Earlier this week, the Wall Street Journal reviewed the most recent comments by Senator Barack Obama regarding his plans for tax policy.
As we noted in the past, the bias is for higher tax rates beginning sometime in the next Congress. This bias stems from the make-up of Congress and the scheduled expiration of the 2001 and 2003 tax cuts and exists regardless of who becomes President.
That said, the S corporation community should pay particular attention to some of the proposals put forward by the Obama campaign - specifically, his plan to raise marginal tax rates on households with incomes above $250,000.
Just how would this hurt S corporations? Critics argue that the number of businesses affected, and the potential economic impact by extension, is small.
But our friends over at American’s for Tax Reform have pointed out that the actual percentage of affected business income is quite large. According to IRS statistics, 80 to 90 percent of all S corporation and partnership income is reported by households with incomes above $200,000.
Combine that statistic with the fact that most business income is taxed at the individual rates, and the potential damage to the economy of raising taxes on these households becomes clear. As the WSJ concludes:
The reality is that the creators of new jobs in the economy are more likely to be rising entrepreneurs or filers under Subchapter S, who typically pay taxes at individual rates. Hanging three or four tax millstones around their productive necks in January if the economy is weak will likely produce unimpressive growth and job numbers in the first year of the new Obama Presidency, and likely beyond. That in turn could drag down the Democrats in Congress who will get credit for voting these higher taxes into law.
So Much to Do, So Little Time
Congress returned this week to a long list of must-pass items, but only a few weeks to get them done and little consensus on how to do them. The list includes:
- Tax Extenders
- Continuing Resolution
- American with Disabilities Act
- Second Stimulus
- Media Shield 1st Amendment Legislation
Given the length and composition of this list — the Media Shield bill alone is worthy of several constitutional conventions — the odds of a lame duck session are growing by the minute.
On the tax front, the stalemate over whether to offset tax relief or not continues. Early this week, House Majority Leader Steny Hoyer (D-MD) took the Senate to task for failing to move on extenders, especially those targeting at renewable energies.
About the same time, Senator Baucus indicated that the Congress may leave for good this year without extending many of the tax provisions that make up the extender package, including the R&E tax credit. He did say that a one-year extension of the AMT patch will likely pass, perhaps as part of the continuing resolution.
Senator Baucus then joined Senator Grassley in introducing a comprehensive, $40 billion package of energy tax provisions, including a three-year extension of the Production Tax Credit.
The plan for both the House and the Senate is to consider comprehensive energy bills early next week, but it’s unclear anything will pass.
All this focus on energy means there’s less time and less attention being paid to the broader tax challenges faced by S corporations and other businesses. If Congress does adjourn permanently prior to the elections, these issues will be waiting for the new Congress when it organizes in January.