We are nearing the finish line for the 110th Congress with more on the table than when we started nearly two years ago.
None of the 12 bills to fund the government have been adopted. Tax provisions that expired at the end of 2007 remain to be extended. And the collapse of the subprime mortgage market that began a year ago with the failure of several hedge funds has grown into a full fledged credit crisis that, according to the Administration, threatens to harm the entire economy.
It appears Congress will stay in through next week and will have to address the following major items:
- A Continuing Resolution to fund the entire government through next March;
- A tax bill to extend expired and expiring provisions through 2009 and beyond; and
- Some form of relief to the credit markets, perhaps along the lines of what Secretary Paulson proposed last week.
Nothing like waiting until the last moment to start that really big term paper.
Some people believe you are not a real player in Washington tax circles until you have your own tax extender to worry over. If that’s the case, then your S Corporation Association has hit the big-time.
The S-Corp extender would extend for one year a provision that allows shareholders to deduct the full value of S corporation property they donate to charity. This provision, like all the other extenders, is caught in a battle of wills, with the House Democrats on one side and everybody else on the other.
Earlier this week, the Senate adopted a $150 billion package that included extensions of the AMT patch, the R&E tax credit, and the assorted energy tax provisions designed to encourage renewable energy. Over the last couple days, the House responded by passing separate bills to do the same thing.
The biggest difference in the two approaches is that the Senate package is offset with $25 billion in tax increases, while the House bills are offset by a total of $60 billion in tax increases. The horse traders in the room are probably thinking, “The Senate is at 25, the House is at 60. Let’s split the difference, pass the bill, and go home.”
But our intelligence is that both the Senate Republicans and the White House have made it clear that $25 billion in revenue raisers is as high as they are willing to go in this process — they would have preferred zero — and the House will have to take the Senate-passed bill or there will be no bill.
The Administration issued a veto threat against the House energy package, suggesting the House take up and pass the Senate bill instead. Whether House Democrats take the suggestion of a departing President remains to be seen.
Bailout Keeping Congress In D.C.
As we forecasted, the legislative wrangling over the bailout has been about as ugly as it gets. While we still expect a deal to get passed and sent to the President, there are several huge obstacles in the way and, while a deal this weekend is possible, action later next week is more likely.
The core of the plan being drafted in Congress is to give the Treasury the authority to purchase up to $700 billion in distressed assets over the next couple years. These assets are backed by subprime and Alt-A mortgages, are primarily held by banks and other financial institutions, and have undermined the ability of these institutions to continue their lending and other operations. Credit measures like Libor are signaling the threat Paulson outlined last week is becoming increasingly real.
If it works the way Paulson and Fed Chairman Bernanke suggest, the Treasury would purchase these assets at reverse auction for a competitive price, inject liquidity into the financial system while removing a considerable amount of risk and uncertainty, hold the assets until the housing market stabilizes, and then sell them back to the private sector. Observers much smarter than your intrepid S-Corp team — including Bill Gross and Warren Buffett — believe a properly executed plan would return a profit to the taxpayer.
The biggest obstacle to the bailout is the stand-off between Speaker Pelosi and House Republicans. The Speaker has made clear she will not move the bailout package unless a majority of House Republicans support it. But House Republicans — including their leadership and a substantial portion of their conference — have made it clear they oppose the current plan.
The solution is either that the plan changes enough to attract more House Republicans, or the Speaker moves the package without them.
- Here’s the latest Democratic draft reflecting the core proposal with numerous additions.
- Here’s the House Republican bailout principles released yesterday.
As you can see, there’s not a whole lot of common ground here. Republican Leader John Boehner just appointed the Republican Whip, Roy Blunt from , to represent House Republicans in future discussions, so talks will resume this afternoon and go into the weekend.
The question for S corporations is whether the dire predictions of the credit markets seizing up — affecting lines of credit, payrolls, etc — are realized before these talks result in some type of agreement.