The Congress is back, and Senator George Voinovich (R-OH) indicated last week that he will support closing debate on the small business tax bill pending in the Senate.B He should be the 60th vote, clearing the way for that bill to pass the Senate and move into negotiations with the House.B Thatb�s good news for private enterprise.
In a twist, the Senator indicated the price for his support would be a Senate vote to repeal the 1099 reporting requirement adopted as part of the health care reform bill earlier this year.B As a reminder, this new law requires businesses to file 1099s for any business-to-business spending that exceeds $600 a year.B That means any business that spends more than $600 a year at Staples will have to send a 1099 to both Staples and the IRS.
In response, the business community sent a letter to Capitol Hill last week signed by a remarkable 128 organizations, including the S Corporation Association, calling on Congress to repeal this ill-conceived requirement.
So far this week, we now expect the Senate to resume the small business bill, hold competing votes on an amendment from Sen. Johanns (R-NE) B to strike the 1099 requirement outright and an alternative amendment from Sen. Bill Nelson (D-FL) to just water it down a little, and move to adopt the underlying bill.B Not sure if Senator Johanns has the support needed to succeed on his amendment, but itb�ll be close and web�re rooting for him.
The Rate Debate Continues
S-CORP friends Alan Viard and Kevin Hassett had a great piece in the Wall Street Journal earlier last week making the case for avoiding the massive tax increase on employers beginning next year.B As the two AEI economists writes:
The numbers are clear. According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. That’s the number to look at, not the 3%. Would Mrs. Pelosi and Mr. Biden deny that the more successful firms owned by individuals in the top income-tax bracket are disproportionately responsible for investment and job creation?
Thursday, the Obama Administration responded. First, Assistant Secretary Michael Mundaca reiterated in the Journal that only a few taxpayers will be hit, and most of those are wealthy lawyers and hedge fund managers:
The problem with their argument, however, is that it counts any type of partnership income, sole proprietor income, or S corporation income as small-business income. Thus, they count as small-business income profits that go to a partner at a major law firm or hedge fund. Our analysis indicates that small-business owners under this definition, who would be affected by allowing the top two rates to increase as scheduled, have an average gross income of over $1 million. Keeping the Bush tax cuts in place for these taxpayers would not likely result in additional job creation, and it would add significantly to federal budget deficits and debt.
This response is largely rhetorical and ignores the millions of profitable S corporations and partnerships that are not law firms or hedge funds. More to the point, what’s wrong with legal and other professional firms? We thought this was a debate over jobs? Don’t law firms, accounting shops and doctors offices employ people too? Why is raising taxes on one employer wrong while raising taxes on another is okay?
Next, the President addressed this issue in his morning press conference:
Now, on the high-income tax cuts, my position is let’s get done what we all agree on. What they’ve said is they agree that the middle-class tax cuts should be made permanent. Let’s work on that. Let’s do it. We can have a further conversation about how they want to spend an additional $700 billion to give an average of $100,000 to millionaires. That, I think, is a bad idea.
If you were going to spend that money, there are a lot better ways of spending it, but more to the point, these are the same folks who say that they’re concerned about the deficits. Why would we borrow money on policies that won’t help the economy and help people who don’t need help?
Couple comments. First, when did this become a debate over millionaires? Both the President and Secretary Mundaca make reference to millionaires, whereas the line they’ve drawn in the sand is for individuals making more than $200,000 and couples making $250,000.
Second, the choice on the table is whether to raise marginal tax rates on employers currently paying the top two income tax rates. The President supports allowing the top rate to rise from 35 percent to about 40 percent beginning next year. He then says he has better ways to “spend” the revenue from these higher taxes than the employers who earned the money in the first place.
Many of our members would disagree with the President on that one.
Tax Hike Defections Growing
It appears many elected Democrats disagree with the President as well. In addition to the Senators we listed last week who support efforts to avoid the entire tax hike next year — Nelson, Conrad, Bayh, and Webb — Senator Joe Lieberman added his name to the list today, stating:
I don’t think it makes sense to raise any federal taxes during the uncertain economy we are struggling through. The more money we leave in private hands, the quicker our economic recovery will be. And that means I will do everything I can to make sure Congress extends the so-called Bush tax cuts for another year and takes action to prevent the estate tax from rising back to where it was.
Meanwhile, in perhaps the biggest development yet, staff for the moderate Blue Dog coalition in the House are circulating a letter calling for extending all of the tax relief, including the highest rates:
While those in the highest income brackets comprise only two to three percent of American taxpayers, economists estimate that they are responsible for 25 percent of national consumer spending. As 70 percent of our economy is driven by consumer spending, this is not the time to jeopardize further growth. It is also estimated that up to one-third of high-income taxpayers are small business owners, our nation’s job creators and the backbone of our economic recovery.
The Blue Dog letter is key to House adoption of all of the tax relief. If a significant number of their coalition signs on (they have 50-plus members) it would give the anti-tax hike team majority support for extending all of the tax relief and put Speaker Pelosi in a very difficult position. She would have to choose between blocking any tax-related bills from coming to the House floor, including efforts to extend only the middle-class tax relief, or bring up such a bill and risk losing control of the floor to the anti-tax hike majority.
Given these developments, we still believe “Congress does nothing” remains the most likely outcome for 2010, but “Congress act and prevents the entire tax hike” is moving up and is now a close second.