We’ve been asked to gaze into our crystal ball and see what the future of tax policy looks like. For S Corporations, it looks a lot like when the Ghost of Christmas Future popped in to see Ebenezer Scrooge. Nothing has been etched in stone yet, but it’s still not a pretty picture of things to come.

On the macro level, three factors are going to frame the tax policy debate in the next Congress:

1. All the tax relief enacted in 2001 and 2003 expires at the end of 2010. Unless Congress takes action, tax rates on individuals and flow-through businesses, the child credit, estate tax, marriage penalty, small business expensing, etc all revert to their pre-2001 levels.

2. The Alternative Minimum Tax will continue to take over the tax code. In tax year 2007, about five million taxpayers will pay AMT. Absent action, that number will rise to 25 million in 2008 and grow from there.

3. The long term budget deficit picture is bleak. Over the next five years, the federal budget actually moves towards balance. Beyond five years, however, the growth of Social Security and Medicare will crowd out all other categories of federal spending, driving up deficits to unsustainable levels.

The combination of 1 & 2 also raises the projected federal tax burden on families and businesses to historic levels. As the CBO reports:

Under the assumption that current laws and policies will remain the same, total revenues reach 20.3 percent of GDP in 2018, a level not reached since 2000, and prior to that, not since World War II.

So the baseline is higher taxes on S corporations (and everybody else) together with growing deficits. With that as the backdrop, what is likely to happen? While much depends on who controls Congress and sits in the Oval Office next year, a couple things are clear.

First, the bias is for tax rates to rise. If Congress chooses to do nothing, or even if it’s deadlocked and unable to move meaningful tax bills that take the tax code in either direction, rates are going to go up.

Second, the current obsession with “pay-as-you-go” tax policy will pressure Congress to raise rates even higher. For example, Democrats and Republicans alike are eager to extend the $1000 child tax credit and marriage penalty relief. But extending this tax relief counts against the baseline and under PAYGO would require an offset.

That’s the dilemma for PAYGO advocates. They want to extend the tax relief for middle income families, but they want to offset the associated revenue loss too.

How high is the revenue loss? The President’s recent budget submission puts the ten-year revenue loss of the child credit and marriage penalty provisions at over $300 billion more than the cost of extending the lower rates on dividends and capital gains.

Add to that the cost of eliminating the AMT and you get a sense of just how hungry Congress is going to be for tax revenues in the next three years.

As a result, we expect there to be a big push to enact tax reform next Congress. Ways and Means Chairman Charlie Rangel plans a series of hearings on the issue in coming months and use those hearings as the basis for moving a broad reform package next Congress.

What will it look like? His “Mother“ bill introduced last fall is good place to start. We previously highlighted the particular dangers this legislation poses to S corporations. In fairness to Chairman Rangel’s staff, they’ve listened to our concerns and expressed a sincere desire to continue communications. Nonetheless, the factors highlighted above would tie the hands of even the most pro-S corporation Committee. The Mother bill reflects those challenges.

For starters, it assumes all the Bush tax relief expires in 2011. It then reduces taxes (or increases refunds) for lower income families, swaps the AMT for a four-percent surtax on families and businesses earning more than $150,000, and cuts the corporate tax rate while eliminating numerous deductions used by C and S corporations alike. The net result for S corporations is higher tax rates applied to a broader base of income.

The Christmas Carol had a happy ending because Ebenezer changed his behavior and thus his future. In that regard, he had an advantage over S corporations. Ebenezer, after all, was master of his own destiny. The S corporation community must work within the legislative process.

Nonetheless, we do have the ability to influence tax policy. As an Association, we intend to continue to work with our allies to ensure Congress understands the role S corporations play in job creation and economic growth. With a new President, Congress, and tax reform on the table for 2009, this education effort is more important than ever.