There are two ways to pass a tax bill in the Senate: bring it up under the regular floor rules and gain the support of 60 Senators, or bring it up under the “budget reconciliation” process and attain the support of a simple majority. The budget offered by Senate Budget Chair Judd Gregg last week assumes $227 billion in lower taxes over the next five years, but doesn’t protect that tax relief under reconciliation.

What does that mean for S-CORP members?

It means that any tax bill brought to the Senate floor that conforms to the budget resolution would still need 60 votes to pass the Senate. It also increases the likelihood that any tax bills considered by the Senate this year will need to be “paid for”, with revenue raisers fully offsetting any tax relief.B For S corps, it means we’ll need to continue to educate Members of Congress about why the proposed payroll tax increase “pay-for” is bad tax policy and bad economics.

Last Year’s Tax Bill - Still Not Finished

The downside of using reconciliation in the Senate is the bill has to conform to the Byrd Rule. The purpose of reconciliation is to reconcile spending levels with revenue levels, and the Byrd Rule is designed to make sure a bill brought up under reconciliation stays within those confines.

Among other things, the rule subjects to a 60 vote point of order any provision that increases outlays or decreases revenues outside the budget window. That appears to be the chief challenge to finishing up last year’s $70 billion tax relief package. On the one hand, the House is insisting that the Senate accept its two-year extension of the lower 15 percent rates on capital gains and dividends. On the other hand, those provisions reduce revenues by about $30 billion outside the budget window. Even a one year extension would have a significant impact on revenues past year five. This means the Senate either finds 60 votes in support of a tax package extending the lower investment income tax rates, or the House accepts some revenue raisers to offset the out-year cost. Or the bill doesn’t get done. Please see the related story below.

Thomas Still Cool to Idea of Offsets (Tax Analysts Tax Wire, March 2, 2006)

With conference negotiations on a $70 billion package of tax cuts (H.R. 4297) temporarily on hold, House Ways and Means Committee Chair William M. Thomas, R-Calif., on March 1 remained reluctant to accept Senate-approved revenue raisers as a solution to conferees’ woes.

Conferees, who have yet to officially meet, are faced with reconciling the significant differences between the House and Senate-passed tax reconciliation bills. Much of the debate so far has revolved around whether to include in the final conference report a one-year extension of alternative minimum tax relief, as approved by the Senate, or a two-year extension of the reduced rates on capital gains and dividends, as approved by the House. Lawmakers on both sides of the aisle have suggested that one of those provisions will need to be dropped from the final report to keep the bill’s cost below the cap, while others, including conferee and Senate Finance Committee Chair Chuck Grassley, R-Iowa, have said the inclusion of offsets in the bill could allow both of those provisions to fit within the confines of the legislation.

The Senate’s tax cut package already includes a number of offsets that would raise $18.5 billion over five years and $35 billion over 10 years. The House, which has historically been averse to including offsets in its own tax cut legislation, did not include any in its reconciliation bill.

Thomas told reporters that instead of including offsets in the bill to make more room for additional tax cut extensions, the solution might be to subtract other provisions and move them outside of reconciliation. Legislation moved through the reconciliation process avoids Senate procedural hurdles such as filibuster and can be passed with a simple majority vote.

“The Senate operates on an additive process. There are solutions to be found in the subtractive process,” Thomas said. “It’s very difficult for the Senate to operate in a subtractive structure because every time you take something away you lose a vote. . . . But you don’t just have to do addition to find a solution, you can also do subtraction. You can also do omission.”

Thomas noted that Grassley has already floated the notion that some provisions, such as the so-called business “extenders” included in both chambers’ reconciliation bills, would receive enough bipartisan support to pass outside of the reconciliation process.

“You may not have to carry some things inside reconciliation, you might be able to carry them outside reconciliation,” Thomas said.

No. 46

Thursday March 9, 2006

Page G-10

ISSN 1522-8800

Tax, Budget & Accounting

U.S. Budget

Sen. Gregg’s Budget Blueprint Avoids Tax Reconciliation Protection for 2007

The chairman’s mark of the 2007 budget resolution unveiled March 8 by Senate Budget Committee Chairman Judd Gregg (R-N.H.) does not contain any reconciliation instructions for tax cuts, a feature that may hamper efforts to cut taxes outside of a bill currently under negotiation by lawmakers.

The chairman’s mark “assumes a modest reduction in revenues, relative to the baseline, that balances the need for fiscal responsibility with the need to continue modest tax rates necessary to continue economic growth and job creation,” according to a summary distributed by the panel.

House and Senate tax writers have been trying to hammer out a compromise on the tax cut reconciliation bill (H.R. 4297) that emerged from the fiscal year 2006 resolution passed in 2005. That resolution called for about $70 billion in five-year reconciled tax cuts that would enjoy procedural protections in the Senate.

Without reconciliation protection, any tax provisions would be subject to normal legislative order and subject to possible filibuster by Democrats. That condition has not existed since 2004, when the lack of a budget resolution also meant tax cuts fell under normal order.

However, the proposed budget resolution assumes $227 billion in tax cuts over five years, which the summary said totals about 1.6 percent of the more than $13 trillion in tax receipts to be collected over the window.

“Since the Tax Relief Act of 2005 (pursuant to the reconciliation instruction in the FY 2006 budget resolution) has not yet been enacted, the tax relief assumed in the Mark is sufficient to accommodate extensions of current capital gains and dividend tax rates and existing provisions for small business expensing through the five year budget window,” the summary said.

House Markup Postponed

According to a summary of changes from the Congressional Budget Office baseline, the mark assumes a $33.5 billion tax cut for fiscal 2007 and smaller cuts up until 2011, when it assumes a $153.8 billion tax cut.

The budget resolution is a nonbinding document that gives a general blueprint of taxing and spending policies. The Budget Committee sets a top line number for the part of the government’s estimated $2.787 trillion spending in 2007 to be appropriated by lawmakers. The chairman’s mark set discretionary spending at $873 billion in 2007.

On the House side, the House Budget Committee, which had been expected to hold its own markup session the week of March 6, has postponed its session to a date yet to be determined. House Republican leaders have said they want to have floor action on their budget resolution by the end of March, a target date that may slip now, given the mid-March recess in observance of St. Patrick’s Day.

By law, Congress is supposed to complete work on the budget resolution by April 15, but that deadline has often been missed in the past and entails no penalties.

More Money for Tax Enforcement

Gregg said the mark increases the amount of money set aside for tax enforcement well above a proposed increase in President Bush’s budget in order to close the gap between tax receipts owed and those paid promptly, the “tax gap.”

“We doubled it and it’s available. I think [ranking minority member] Sen. [Kent] Conrad [D-N.D.] will have a higher number and I’m willing to listen to a higher number as long as it’s not going to be just money thrown at the problem,” Gregg told reporters after the meeting.

But he warned the provision would not be binding on appropriators. “We have no force of law on any of this,” he said.

The Budget Committee is set to consider amendments and mark up the budget resolution March 9.