TAX NEWS - 
2010
US Tax: Tax agenda grows as Congress returns for July work period
But a tight calendar, nontax issues competing for floor time, and the threat of filibusters from Senate Republicans could limit how much lawmakers are able to accomplish during the relatively brief work session ahead. The House will have only three weeks to work on legislation before adjourning for the summer recess, which will last until September 12, while the Senate will be in session for four weeks.
Small business
The Senate will resume consideration of legislation that would provide an additional year of bonus depreciation for businesses of all sizes, as well as enhanced section 179 expensing rules and other incentives targeted to small businesses. The Creating Small Business Jobs Act of 2010 (H.R. 5297) was introduced on June 29, but the Senate's pre-recess floor schedule was truncated by memorial services for the late Sen. Robert Byrd, D-W.Va.
The bill's major revenue raisers include information reporting and other provisions intended to close the so-called "tax gap," as well as a provision making "crude tall oil" ineligible for the cellulosic biofuel producer credit. According to preliminary estimates from the Joint Committee on Taxation staff, these offsets – along with "Roth" retirement account provisions and an adjustment to corporate estimated tax payment requirements in 2015 – would cover the 10-year, $11.7 billion cost of the incentives package.
Lawmakers had submitted a list of amendments to the bill before the recess, but Majority Leader Harry Reid, D-Nev., is expected to maintain tight control of the amendment process and it is unclear which provisions, if any, will be brought up for a vote.
Among the tax amendments filed so far are proposals to remove cell phones and similar equipment from the definition of "listed property" under section 280F, liberalize the Work Opportunity Tax Credit rules as they apply to recently discharged veterans and disadvantaged veterans, extend incentives for biodiesel and renewable diesel fuel, allow a five-year carryback for net operating losses related to the Gulf oil spill, and impose a tax on income of controlled foreign corporations attributable to certain imported property.
The House of Representatives approved its own small-business incentives package on June 15, but that bill does not include bonus depreciation and is financed largely through proposed restrictions on the use of grantor retained annuity trusts (GRATs). Those differences could set the stage for contentious conference negotiations once the Senate clears its bill.
Extenders
Senate Democratic leaders abandoned efforts to pass legislation to extend expired tax provisions prior to the recess, after failing several times to garner the 60 votes necessary to end debate and move their bill to the floor for final passage. The leadership has not yet announced when the Senate will revisit the measure.
During June, Senate Finance Committee Chairman Max Baucus, D-Mont., worked continuously to modify revenue offsets and jettison unpaid-for spending provisions in an attempt to win some Republican support. But GOP moderate Olympia Snowe of Maine, who Democratic leaders viewed as a possible swing vote, continued to object to the inclusion of a revenue provision that would subject a greater percentage of S corporation income to employment taxes. And Republicans as a bloc were united against a provision to extend unemployment benefits that would have added an estimated $33.7 billion to the federal deficit.
Path forward unclear – Majority Leader Reid's decision to set extenders aside and move on to other legislation in the wake of the failed cloture votes leaves the fate of the package uncertain in the near future. Reid told reporters on June 24 that revenue offsets in the Senate extenders bill could be pulled out for use in other legislation.
The House approved extenders legislation on May 28. Since then, members in that chamber have largely waited on the sidelines for the Senate to finish work on its own bill. House Democrats have expressed frustration at the failure of the Senate – and Republicans in particular – to act.
Both the House-approved bill and the most recent version of the Senate legislation would retroactively extend through the end of this year dozens of business and individual tax incentives that expired in 2009, and both bills include offsets that would, among other things, significantly tighten the foreign tax credit rules, modify the tax treatment of income from carried interests, and subject certain S corporation income to employment taxes.
Energy
Comprehensive energy legislation may surface in the Senate during July as Reid continues to meet with the Democratic caucus and, in particular, Finance Committee member John Kerry, D-Mass., and Sen. Joe Lieberman, I-Conn., about what changes need to be made to their proposed cap-and-trade legislation introduced earlier this year. Reid has said he would like to consider an energy bill prior to leaving for the August recess.
The Kerry-Lieberman legislation would cap greenhouse gas emissions from certain sources in a similar way to the Housepassed legislation from June 2009, but it also provides certain tax incentives for nuclear power facilities. Since the House passed its version, the Senate has been working at the committee level to strengthen the Kerry-Lieberman proposal. There are a number of challenges – such as regional disparities, concern about the impact on the economy, and concern over increased energy costs – that must be overcome if the bill is to garner the necessary 60 votes for passage, however. Other options that Reid could bring to the floor include a cap on utilities only, a cap-and-dividend approach whereby the revenues collected are returned to consumers, and an energy tax incentives package. It is unclear if or when Reid would bring some form of energy legislation to the floor in July given the numerous other competing priorities.
For its part, the House could consider a stand-alone energy tax incentives package before August. A Ways and Means Committee draft of potential items circulated the week of June 28 indicated that, among numerous other incentives, a House bill could include the extension of the:
- Section 48C advanced manufacturing tax credit (and an increase in the allocation for the credit);
- Direct payments in lieu of the production tax credit and investment tax credit; and
- The investment tax credit for long-term projects involving geothermal and offshore wind energy.
While possible revenue offsets were not listed in the draft, Deloitte Tax has learned from sources on Capitol Hill that a potential bill could be paid for by repealing various oil and gas tax incentives.
Extension of the Bush tax cuts
House taxwriters have begun preliminary discussions on proposals to temporarily extend portions of the 2001 and 2003 tax cuts for middle-class taxpayers, and to "patch" the individual AMT. The panel must decide whether or not to offset the cost of such an extension.
Under congressional pay-as-you-go (PAYGO) legislation enacted earlier this year, all new permanent spending or tax cuts must be paid for by corresponding spending reductions or revenue increases. Failure to do so would trigger automatic spending cuts. The PAYGO rules carve out exemptions, however, for permanent extensions of the middle-class tax cuts that were enacted in 2001 and 2003 and originally slated to expire in 2010. These include:
- Extension of the 10 percent rate, the 25 and 28 percent brackets, and the 33 percent tax bracket for single filers with income of $200,000 or less and joint filers with income of $250,000 or less;
- Extension of the child tax credit, marriage penalty relief, and adoption, dependent care, and child care tax credits;
- Extension of the current capital gains and dividend rates for single filers with income of $200,000 or less and joint filers with income of $250,000 or less.
The PAYGO law also provides an exemption for an AMT patch for 2010 and 2011.
But concerns about the growing deficit are prompting some Ways and Means Democrats to call for offsetting the cost of the extensions despite the cover provided in the PAYGO rules. A one-year extension of middle-class tax cuts and an AMT patch may cost upwards of $200 billion. Fiscally conservative "Blue Dog" Democrats are in favor of offsetting some if not all of the full package. However, others on the panel, including former Chairman Charles Rangel, D-N.Y., have hinted at the scarcity of revenue raisers available to pay for the bill.
House Speaker Nancy Pelosi, D-Calif., said earlier this month that work would begin on a package "pretty soon." However, with the proposals still in discussion stages and the litany of other legislative items on the agenda, consideration could be delayed until after the August recess.
Nontax obstacles
Tax legislation is likely to share floor time with other legislative and executive priorities when Congress returns. The Senate Judiciary Committee will be voting between July 13 and 20 on the nomination of Elena Kagan to the Supreme Court and consideration by the full Senate is likely before the August recess.
Congress is also certain to consider the conference report for the financial reform legislation. Notably, the legislation, which was approved by conferees prior to the Independence Day recess, does not include the controversial "bank tax" (a fee on financial institutions aimed at recouping the cost of the Troubled Asset Relief fund).
If the tax extenders bill is not revived, Congress may also look to pass an extension of unemployment insurance or COBRA benefits as standalone legislation.
Finally, it is possible that Congress may begin consideration of comprehensive immigration reform legislation and annual appropriation bills, or continue work on campaign finance reform legislation currently in the House.
Replacing Sen. Byrd – The process of finding a replacement for Sen. Robert Byrd, who died June 28, presents another potential source of concern in the Senate. West Virginia Gov. Joe Manchin will meet with state legislators as early as this week to set the groundwork for a November special election. Meanwhile, Senate leaders hope Manchin will name an interim replacement who can be confirmed quickly.
Although the appointment will not change the composition of the Senate – Manchin is a Democrat and is expected to appoint a Democratic replacement – a delay in filling the seat would make it more difficult for Majority Leader Reid to muster the 60 votes he needs to hold off GOP filibusters and move potentially controversial legislation through the chamber.
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