After reappearing briefly last week, the latest version of the tax extenders package (Baucus IV) has now disappeared. The plan was for the latest version to garner sufficient support and then be attached to the small business tax bill, but the small business bill was pulled, ending the chances of the extender package getting adopted before the August break.

That means all those tax provisions that expired at the end of last year, including the R&E tax credit and the state sales tax deduction, will have to wait until September at the earliest before getting another shot. That’s too bad, as it now appears the package has the votes to move through the Senate.

As we noted last week, one of the modifications Chairman Baucus made to the package was to eliminate the S corporation payroll tax provision. Dow Jones reported this on Friday:

Senate Finance Committee Chairman Max Baucus (D., Mont.) has removed a controversial proposal that would force lawyers, accountants and other professionals to pay more in payroll taxes from a broader bill to extend expired tax cuts. The payroll tax provision, which would have raised $9 billion to help pay for tax cut extensions, had drawn strong criticism from business advocacy groups and Republicans including Sen. Olympia Snowe (R., Maine).

Coupled with other changes, striking this provision should give Baucus the 60 votes he needs to move forward. We will find out in September.

On the small business bill, negotiations continued over the weekend and there’s a very slight chance the bill could come back up before the end of the week. As CongressDaily reported yesterday:

This week will determine if the chamber passes the small-business bill, which stalled last week in a dispute over amendments. Reid on Thursday urged members to “cool down” over the weekend as aides said they hoped for a deal that would set up a quick series of votes and passage of the bill by Wednesday. Republicans have sought votes on four amendments, while Reid last week offered three. Aides said completion could wait until September if they do not reach a deal, which will have to include Republican agreement to limit debate time.

Majority Leader Reid would also need to find extra time in a very crowded week. He intends to take up three other controversial matters before Friday — the Kagan nomination, extra money for states under FMAP, and competing energy bills designed to respond to the Gulf oil spill. All of these items will likely be debated at length, so fitting in yet another bill would be a challenge. With the tight calendar, we’re expecting this issue to get kicked into September as well.

Small Business and 1099 Reporting

Some good news on the small business paperwork front: a majority of House members support repealing from the health reform bill the 1099 reporting requirement that has the small business community up in arms. CNN Money has a nice summary of what’s at stake:

Right now, the IRS Form 1099 is used to document income for individual workers other than wages and salaries. Freelancers receive them each year from their clients, and businesses issue them to the independent contractors they hire.

But under the new rules, if a freelance designer buys a new iMac from the Apple Store, they’ll have to send Apple a 1099. A laundromat that buys soap each week from a local distributor will have to send the supplier a 1099 at the end of the year tallying up their purchases.

The bill makes two key changes to how 1099s are used. First, it expands their scope by using them to track payments not only for services but also for tangible goods. Plus, it requires that 1099s be issued not just to individuals, but also to corporations.

Taken together, the two seemingly small changes will require millions of additional forms to be sent out.

One item that caught our eye was the revenue estimate. The Joint Committee on Taxation believes repealing this paperwork mandate would reduce revenue collections by $2 billion per year! Since filing 1099s does not increase tax levies by itself, the JCT is assuming the IRS will be able to use the payment information to increase enforcement and collections. We’re skeptical. It’s just as likely that collecting, organizing, and putting to use the millions (billions?) of new 1099s would cost the federal government more than it saves.

But back to the good news. Last Thursday, House leadership pulled legislation from the House floor rather than lose a vote on repealing this 1099 requirement. Then on Friday, leadership attempted to adopt this provision with $20 billion in offsetting tax hikes, but failed again to garner the requisite votes. Apparently a sufficient number of House members recognized that trading a poorly-conceived paperwork mandate for higher taxes was not in fact a good bargain and should be rejected.

So there’s hope yet for the small business community. A majority of House members recognizes that imposing yet another paperwork requirement on Main Street businesses is a bad idea and should be repealed. Let’s hope House leadership listens to its members and lets them vote on a clean repeal.

More on Extending Tax Rates

The debate over extending tax rates also is getting kicked into September, but the rhetorical battle is heating up now. The Washington Post in particular is staking out the “let’s tax the rich” position. The paper’s online “Research Desk” feature highlighted the following question from reader Ross Cohen:

Republicans keep fighting for the Bush tax cuts with a talking point about small business owners filing as individuals. I’ve heard 50 and 75% quoted as the number of $250k filers that are actually small businesses. Any truth to this? It seems to be their strongest case against letting the cuts expire.

Post researcher Dylan Matthews responds:

As far as I can tell, this argument originated with Grover Norquist in this column. Norquist cites IRS data to say that two-thirds of income from sole proprietorships, partnerships and S corporations was reported by filers making over $250,000 a year. Although true, this is almost totally irrelevant. Norquist looks at the proportion of income, not filers, which inevitably results in a bigger portion for high-earners.

Really? The only source the Post researcher could find was Grover Norquist? We agree with Grover on this issue and many others, but he does tend to be a lightning rod. Had Ross asked S-CORP his question, here are a couple citations we would have provided him with:

The Joint Committee on Taxation projects that $1 trillion in business income will be reported on the individual income tax returns in 2011. Notably, of that $1 trillion, nearly one-half, $470 billion, will be reported on returns that will be subject to the top two rates of 36 percent and 39.6 percent if EGTRRA and JGTRRA are allowed to sunset.

Testimony of Doug Holtz-Eakin, July 14, 2010

Top bracket taxpayers received a disproportionate share of flow-through business income and paid an even larger share of the tax on it; taxpayers in the highest two tax brackets made up 8 percent of all taxpayers receiving any flow-through income or loss, but they received 72 percent of the net flow-through income and paid 82 percent of the taxes on this flow-through income (Table 3.3).

United States Treasury Report, July 23, 2007

The Joint Committee on Taxation and the United States Treasury are good sources, no? Moreover, how many of our Washington Wire readers noticed that Dylan misread the question? The question asked what percentage of high-rate taxpayers own small businesses. There’s a lot of good data out there, too, including this one:

Because flow-through income is concentrated in the top tax brackets, the reductions enacted in 2001 and 2003 in the highest two marginal income tax rates have important consequences for the recipients of this income - typically owners of small and entrepreneurial businesses. For 2007, the Treasury Department estimates that about 75 percent of the taxpayers who will benefit from lowering the top rate from 39.6 percent to 35 percent are flow-through business owners, and that 84 percent of the tax reduction from the top rate reduction will go to flow-through business owners.

United States Treasury Report, July 23, 2007

So, to summarize: yes, Ross, it is true that small businesses are overrepresented among taxpayers who pay the top two income tax rates, and those businesses will see their tax rates go up under the pending tax increases.

Finally, why is it irrelevant that a large percentage of business income — somewhere between one-quarter and one-third of all business income — is taxed at the top two rates? From our perspective, that is the heart of the issue. If a single taxpayer is responsible for a large amount of economic activity and employment, raising his or her taxes in the middle of a weak recovery makes little sense.

As the Tax Foundation noted several years ago:

So why should we pay attention to the way our tax code treats small businesses? They are an important source of innovation and risk-taking, creating between 60 and 80 percent of net new jobs, employing over half the labor force, and generating more than one half of the nation’s gross domestic product. Higher income tax rates reduce the investment spending of entrepreneurs and the likelihood that they invest at all, discouraging the growth or expansion of small businesses.