House leadership has made clear they will take up legislation to extend the current tax rates and other policies through 2013, combined with expedited procedures for tax reform to be enacted in 2013.
This one-two punch is designed to address two challenges facing policymakers today. The first is the tax component of the “fiscal cliff” we face at the end of the year. The pending expiration of the lower rates on wages, business income, and investment income is having a tangible, negative impact on investment and job creation right now and, left unchecked, threatens to push the economy back into recession. Businesses simply don’t know what the rules are going to be moving forward, and are reluctant to tax risks and hire new people as a result.
The second goal is to address the underlying instability in the tax code and its impact on jobs and investment through tax reform. The code is rife with challenges, including:
- The devolution of the Alternative Minimum Tax into a tax on millions of middleclass families;
- The growth in the number of temporary tax provisions, including the estate tax rules, that need to be extended every year or so; and
- The emergence of the U.S. tax rates on corporations and pass-through businesses alike as the highest in the developed world.
The purpose of the expedited process is to enable Congress to more easily develop and pass legislation addressing these challenges, while cutting overall marginal rates and improving incentives for work and investment.
While there is an element of “wait and see” to the reform portion of this package, our view is that the legislation outlined by House leadership is the most promising and responsible path for Congress to take right now and it deserves our support. A little clarity for employers coupled with the promise of reform would go a long way to improving the economic outlook now and into next year.
What are the bill’s prospects?
The House appears to have the votes to pass the legislation described above — a strong bi-partisan majority is not out of the question — but what about the Senate? Doesn’t the Democratic majority in that body have the votes to kill it? Maybe not.
The Hill today highlights an emerging group of Senate Democrats who oppose raising taxes on anyone right now. According to The Hill:
A growing number of Senate Democrats are signaling they are not prepared to raise taxes on anyone in the weak economy unless Congress approves a grand bargain to reduce the deficit.
At least seven Democratic senators have declined to rule out supporting a temporary extension of the Bush-era income tax rates, breaking with party leaders who have called for letting the rates expire for people earning more than $1 million per year.
Combined with the 47 Senate Republicans, those seven votes would give the proposed House bill majority support in the Senate, which is certainly good news.
That doesn’t mean the House bill will pass, however. It’s clear a minority of Senators are willing to stand aside and watch as tax rates on higher income taxpayers and businesses go up, and perhaps middle income Americans too. Again, according to The Hill:
Some Senate Democrats in safe seats have even gone so far as to privately propose allowing all the Bush tax rates to lapse to maximize their bargaining power with Democrats.
Democrats in Republican-leaning states blanch at this idea. They do not want to have to explain an across-the-board tax hike to constituents when economic growth is sluggish and unemployment is high.
So the House will pass a one-year extension in the next month, and then this debate will shift to the Senate, where it appears a minority of Senators will work to block the legislation from passing that body.
What can the S Corporation Association and its members do? Make clear to members in both the House and the Senate that allowing the current tax rates on business and investment income to expire is simply not an option. They must be extended if the economy is to return to its normal growth rates.
We’ve been on the Hill with that message for over a year now, and its beginning to gain traction. The pending vote in the House is a big step in the right direction, and our goal is to get as many votes — Republican and Democratic — as possible to send a signal that the Senate needs to act.