Real quick, the House just passed its small business tax package (H.R. 976) to accompany the proposed minimum wage increase, 360-45. This action follows a very bipartisan markup last Monday, where the tone of the hearing was a dramatic departure from what we’ve come to expect from Ways and Means meetings. That this comity occurred over a $1 billion package that included no S corporation provisions was a little disconcerting, but it is something we will have to work on.

So what’s the next step? The Senate could take up the House-passed bill, substitute in the Senate’s $8 billion small business tax relief package (including the S corporation tax title we care about), and ask for a conference with the House. Or the two bodies could negotiate away their differences now, and then pass the resulting product out of the Senate and House.

Either way, it looks like the tax writers have two or three weeks of work ahead of them to reconcile their differences. Common ground over the competing revenue raisers should be particularly difficult to find. We’ll keep plugging away to ensure the Senate-passed S corporation provisions survive negotiations and that they take effect immediately.

Senators Offer Middle Class Tax Package

Finance member Charles Schumer (D-NY) and five freshmen Democratic members introduced legislation yesterday (S. 614) to target tax relief at middle class families. According to the authors, the bill would reduce revenues by $137 billion over ten years in order to:

o Double the Child Credit to $2,000 for a child’s first year;

o Increase the dependent care credit to 35 percent for certain families;

o Extend AMT relief; and

o Consolidate existing education deductions in a single, $2,500 credit to cover tuition, fees, and books.

So, in the era of PAYGO, how should the Congress offset $137 billion in tax relief? You guessed it — the tax gap. As BNA reported this morning, “Schumer mentioned several possible ways to pay for the middle class relief, including raising income taxes on families making $400,000 per year, repealing oil industry tax breaks, and/or narrowing the tax gap.”

S corporations and small businesses need to be on their guard that talk about reducing the tax gap doesn’t turn into broad-based tax increases on the small business community. The S corporation payroll tax provision, repealing LIFO accounting rules, and raising taxes on small business exporters are all provisions that have been suggested in the context of addressing the tax gap.