TAX NEWS - 2010

US Tax: Back from recess, lawmakers keep tax agenda largely in the talking stages

As U.S. Congress returned from the Independence Day recess, the Senate started – then stopped – work on a small-business tax bill; meanwhile, leaders in both chambers announced plans to move energy legislation and continued to tentatively stake out positions on the fate of the Bush tax cuts.


Senate small-business measure on hold again

The Senate briefly took up 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. But work on the Creating Small Business Jobs Act of 2010 (H.R. 5297) quickly stalled after Democratic leadership and Republicans reached an impasse over how to proceed with a long list of proposed amendments. (The bill was introduced June 28, but debate was cut short before the recess because of memorial services for the late Sen. Robert Byrd, D-W.Va.)

Offsets – As proposed, 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.

Leaders now hope to revisit the measure the week of July 19.

Estate tax fix – One notable amendment introduced July 13 by Finance Committee members Blanche Lincoln, D-Ark., and Jon Kyl, R-Ariz., would permanently address the estate tax for 2011 and beyond. The amendment directs the Finance Committee to draft a provision that would set the estate tax rate at 35 percent and provide a $5 million exemption level for individuals, which would be phased in over 10 years and indexed for inflation. Further, the amendment would provide for a "stepped up basis" for inherited assets. For 2010, decedents would have the option to elect to have no estate tax imposed and use a modified basis for inherited assets. Currently the estate tax is repealed for 2010 but is scheduled to return in 2011 at a 55 percent rate and a $1 million exemption.

It is unclear whether or not Lincoln and Kyl will be allowed to offer their amendment on the floor when work on the bill resumes. The duo defended their provision in a joint press release July 14, asking, "if the Small Business Lending bill is intended to help small business create jobs, wouldn't it make sense to provide small business owners with the certainty that their tax rates aren't going to skyrocket at the beginning of next year?"


Energy legislation taking shape

On the energy front, Senate Majority Leader Harry Reid, D-Nev., announced July 13 that he plans to introduce a four-part bill that will include provisions addressing domestic offshore oil drilling, energy efficiency and clean energy, and limits on carbon emissions, as well as a tax title to be developed by the Finance Committee. Reid said he expects to bring the bill to the Senate floor the week of July 26 and that legislative language could be released in advance. The legislation is currently in the "rough draft" stage, he noted.

Finance Committee Chairman Max Baucus, D-Mont., said he is working on a package of energy tax incentives that could be included in the legislation. Taxwriter Jay Rockefeller, D-W.Va., and Sen. George Voinovich, R-Ohio, could also propose tax incentives to encourage carbon capture and sequestration.

It is unclear currently how Reid's proposal would limit carbon emissions. One option that seems to be gaining traction is a  cap on utilities only. Energy and Natural Resources Committee Chairman and Finance Committee member Jeff Bingaman, DN.M., recently drafted legislation that would cap utilities beginning in 2012. Other possibilities include a cap-and-dividend approach or a comprehensive cap-and-trade program as introduced by Sens. John Kerry, D-Mass., and Joe Lieberman, IConn., earlier this year.

Previous efforts to pass climate change and energy legislation in the Senate during the 111th Congress have failed due largely to regional differences as well as concerns over the economic impact on businesses and consumers.

Ways & Means to mark up 'green' incentives – In the House, Ways and Means Committee Chairman Sander Levin, DMich., told reporters July 14 that he hopes to mark up a green energy tax incentives package the week of July 19. According to a Ways and Means Committee draft outline circulated July 15, the bill could include, among other provisions, extensions 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.

Although the draft did not list possible revenue offsets, Deloitte Tax has learned from sources on Capitol Hill that the bill could be paid for by repealing various oil and gas tax incentives.


Prospects for the Bush tax cuts

In other news, congressional leaders continued to discuss options to address the pending expiration of the 2001 and 2003 tax cuts, although no specific proposals appear to be in sight.

Senate Finance Committee members at a July 14 hearing appeared to be moving toward consensus on extending the provisions temporarily and addressing a permanent solution in the context of fundamental tax reform. Disagreement remains, however, over whether the temporary extensions should be limited to tax cuts for the lower- and middle-classes. (The Obama administration has proposed extending the tax cuts for individuals earning below $200,000 a year and families earning less than $250,000, and allowing tax cuts to expire for wealthier taxpayers.)

Dividends rate – Speaking to reporters July 13, Finance Committee Chairman Baucus said that he does not favor allowing the qualified dividends rate to return to the ordinary income rate of 39.6 percent as would happen next year. He did not say, however, whether the rate should be tied to the top capital gains rate that is scheduled to increase to 20 percent (from 15 percent) in 2011.

One-year fix possible in House – House Ways and Means Committee Democrats met privately earlier this month and agreed on working toward extending the low- and middle-income tax cuts for one year through 2011. They also may include a two-year patch of the alternative minimum tax (AMT).

House Majority Leader Steny Hoyer, D-Md., said on July 13 that he does not intend to offset the possible one-year extension of the tax cuts. Congressional pay-as-you-go budget rules allow for a permanent extension of the 2001 and 2003 tax cuts for low- and middle-income taxpayers without revenue offsets. The issue of whether or not to pay for an extension will likely be significant in garnering sufficient votes in both chambers. Reportedly, the cost of extending the low- and middle-income tax cuts for one year is $135 billion and the cost of a two-year AMT patch is $137 billion.

Timing unclear – Although House Democratic leaders have said that they could consider their version of the tax cuts package prior to the August recess, Hoyer recently indicated that a timeline has not been established.

For his part, Baucus has indicated that he will work with his Senate colleagues to address the expiring tax cuts before the end of 2010. In a July 14 letter, the Finance Committee's 10 Republican members urged Baucus to hold a mark-up this month.

Fiscal Commission leaders weigh in – In a related development, Erskine Bowles, co-chairman of the president's National Commission on Fiscal Responsibility and Reform told an audience at a U.S. Chamber of Commerce event July 14 that the commission has made no decision regarding extension of the Bush tax cuts.

Bowles stated that he would like to see revenues and spending each capped at 21 percent of gross domestic product, as this was the point at which the budget was balanced when he was Chief of Staff to President Clinton. Getting to that point, he explained, would require very large spending cuts as well as additional revenues.

Bowles expressed his personal preference for generating revenue through some type of consumption tax, although he did not offer a specific proposal.

For his part, Alan Simpson, who co-chairs the commission with Bowles, dismissed the idea that the panel would recommend a value-added tax on top of the income tax, citing the complexity of implementation.

The commission must vote on a final report containing a set of recommendations by December 1. If 14 of the 18 members vote to approve the recommendations, the package will go to the Senate for an up or down vote and then to the House. Bowles hedged on the likelihood of garnering the 14 necessary votes among commission members, however, noting differences of opinion will make it very difficult.

Bowles and Simpson were uncertain over whether Congress must vote on the recommendations during a lame duck session this year or when the new session convenes in 2011. The recommendations, if approved by Congress, would take effect in 2012.