Tax Relief Grows in Proposed Stimulus

Congress is back and ready to legislate. First out of the box will be the long-anticipated economic stimulus package. Unlike previous efforts, the current push has the benefit of support from leadership in the House, Senate, and the new Administration, so we expect a sizable package to reach the President’s desk prior to the February recess.

What exactly will the package include? Details are being negotiated right now but the broad outline remains the same — a large package of spending on infrastructure, relief to cash-strapped states in the form of increased federal Medicaid payments, and tax relief to businesses and families. What has changed is the relative size of the tax relief, which continues to grow as the economy shrinks.

According to our friends in the press, the Obama team is currently targeting a package of $775 billion, including approximately $300 billion in tax relief. On the tax side, contending provisions include:

  • Relief to Working Taxpayers: Some variation of candidate Obama’s “Making Work Pay” proposal is likely to form the core of the tax/refund relief, perhaps as a permanent adjustment to employer withholding totaling $500 per taxpayer.
  • Small Business Expensing: The higher $250,000 limit on small business expensing expired at the end of 2008. Package will likely include a two year extension of that higher limit.
  • Other Business Provisions: In addition to expensing, other business breaks could include extending loss carry-backs, bonus depreciation, tax credits for firms that hire new workers, and other business incentives.
  • Local Government Relief: This proposal would remove the applicable Alternative Minimum Tax on certain municipal bonds.

Also part of the mix is the S Corporation Association priority of Built-In Gains tax reform. As S-Corp readers know, such relief would help small businesses strapped for cash access much-needed capital by unlocking valuable assets they have had to hold for an overly restrictive time period.

As far as process goes, negotiators from the pertinent committees and the Obama team are meeting right now. The Senate Finance Committee had earlier indicated it might mark up a stimulus package this Thursday, January 8th. That target date appears to be pushed back to later in the month due to logistical as well as policy concerns, but the Committee has made clear to Senate Leadership and the Obama team that they intend to be part of the process of putting together this bill.

That’s good news for S corporations, since many of our champions on built-in gains and other reforms are Senate Finance Committee members. We’re continuing to reach out to them, our Ways and Means Committee friends, and the Obama economic team to make sure they understand the value to the economy and job creation of helping S corporations better access their capital.

Bottom line – the stimulus package is being actively developed and we expect it to move from proposal to law within the next six weeks.

Bailout Watch

The ongoing soap opera of the auto bailout continues, with Congress failing to find a means of balancing the needs of Detroit with the concerns of taxpayers and Senate Republicans. As a result, the bailout stalled in the Senate last week and the Administration appears poised to step in and use whatever authority it has — TARP, Treasury, Fed — to provide the companies with the liquidity necessary to survive into the New Year and the next Administration. A nice little Christmas present for the Obama economic team, indeed.

Whatever happens, what is clear is that the plight of Detroit will continue into next year and will provide yet another catalyst for a major stimulus package early next Congress. Just how early may surprise folks.

The Senate Finance Committee reportedly plans to begin formal consideration of a stimulus package January 8th, twelve days before President-elect Obama is sworn in. According to our friends at Dow Jones:

The package is expected to include between $600 billion and $700 billion to jump-start the economy, and congressional leaders say they want to pass it before President-elect Barack Obama takes office Jan. 20.

For those of us focused on the tax code, that means the next vehicle for tax provisions will be drafted over the next couple weeks. How much of the package will be devoted to tax relief?

The panel’s chairman, Sen. Max Baucus, D-Mont., said in a news conference last week that tax cuts for businesses and individuals could comprise as much as half of the package. U.S. House Speaker Nancy Pelosi on Monday estimated the tax portion of the package at closer to one-third.

With that time table in mind and with tax policies on the table, we’re working with our allies on the Hill to ensure that S corporation changes to the built-in gains rules are considered as part of this package. If the economy needs capital, S corporations are sitting on lots of it, and BIG relief would help put it to work. Our Hill champions are working the issue, armed with a letter from our association allies as well as a statement of support from four Senators to their leadership.

New Taxwriters Selected

The combination of Democratic gains and lots of retirees means the Ways and Means Committee will be welcoming at least eleven new faces when it reconvenes for the 111th Congress. Democratic gains shifted the ratio of the overall House close to two-thirds/one third, so Democrats last week set the new ratio of Members on the Committee at 26 Democrats to 15 Republicans — up from 24-17 in the 110th Congress — and selected four of the five new members necessary to fill the seats. New Democratic Members include:

Rep. Danny Davis (IL)

Rep. Bob Etheridge (NC)

Rep. John Yarmuth (KY)

Rep. Brian Higgins (NY)

Note: One of the seats was offered to Rep. Raul Grijalva (AZ) but apparently he turned it down, so an additional name will have to be selected. On the Republican side, Representative Dave Camp (R-MI) was selected Ranking Member following the retirement of current Ranking Member Jim McCrery (R-LA). Republicans did not make any other committee membership decisions but rather put off the appointment of six new members to fill the vacancies when Congress returns in January.

On the Senate side, the report is the same as just after the election, with leadership waiting to see how the election in Minnesota goes before setting committee ratios and picking new members. One new development is President Obama’s selection of Senator Ken Salazar (D-CO) to be Secretary of Interior.  His departure from the Finance Committee means Democrats will likely have two new members on the committee next year rather than just one.

Estate Tax Update

We’ve forecast that one of the few tax challenges likely to get addressed in 2009 will be some sort of deal on the estate tax. As readers know, the estate tax is scheduled to go out of existence in 2010 only to return from the grave the following year, looking very much like the youthful and hungry estate tax of the year 2000. This repeal and restoration routine gives both sides a strong incentive to come to a compromise — estate tax apologists don’t want to face its repeal in 2010 and estate tax critics don’t want to see its resurrection in 2011.

We noticed that Len Burman over at the left-leaning Tax Policy Center agrees. In an open letter to President-elect Obama, he raises the red flag over the pending estate tax repeal from the pro-estate tax perspective:

One more thing. You probably want to fix the estate tax before the end of 2009. Otherwise, the tax disappears for only a year in 2010, returning in full force in 2011. We just don’t want to see how greedy potential heirs would respond to the incentives created by a one-year “death tax” holiday.

Yeah, Len just wants to make the world safe from greedy heirs. Thanks. Setting aside the obvious question of who’s greedier — individuals with money or policy makers who want to take it from them — his point just reinforces our notion that the estate tax is going to be front and center of policymakers come next summer.

Stimulus Deal Announced

As the news reported over the last couple of days, Administration and House leaders have agreed to a package of temporary tax relief to provide the economy with fiscal stimulus. As reported, the package would reduce revenues by about $150 billion over ten years. The major provisions are:

  • Rebate checks (tied to a temporary cut in the 10% tax bracket) to families – $600 for singles making less than $75,000 and $1,200 for couples earning less than $150,000.
  • Fifty percent bonus depreciation for business investment through the end of 2008.
  • An increase in small business expensing (section 179) from $125,000 to $250,000.
  • A temporary increase in the conforming mortgage limit from $417,000 to $625,500.

Hill leadership has pledged to take up the agreement quickly and get something to the President in the next four weeks.

Couple of observations: the negotiations took place between the Secretary of Treasury and House Leadership. Senate Leadership chose not to be part of the mix. Apparently, in an effort to encourage a conclusion to the discussions, Senators Reid and McConnell removed themselves from the room and pledged to take up whatever the remaining negotiators could agree to.

Pledging to take up the House-passed package, however, is the not the same as guaranteeing its adoption without changes. We expect to see considerable effort on the Senate side to amend the agreement. Republicans will likely attempt to strike the income caps for families receiving checks while Democrats will push to add extended unemployment insurance benefits (UI) to the mix. The Senate Finance Committee has scheduled a markup of its own stimulus plan – details uncertain – for next week.

One challenge facing advocates of extending UI is that unemployment continues to be historically low at just 5 percent. Two decades ago, that was considered full employment. And while the percentage of long-term unemployed workers is higher than in the past – meaning those workers who have lost their jobs are having a more difficult time finding a suitable replacement – weekly jobless claims are hovering around 300,000 for the past couple weeks, nowhere near the 400,000 to 450,000 level usually associated with a deteriorating job market and recession.

Nonetheless, expect the UI issue to be fully debated in the Senate, and if history is any guide, an extension of UI benefits is likely to be part of the package that goes to the President. Perhaps a trade combining the UI extension with the elimination of the income caps is in the cards.

Built-In Gains and Stimulus

As the Senate considers what else should go into the stimulus agreement worked out this week, the S Corporation Association and its allies have been pushing to add relief from the built-in gains tax (BIG) as a means of freeing up much needed capital.

According to government statistics, hundreds of thousands of S corporations nationwide are potentially sitting on assets that they would like to sell in order to grow their businesses and create jobs, but they can’t because of the prohibitive tax implications of BIG.

This “lock-in effect” results in billions of dollars in assets being used at less than their full potential. This can have a particularly adverse impact on S corporations since, as closely-held businesses without access to the public markets; they have fewer options for raising capital. In an economy where a one or two percent decline in growth can mean the difference between a recession and a moderate, mid-term slowdown, eliminating that lock-in effect and allowing those assets to become fully productive again could be significant.

Bipartisan legislation to reduce the harmful impact of the built-in gains tax has been introduced on the House side by Congressman Steve Kagen (D-WI) and Ways and Means Members Ron Kind (D-WI), Jim Ramstad (R-MN) and Phil English (R-PA). The bill, H.R. 3874 would reduce from 10 to 7 years the holding period required for built-in capital gains.

On the Senate side, Finance Committee Members Lincoln, Hatch, and Smith all have a history of supporting this reform, and we expect to see legislation introduced in that body in the near future. If the Senate is intent on attaching additional items to the stimulus deal, this is one provision that promises big benefits to the economy and job creation relative to its revenue impact.