The Wall Street Journal reports this morning that Ways and Means Chairman Charlie Rangel will likely introduce his “Mother of All Tax Bills” this week, a proposal marrying the repeal of the individual AMT with a cut in the top corporate rate to 30 or 31 percent.

How is he going to offset the revenue loss of all this tax relief? Here’s what we’re hearing:

  • Rate Increase on Upper Income Taxpayers;
  • Eliminate the Manufacturing Deduction;
  • Change the Rules Allocating Expenses on International Income;
  • Repeal LIFO (!);
  • Raise Tax Rates on Publicly Traded Partnerships and Hedge Funds.

Chairman Rangel has made it clear he does not see this bill moving forward this year, but rather is using its introduction to stimulate debate and set the table for legislation next year. Nonetheless, the current plan appears to include a significant tax increase on S corporations. In essence, he’s proposing to raise taxes on S corporations to offset part of the cost of cutting rates for larger C corporations.

As S Corp readers know, we’ve worked for the last year and half to block changes to LIFO accounting rules. There is no policy justification for taking this tool away from manufacturers and other businesses with inventories that appreciate in value.

While the manufacturing deduction has always been a blunt means of helping US manufacturers, eliminating it and using the revenues to help C corporations exclusively ignores the fact that many US manufacturers are organized as S corporations. The Rangel plan, as outlined above, would impose a tax increase, not a cut, on these businesses.

You’ll hear more from us on this as the debate matures, but our initial read on this package is that it offers little for S corporations by way of eliminating the AMT, and has the potential to be a massive tax increase for S corporations who are manufacturers using the LIFO method of accounting.