February 14, 2014

Senator Ron Wyden (D-OR) took the helm of the Finance Committee this week.  What does this mean for tax policy?  Here’s what the press has to say:

  • The Hill tells us he blames Republicans for gridlock on tax reform;
  • Roll Call says he’s the “most liberal [Finance Chair] ever”;
  • Forbes says he wants to level out rates on ordinary and investment income; and
  • Politico observes he has a “penchant for big ideas.”

Beyond that, a couple consistent items do stand out.  First, it appears the new chairman is with us on the need for comprehensive, rather than corporate only, reform.  As the Hill writes:

But Wyden also appeared to break with many Democrats on some areas of tax policy. Wyden suggested it would be “a challenge” to reform just the corporate code, as Obama has suggested, because of the businesses that pay taxes as individuals.

Here’s Politico Pro:

But Wyden said the proposal put forward by President Barack Obama to reform just the corporate side of the code, a plan Republican critics say ignores small business that file as individuals, has “challenge[s].”  “We’ll look at that, but here’s the challenge. Most businesses are not what are called C corporations, which is where the concern has been. Most of them are sole proprietorships, hot dog stands, barber shops, partnerships, so it is very hard to bite off just one piece of it,” he said.

Another area of consistency in the reporting is Wyden’s short-term focus on moving an extenders package.  As readers know, a grouping of more than fifty tax provisions, collectively called the tax extenders, expired at the end of last year, including key provisions like the R&E tax credit, 179 expensing, and the shorter built-in gains holding period.  Wyden has made clear moving an extenders package is his first priority.

Finally, mostly liberal or not, the press is in agreement that Wyden has a long history of working across the aisle and crafting big, bipartisan reform bills.  As Forbes put it:

That makes Wyden sound like a standard progressive Democrat. But his record is much more complex. For instance, Wyden has bucked his own party’s leadership by reaching across the aisle to lawmakers such as House Budget Committee Chairman Paul Ryan (R-WI) on Medicare reform.

Wyden likes big ideas, but he is also a pragmatist. His challenge as the new chair of the Finance Committee will be to mix the ambitious with the realistic. That’s what Bob Packwood, the last Finance Committee chair from Oregon, did when he helped pass the Tax Reform Act of 1986.

S Corporation Numbers Hit Record High

The growth rate of the S corporation community has slowed in recent years, but it is growing nonetheless.

According to the IRS, there were 4.6 million S corporations in 2012, up from 3.3 million ten years ago. These numbers come from the agency’s data book that tracks the total number of tax returns filed and breaks them down by type.  The 4,579,669 subchapter S returns filed for 2012 are the most in the fifty years of S corporations.

Looking at past reports, a couple of interesting points pop out.

The top location for S corporations is California, right?  Nope – it’s Florida with nearly 600,000.  California is a distant second at 443,000.  Other states with lots of S corporations include Texas, Illinois, Pennsylvania, and Georgia.

California might catch up to Florida if its growth trend keeps up, however.  Over the last decade, its S corporation population has grown by 84 percent – the fastest in the country – while Florida has grown at a more typical rate of 37 percent.  The slowest S corporation growth has been in the business hostile Northeast (New Jersey lost 6 percent of its S corporations) and, surprisingly, the Midwest (Indiana and Ohio saw just 7 percent growth).

It is obvious the financial crisis took its toll on S corporation creation, just like other forms of businesses.  There were 4,440,001 S corporations in 2008, but only 4,579,669 million three years later, a growth rate of just thirty-five thousand per year.  Compare that to a growth rate of 300,000 to 400,000 per year a decade or so ago.

Where do all these new S corporations come from?  Some are existing businesses that convert from C corporation status, and some are new business formations.  Back in 2003, the IRS broke down the growth rate thus:

For Tax Year 2003, some 342.9 thousand corporations elected subchapter S status for the first time. Of these, 252.8 thousand were newly incorporated businesses. The remaining 90.1 thousand elected to make the conversion from a taxable corporation to an S corporation.

So of the 34,000 new S corporations for 2012, how many were new and how many converted?  We don’t know, because for some reason the IRS stopped doing detailed reports on S corporations back in 2003.  So the top lines numbers in the Data Book are all we have.  That, and 4.6 million S corporations!