As reported in the press, last week the Senate failed to add a sizable energy tax package to its comprehensive energy bill prior to adoption.
The Senate voted 57-36 not to end debate (60 votes are needed) on the tax package that was offered as an amendment to the broader energy bill. This vote fell short despite the fact the Finance Committee reported the package out by a bipartisan vote of 15-5 vote just a few days earlier.
While the package itself has little directly affecting S corporations, there are a couple lessons to draw from the challenge Senate leadership is having getting the package adopted.
The first lesson is there’s no such thing as a free lunch, or in this case, a free revenue raiser. The Finance-reported package would have reduced revenues by $32 billion over ten years, and the Committee had paired the revenue losing provisions with tax increases — mostly targeted at the oil and gas industries — of $32 billion. Oil and gas companies are unpopular these days. The Solar, wind, ethanol, and other renewable fuels industries are very popular. Yet, when it came time to vote, the opposition to the revenue offsets was sufficient to overcome support for the renewable tax breaks.
The second lesson is this issue, and most of the revenue raisers in question, will be back. Senate Leader Harry Reid (D-N) has already indicated he plans to bring this package back up for a vote in July, possibly as part of the expected Agriculture authorization bill. The vote on the energy tax package was very close — three votes away from closing off debate — and with four healthy Senators absent from the original vote, there’s a good chance Senator Reid will find the necessary votes.
How the other tax bills on the agenda — education, housing, children’s health insurance, AMT relief, extenders, etc — manage to offset their revenue costs is still very much in the air and something we’ll be watching closely.
Senate AMT Hearing, House AMT Plans
The Senate held a hearing on the Alternative Minimum Tax Wednesday. For AMT junkies — and really, who isn’t one at this point — the Joint Committee on Taxation has just released a really nice summary of the issue, together with some revenue estimates of several solutions.
Meanwhile, House Democrats continue their efforts to produce a permanent AMT bill by the end of July, but their words suggest they may push that deadline back to this fall. Here’s a piece from yesterday’s CongressDaily:
“There is some consideration being given to doing it after August, only because the appropriations bills haven’t moved as quickly as we thought,” Neal said before entering a meeting with Rangel, Democratic Caucus Chairman Rahm Emanuel of Illinois and Rep. Xavier Becerra, D-Calif., to discuss the committee’s plans on AMT and other issues.
Also, the article suggests that the House Democrats’ plan may have narrowed its options on how to pay for AMT reform to the surtax idea we have discussed previously.
For S corporations, this surtax presents two challenges. First, a surtax of 4 percent or so applied to AGI above a certain threshold (they appear to be looking at $500,000) would raise marginal tax rates on S corporation business income, including capital gains, dividends, and interest. Second, since the underlying rates on ordinary income, dividends, and capital gains are scheduled to increase back to their pre-2001 levels beginning in 2011, the actual tax rates S corporations could expect to pay may rise to the mid-40 percent range within the next five years! S corporations haven’t paid this high of a marginal tax rate since 1981. Meanwhile, the top tax rate on C corporations remains at 35 percent.
On the Senate side, it appears there is little appetite for taking on a permanent AMT fix. Nonetheless, whatever action the House takes will set the stage for future discussions on the AMT. Obviously, S corporations have as much at stake on its resolution as anybody.