Following a series of votes on alternatives, the Senate adopted a $150 billion package of tax extenders yesterday by a vote of 92-5. The key components of the package include:

  • A one year extension of the higher exemption amount under the Alternative Minimum Tax. This provision will prevent about 20 million taxpayers from getting sucked into the AMT when they file their taxes this April.
  • An extension of expired and expiring personal and business tax provisions, including the state sales tax deduction and R&E tax credit, though 2009.
  • Several new provisions, including making the refundable child tax credit more valuable to low-income families and mental health parity provisions.
  • Disaster relief for Hurricane Ike.
  • A $17 billion package of energy extenders and new provisions, including an extension of the Section 45 production tax credit and a new credit for plug-in hybrid vehicles.

The big break-though was the decision by Senate leadership not to insist on offsetting the revenue impact of extending the AMT relief and other expired and expiring provisions. Of the total $150 billion revenue impact, only $42 billion is offset.

The package now moves to negotiations with the House, where its future is uncertain. The House today is expected to take up a smaller, $43 billion package of extenders fully offset with the same tax increases included in the Senate package.

All this action masks the fact that the underlying question remains the same — will House Democrats set aside their demand that all extensions of existing tax provisions be full offset, or will they accept the Senate compromise? With only a few days left before Congress leaves for the elections, we’ll know the answer in a couple of days.

Futures on Tax Rates

In the past, we have discussed how tax policy changes depending on who is the next President. Our assessment is that while there will be marginal differences, the final polices enacted under a McCain or Obama presidency will be more similar than not, with a strong bias for higher rates.

Greg Mankiw, former Chairman of the CEA, takes a more rigorous approach, but comes up with a similar conclusion. As posted on Greg’s blog:

What kind of tax policy will we get if John McCain is elected President? He says he wants to make the Bush tax cuts permanent. But is he likely to deliver that outcome in the face of a presumptively Democratic Congress? We can get some insight into this question using Intrade betting and some basic rules of conditional probability.

First, who knew the Intrade Prediction Markers tracked tax rates? Well they do, and using the current Intrade betting, Greg comes to the following conclusion:

That is, according to the Intrade betting, we are likely to see a significant hike in the top income tax rate even if McCain is elected President.

Bailout Proceeds

Estimating what will happen with the Treasury bailout plan is complicated by all the noise from Members of Congress expressing their opposition, advancing alternatives, and proposing additions like caps on executive compensation and changes to bankruptcy rules.

With a plan this large — and really, there’s nothing larger than giving Treasury $700 billion to save the economy — your S-CORP team prefers to step back and look at the forest.

Is the leadership in Congress willing to tell Treasury Secretary Paulson and Federal Reserve Chairman Bernanke “No” and take the risk — and responsibility — that the economy goes into free-fall? The answer is no, which means Congress will adopt some version of the Treasury plan with the core provisions intact.

The sausage making process will take a few days; it won’t be pretty, and many less than attractive provisions will be added to the legislation, but we believe it will get done.

By the way, Intrade agrees — the odds of Congress passing the package before the end of the month skyrocketed from yesterday’s close of 55 percent, to 80 percent this morning.