National Journal's CongressDaily

February 23, 2010 Tuesday

Wyden, Gregg Release Overhaul Details

by Peter Cohn

Sen.Ron Wyden, D-Ore., and Senate Budget ranking memberJudd Greggtoday unveiled their bipartisan overhaul of the tax code that takes aim at numerous corporate sacred cows in exchange for a dramatically reduced overall corporate tax rate.

Their proposal would cut the corporate rate from a maximum of 35 percent to a single flat rate of 24 percent, which is highly sought after by the business community, particularly multinationals. But that move comes at a high price, including the elimination of numerous deductions and other tax preferences corporations have enjoyed for years, including deferral of tax on overseas profits until they are brought back to the United States and a deduction for domestic manufacturing activities.

Individuals would see a maximum tax rate of 35 percent, down from what is expected to rise nearly 5 percentage points when the 2001 tax cuts expire at the end of this year. There would only be three tax rates under the Wyden-Gregg plan: 15 percent, 25 percent and 35 percent. That means some individuals and families will see tax increases, although the average taxpayer with $200,000 or less in annual adjusted gross income would benefit, according to the Congressional Research Service.

The alternative minimum tax, which hits more middle-class families each year because it was never indexed for inflation, would be eliminated.

Some tax breaks for individuals would be repealed, including numerous exclusions from tax such as for income earned abroad; health benefits under cafeteria plans; employee meals and lodging; and moving expenses. But the standard deduction would nearly triple, while many common itemized deductions would remain in effect.

Some additional revenue-raising proposals are included as well, such as applying the Medicare payroll tax to all state and local government employees and legalizing, regulating and taxing Internet gambling.

"By simplifying the tax code and scaling back tax breaks for special interests, we can give everyone an opportunity to get ahead. Businesses of all sizes will be in a better position to compete and grow jobs. Working families will keep more of their hard-earned dollars, and everyone will spend a lot less time filling out tax forms," Wyden said.

The plan drew praise from groups ranging from the anti-tax Americans for Tax Reform to the progressive Citizens for Tax Justice. But business groups representing multinational firms were wary about the elimination of so many existing tax breaks, including those that bring down the effective tax rate they pay to less than 24 percent in the case of some companies.

"There are winners and losers: oil companies -- losers, for example. Worldwide companies would get a hit, manufacturers would get a hit; it's very problematic and would cause a lot of concern among our members," said Dorothy Coleman, vice president of tax and domestic economic policy at the National Association of Manufacturers.

Official cost estimates were unavailable. But according to a rough analysis provided by CRS, the Wyden-Gregg plan would cost nearly $900 billion more over a decade than the tax proposals outlined in President Obama's budget plan. All but about $230 billion would be offset by eliminating various deductions and credits, with the remainder offset through cutting back on corporate subsidies.

National Journal's CongressDaily

February 23, 2010 Tuesday

AM Edition

Obama Health Plan Contains S Corporation Carve-Out

by Peter Cohn

President Obama's $950 billion healthcare reform plan released Monday exempts income derived from running a small, closely held business from a proposed new payroll tax on investments.

The carve-out is a concession to a range of business groups and advocates for the self-employed. But critics charge it could open the floodgates to a raft of companies re-structuring their businesses as subchapter S corporations in order to avoid the tax.

To help pay for his healthcare plan, Obama  would raise the portion of the Medicare payroll tax paid by employees earning more than $200,000 a year, or $250,000 in household income, to 2.35 percent. That 0.9 percent bump would be supplemented by applying the existing 2.9 percent payroll tax -- split evenly between employers and employees -- to unearned income, defined as capital gains, interest, dividends, annuities, royalties and rents. The tax would also apply to the upper-income category.

Looking for more? ForCongressDailyarticles and markup reports, see our Healthcare Reform page.For more healthcare articles as well as blogs, videos and related materials, see the National Journal Group's expanded health page.

Unlike previous iterations of the plan, such as one advocated by the progressive group Citizens for Tax Justice, the Obama proposal exempts active income earned from shares in an S corporation, which are generally small, privately owned firms.

Critics argue structuring a firm as an S corporation enables shareholders to avoid paying Social Security and Medicare payroll taxes. One famous example is that of former Sen.John Edwards, D-N.C., whose fees from work as a trial attorney ran into the tens of millions of dollars, but he only paid payroll taxes on the much smaller portion of his income derived from wages.

The Obama  plan draws on an earlier Senate plan to hike the employer portion of the Medicare payroll tax on wages. Congressional tax staff later determined that would lead to many businesses simply converting to S corporation status, thus converting their salaries into dividends, to skirt the tax. That in part drove a re-thinking of the tax to also apply it to unearned income.

After the small business lobby weighed in against the tax, Senate staff floated the idea of exempting active participation in S corporations, arguing taxing that income would hinder job-creation and investment. Twenty trade groups ranging from the American Council of Engineering Companies to the U.S. Chamber of Commerce wrote to congressional leaders Jan. 28 urging them to reconsider the tax altogether.

Under the Obama proposal, only passive investment income associated with an S corporation, such as dividends and interest from stock and bond holdings, would be subject to the tax, as well as the income of non-active shareholders. Income from active participation in such a business, which the IRS defines as "making decisions involving the operation or management of the activity, performing services for the activity, and hiring and discharging employees," would not be taxed.

"Factors that indicate a lack of active participation include lack of control in managing and operating the activity, having authority only to discharge the manager of the activity, and having a manager of the activity who is an independent contractor rather than an employee," the IRS guidance continues. The determination can be subjective, however, as the IRS notes that active participation "depends on all the facts and circumstances."

Industry officials said the Obama  plan contains some inconsistencies. For example, passive S corporation shareholders who earn more than $200,000 at another job could be hit with up to 3.8 percent added tax, after factoring in the 0.9 percent payroll tax increase on wages combined with the 2.9 percent tax on investment. At the same time, an active S corporation shareholder making more than $200,000 would only pay the 0.9 percent tax on wages.

Officials said that would unfairly penalize passive shareholders, since income from that S corporation by definition could not be considered wages -- and thus could not be construed as avoiding the payroll tax.

The Star-Ledger (Newark, New Jersey)

February 10, 2010 Wednesday

Do tax breaks work? Does anyone care

By Carl Davis

McCLATCHY-TRIBUNE NEWS SERVICE

EDITORIAL/OPINION; Pg. 015

Despite all the attention paid to President Obama's  recent budget proposal, at least one important section has gone largely unnoticed.

Buried within an appendix, and blandly titled "Performance Measures and the Economic Effects of Tax Expenditures," this section is supposed to explain the administration's efforts at figuring out whether the $1 trillion doled out through special tax breaks each year are worth their cost. Unfortunately, for the second year in a row, the Obama administration has chosen to simply copy-and-paste the Bush administration's language on this issue, complete with all the same promises about what will be done at some point over the "next few years."

Do capital gains tax breaks encourage economic growth? Does the research tax credit result in additional research? Are charitable deductions an effective way to encourage giving? Questions such as these have not been studied in a systematic way by our government, despite numerous promises having been made in this section of the president's budget for over a decade.

Each year the government effectively "spends" more on special tax breaks, or "tax expenditures," than it does on the entire discretionary spending budget (i.e. the part of the budget not devoted to Social Security, Medicare, Medicaid, etc). These tax breaks are usually enacted with the same goals as spending programs, such as promoting education, housing or renewable energy. But they receive only a small fraction of the scrutiny directed at regular spending.

With deficit-reduction quickly climbing the list of legislative priorities in Washington, the need to take a closer look at tax expenditures is growing. The House of Representatives has already shown interest, having passed legislation that extends 50 expiring tax breaks only on the condition that each be subject to a nonpartisan study. The administration, however, is in better position to conduct such studies on a comprehensive basis, and the increasingly bleak budgetary outlook demands that it do so.

During more favorable budgetary times, both political parties were more than willing to enact new tax expenditures (and to continue existing ones) at every opportunity. But with the budgetary outlook continuing to sour, policymakers will soon have to acknowledge that fiscal sustainability requires a close re-examination of the nation's priorities.

To its credit, the Obama administration has begun to turn its attention toward some tax expenditures; more than three dozen, mostly benefiting corporations, were singled out for elimination or reduction in its Feb. 1 budget proposal. This, however, is only the tip of the iceberg. Pushing forward with tax expenditure review could identify numerous additional tax expenditures that should be brought to the chopping block.

Carl Davis is a senior analyst with Citizens for Tax Justice. This article was distributed by McClatchy-Tribune News Service.

Gannett News Service

February 4, 2010 Thursday

Payroll tax credit could to key to Senate jobs bill

Note: Update adds comments from the National Federation of Independent Business in 13th and 14th grafs

By BRIAN TUMULTY

WASHINGTON - A tax credit for hiring unemployed workers is a central feature of a yet-to-be-unveiled $81 billion jobs bill that Senate Democrats are hoping will receive Republican support when it reaches the floor for a vote next week.

The tax credit would offset the employer's 6.2 percent share of Social Security payroll taxes through the end of this year for workers who were previously unemployed for at least 60 days.

Republican Sen. Orrin Hatch  of Utah is a sponsor of the measure, along with Democratic Sen. Chuck Schumer of New York.

Hatch and Sen. Charles Grassley, the ranking Republican on the Senate Finance Committee, are seen by Democrats as the key to building bipartisan support the legislation, which is still a work in progress and subject to change.

The two Republican senators decided Thursday to discuss the legislation with their GOP colleagues before publicly endorsing it.

Unlike the $154 billion jobs bill that passed the House in December, which focused on infrastructure and public sector jobs, a key element of the Senate bill is private sector job creation.

The Senate would renew a $250,000 deduction for business equipment purchases that was in effect last year, but the House chose not to address.

Both bills would provide an extension of long-term unemployment benefits and an employer tax credit to lower the cost of COBRA health insurance to laid-off workers. Those two provisions cover $30 billion of the bill's total cost over 10 years.

The Senate bill, as currently envisioned, also would contain a one-year extension of the highway trust fund.

The employer tax credit for new hires, which accounts for $10 billion of the package, is seen as a way to boost private sector hiring at a time when payroll employment has not yet begun to grow.

Employers are often reluctant to hire new workers early in an economic recovery, said Len Burman, a professor of public affairs at Syracuse University's Maxwell School. The proposed tax credit, Burman said, "would lower the cost of bringing on more people."

Michael Lind of the liberal-leaning New America Foundation said the simplicity of the proposed payroll tax credit would make it easy for employers to understand. "I think it's preferable to some of the other tax credits that are being proposed because it's simpler," he said.

At the National Federation of Independent Business, tax counsel Bill Rys was skeptical whether the payroll tax credit would provide much of an incentive to hire workers.

"Most of the businesses that are going to be using it would be hiring a worker anyway," he said.

Rys indicated it would help small businesses with their cash flow, but added, "The challenge small business has is having customers come through the doors. That's a real challenge."

Some tax experts across the political spectrum also doubt the tax credit would have its intended effect of spurring new hires and boosting economic growth.

"It's a horrible micromanaging of the economy, in my view," said Chris Edwards, director of tax policy studies for the Cato Institute, a free-market think tank. "The decision to hire workers and what to pay them is central to a market economy. It's abhorrent that the federal government wants to get inside businesses."

Edwards described the proposed tax credit as "a social welfare program."

At the liberal-leaning Citizens for Tax Justice, Bob McIntyre also doubted the tax credit would produce its intended effect. "It will work in the sense that they are throwing out money into the economy," he said. "It will go into the pockets of some businesses and they will spend some of it."

McIntyre favors a jobs bill along the lines of the House-passed legislation, which would spend billions of dollars more on infrastructure and trying to help state and local governments retain workers.

"You'd end up with a bridge maybe, which would be something nice," he said.

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Contact Brian Tumulty at btumulty@gannett.com