said, the debate over the highway bill should serve notice to the business community that while tax reform may be on hold, Congress will continue to look to tax policy to offset some of its other priorities, so we need to be vigilant.
Meanwhile, action on extenders and related items continues at a low level. This week, the House will take up a permanent 50 percent bonus depreciation bill. While bonus depreciation is not really an “extender,” it does keep the focus on all those expired provisions, and it’s not bad policy either. Coupled with the higher Section 179 limits, the bill goes a long way towards moving the tax treatment of business investment towards general expensing, something many economists have argued is good for the economy. As the Tax Foundation noted:
We find that permanently extending this provision would boost GDP by over 1 percent, wages be 1 percent, and create 212,000 new jobs due to its effects on the cost of capital. It would also increase federal tax revenues by $23 billion after taking into account the increases wages and incomes caused by making bonus expensing permanent.
Extending R&E, Section 179, and built-in gains — either permanently or for several years — would be good for the economy too. These provisions already expired at the end of last year (2013), so every day Congress waits is a day of benefit lost. When Congress does act, it will make the extension effective back to January 1st, but it will be hard to argue that business investment increased in 2014 because of higher Section 179 limits that weren’t retroactively extended until this December, won’t it? The behavioral effect will be lost.
Moreover, any extension that is less than two years (2014 and 2015) would require Congress to come back next year and perform the exercise all over again. How Congress expects businesses to use these provisions to their advantage when they keep expiring is beyond our ability to explain, and one of the best arguments behind Chairman Camp’s push to make them permanent.
Despite the strong case for action now, any meaningful movement prior to the elections would be shocking. There’s only seven or eight weeks of session left before Congress recesses for the elections, and with the extenders already expired, we can’t see a real catalyst out there that would compel the House and Senate to come together on a package.
That’s too bad, and is just one more reason why both the tax code and the policy making process that creates it appear wholly dysfunctional.
More good news on the tax front. Senator John Thune (R-SD) has filed an amendment making permanent two key S corporation reforms. Joined by Senators Ben Cardin (D-MD) and Pat Roberts (R-KS), the Thune amendment would make permanent the shorter, five-year recognition period for built-in gains as well as an improved basis adjustment for charitable contributions by S corporations.
The text of the amendment is identical to the text of H.R. 4453 and H.R. 4454, legislation sponsored by Representatives Dave Reichert (R-WA) and Ron Kind (D-WI) that passed the Ways & Means Committee earlier this month and are due to be considered by the House of Representatives in coming weeks.
As with the Reichert/Kinds bills, a large coalition of business organizations wrote in support of the Thune amendment. The letter, signed by the American Trucking Association, the Associated Builders and Contractors, the S Corporation Associations, and twenty-one other organizations, closes, “On behalf of America’s Main Street business community, we respectfully ask that you support the Thune amendment and permanently extend the 5-year recognition period for built-in gains.”
The Thune/Cardin amendment would makes changes to the tax extenders package currently being considered by the Senate, That package already includes two-year extensions of the BIG and charitable provisions, but it faces an uncertain future. Earlier reports suggested Republicans would vote en bloc against closing out debate to protest their on-going inability to offer amendments on the Senate floor.
The latest news, however, suggests that Republicans may support closing debate in order to ensure that the extender package keeps moving through the legislative process. As National Journal reported earlier today:
Usually when Majority Leader Harry Reid prevents Republicans from offering amendments, GOP senators block the underlying bill. At least, that was how Republicans handled the recently dispatched energy-efficiency bill, which went down earlier this week.
“There’s probably a lot more support among Republicans for tax extenders than there perhaps was for energy efficiency,” said Sen. John Thune of South Dakota, the chamber’s No. 3 Republican.
The difference, according to lawmakers, is that some of the roughly 60 provisions in the tax-extenders package benefit constituents in some way. Thune also said that members view extending current tax policy differently than they do enacting new energy legislation.
“I just think you’re talking about tax policy,” Thune said. “You’re talking about extending tax policy. And many of them are things that our members are supportive of.”
The tax provisions that expired at the end of 2013 are extremely popular with the business community and, now that tax reform has been set aside, the only real opportunity to see them extended would be for the House and the Senate to come together on a package and send it to the President. With strong leadership in both the House and the Senate, these two S corporation provisions are well positioned to be part of that package.
Earlier today, the House Ways and Means Committee voted out a number of business-friendly tax provisions, including two S corporation reforms introduced by Reps. Dave Reichert (R-WA) and Ron Kind (D-WI). You can click here to watch the video of the markup in its entirety.
The first bill (H.R. 4453) makes permanent a five-year built-in gains recognition period while the latter (H.R. 4454) does the same with a basis adjustment for charitable giving by S corporations. Both provisions were included in Chairman Camp’s tax reform draft and were voted out of Committee with comfortable majorities.
In a related effort, two dozen industry groups and trade associations wrote to the Ways and Means Committee members in support of permanent BIG tax relief, including the National Federation of Independent Business, the National Wholesalers, the American Trucking Associations, and the S Corporation Association. As the letter to the tax committee states:
Locking up a company’s capital for an entire decade is simply unreasonable. Past Congresses have recognized that a decade is too long and voted to reduce the recognition period on three separate occasions, but those temporary measures have expired and the 10-year rule is back in effect.
Enacting a permanent shorter recognition period would sustain the original intent of the rule while providing S corporations with much needed certainty. It would allow them to make decisions based on what is best for the company rather than the dictates of the tax code. At a time when our economy badly needs increased investment, allowing more companies to access their own, locked-up capital is an important step.
As for next steps, we understand the House plans to take up some or all of the six tax bills voted out today sometime in May.
Meanwhile in the Senate, Majority Leader Harry Reid says he wants to bring an extenders bill to the floor in the next month, but exactly how he is able to bring Republicans (and some members of his own party) along is unclear. The big hurdle here is how he plans to handle amendments. Given the dearth of amendable tax bills in recent years, Members will be itching for the opportunity to offer amendments to the extenders package. How to manage the onslaught while protecting vulnerable Senators from difficult votes will be the challenge.
Given that challenge, the odds for action on extenders still favor movement sometime after the election, but each tangible step forward, like today’s successful markup, increases the chances that something happens sooner. That’s good news for S corporations sitting on locked-up assets, and its good news for good tax policy too.