TAX NEWS - 2010

US Tax: We're not in Kansas anymore...

Twice this week, U.S. Senate failed to overcome a procedural hurdle to end debate on the latest iteration of the American Jobs and Closing Tax Loopholes Act (H.R. 4213). Although this continued delay creates additional uncertainty for taxpayers around both the timing and the final composition of legislation to extend 2009 expired tax provisions, a few observations may help provide a better understanding of where Congress is headed in this process. The nearly 40 amendments to H.R. 4213 introduced in the Senate during the past few weeks of consideration are a clear indicator of where the politics and lawmakers' priorities lie.

First, much of the political capital that members of Congress can spend in seeking to limit tax-increase measures has been consumed in their efforts to modify or eliminate the proposal related to self-employment taxes paid by certain S corporation shareholder-employees. This capital, therefore, has not been spent elsewhere.

Second, although many members have discussed the carried interest provision, the modifications made by Finance Committee Chairman Max Baucus, D-Mont., to his bill seem to have narrowed and confined that discussion. The current Senate draft is identical to the House-passed bill except for a handful of items. These relate to the percentage of carried interest income that will be treated as ordinary income, the treatment for assets held for longer periods, and the treatment of enterprise value (goodwill) associated with the disposition of an investment services partnership interest.

Third, despite strong opposition from the business community, members have not demonstrated any real concern with the effective dates or scope of international tax revenue offsets in the current bill. In fact, efforts to address international tax in the amendment process were attempts to add new revenue-raising provisions to the bill, not carve back existing provisions.

Fourth, Democratic leaders seem to have identified a new "easy" source of revenue: the Oil Spill Liability Trust Fund tax. The first proposal was to increase this tax from 8 cents per barrel to 9 cents. As other revenue offsets have shrunk or deficit concerns have intensified, that increase has grown to 49 cents in the current Senate bill. It may well continue to grow as members search for a compromise package.

Fifth, when confronted with the tradeoffs between deficit spending and the need to provide additional relief for the unemployed, Congress appears to be more concerned about deficits than current spending priorities. This could have broader implications both for revenue-raising risks (see discussion below), and the willingness of members to act on the pay-as-you-go exceptions Congress adopted for the 2001 and 2003 tax cuts for low- and middle-income taxpayers, temporary alternative minimum tax relief, and a temporary estate tax extension.

The Senate's failure to complete action on extenders this week leaves members with only a handful of options and increasingly little time before the Independence Day recess. The longer this process drags on, the more difficult it becomes for members to address remaining legislative priorities. Ultimately, legislation to extend 2009 expired tax provisions is likely be enacted, but the difficult road this bill has taken suggests that resolving estate tax issues and addressing the expiring 2001 and 2003 tax cuts will be extremely challenging.