US Tax: Congress faces extensive to-do list as legislative session enters home stretch
Health care reform efforts, which have included a significant tax component, dominated discussions in both the House and Senate leading up to the summer break. However, despite extensive talks and some action on the committee level, neither chamber has begun consideration of a completed bill. Lawmakers who held health care town hall debates in August got an earful from constituents who expressed confusion and even anger over some of the proposals currently under consideration. Congressional Democratic leaders hope to see a floor vote in the House and a mark-up in the Senate Finance Committee by the end of September; but under that timetable, it is unlikely that lawmakers will send a completed bill to President Obama by his original deadline of October 1.
For his part, the president is expected to take a larger role in the health care debate when he addresses a joint session of Congress on September 9. Obama, who has continued to press Congress on health reform issues despite the public showdowns, plans to meet with House Democratic leadership in advance of the Wednesday joint session.
Another Democratic priority – legislation to address climate change – also remains on the punch list. The House narrowly approved a climate change bill in late June but only after intense lobbying by Democratic leadership in an effort to resolve regional differences over nontax issues related to the implementation of a cap-and-trade program. Preoccupation with health care has slowed down work on climate change legislation in the Senate; moreover, negotiations in that chamber are likely to be complicated by regional differences similar to those that emerged in the House. Although a cap-and-trade program holds significant potential tax implications, tax has been largely absent from the climate change discussion. That could change as the legislative process moves forward, adding another layer of complexity to an already complex debate. Also adding to the heavy lift of health care reform and climate change are two "must-do" tax items that Congress is likely to act on prior to the end of the year: extending the tax provisions that expire at the end of 2009 and addressing the 2010 gap in the estate tax.
House health care legislation targets high-income taxpayers
As the House gets back to work, the Rules Committee will begin merging the three separate iterations of health care legislation (H.R. 3200) approved by the Ways and Means, Energy and Commerce, and Education and Labor committees before the August recess. It is unclear exactly when the combined bill will move to the House floor for debate and a final vote.
On the revenue side, the House Ways and Means Committee on July 17 approved a net $587.3 billion package of revenue provisions to pay for overhauling the nation's health care system.
Income tax surcharge – The Ways and Means bill imposes a surcharge on singles and married couples with modified adjusted gross income (AGI) above $280,000 or $350,000, respectively. The surcharge, which would be structured in three tiers, would equal:
- 1 percent on modified AGI exceeding $350,000 but not more than $500,000 for married couples filing a joint return ($280,000 and $400,000 for unmarried individuals);
- 1.5 percent on modified AGI exceeding $500,000 but not more than $1 million for joint filers ($400,000 and $800,000 for unmarried individuals); and
- 5.4 percent on modified AGI exceeding $1 million for joint filers ($800,000 for unmarried individuals).
For couples filing separate returns, the modified AGI thresholds for joint filers would be reduced by 50 percent.
The largest of the revenue-raising components in the bill, the provision would raise $544 billion over 10 years, according to estimates from the Joint Committee on Taxation staff.
Other significant revenue raisers – The Ways and Means bill also includes provisions that would:
- Further delay the worldwide interest allocation election through 2019;
- Codify the economic substance doctrine;
- Prevent foreign multinationals from "treaty shopping" to avoid tax on income earned in the U.S. by having a U.S. subsidiary make a deductible payment to a country with which the U.S. has a tax treaty with reduced withholding rates before repatriating the earnings in the parent's country; and
- Impose mandates on individuals and employers for the purchase of health insurance.
House taxwriters rejected proposals for so-called "lifestyle" taxes on the purchase of sugar-sweetened soda, tobacco, and alcohol.
Changes possible – House leadership has cautioned that significant changes may be made to the legislation before the bill reaches the floor. House Speaker Nancy Pelosi, D-Calif., for example, has indicated that she would support modifying the high-income surcharge by raising the income floor for the lowest tier to $500,000 (from $350,000).
Senate health care path remains uncertain
Although the Senate Health, Education, Labor and Pensions (HELP) Committee, completed work on a largely nontax health care measure on July 15, Finance Committee discussions over the revenue portions of the health reform package stalled for much of the summer. Before leaving for the recess, Finance Committee Chairman Max Baucus, D-Mont., indicated that if his bipartisan negotiating team – the so-called "Gang of Six" – does not complete a compromise revenue package by September 15, he would be forced to take a more partisan approach to drafting a bill. (The Gang of Six includes Democrats Baucus, Kent Conrad of North Dakota, and Jeff Bingaman of New Mexico, as well as ranking Republican Charles Grassley of Iowa and Republican members Mike Enzi of Wyoming, and Olympia Snowe of Maine.)
Reports suggest Senate Majority Leader Harry Reid, D-Nev., spent the August recess drafting an alternative bill should the bipartisan Finance negotiators fail to reach an agreement. Notably, the Gang of Six held only one joint conference call to continue negotiations during the four-week recess.
Finance Committee revenue options – The Finance Committee has considered numerous tax provisions over the course of the debate but has so far failed to reach an agreement to move forward. Rumors in August suggested the committee might couple an employer and individual mandate with a tax on insurers that offer so-called "Cadillac" plans, but the proposal to tax insurers received a lukewarm reception. Other provisions that Senate taxwriters have considered include:
- Capping the income tax exclusion for employer-sponsored health insurance;
- Capping itemized deductions at 28 percent (or 35 percent when the pre-2001 top rates for individuals are reinstated in 2011);
- Limiting the benefits available through health reimbursement arrangements, flexible spending arrangements, and health savings accounts;
- Eliminating the itemized deduction for medical expenses or increasing the eligibility threshold for claiming the deduction; and
- Imposing "lifestyle" taxes on tobacco, alcohol, or sugar-sweetened beverages.
Climate change on back burner for now
Like health care reform, climate change legislation is proving to be a tough sell politically. The House of Representatives on June 26 approved by a margin of only seven votes a climate change bill (H.R. 2454) aimed at significantly reducing greenhouse gas emissions between 2012 and 2050 through an economy-wide cap-and-trade program. But given the shaky support for the bill among rank-and-file members, the Democratic leadership's decision to bring it to the floor for approval was considered a risky move.
Climate change has thus far taken a back seat to health care reform in the Senate. Majority Leader Harry Reid, D-Nev., has asked the committees with jurisdiction to report out legislation by September 28; but the ongoing health care debate could make that deadline difficult to meet. Nonetheless, Reid's office said the majority leader still expects to have "ample time to consider this comprehensive clean energy and climate legislation before the end of the year."
Little tax discussion to date – Although cap-and-trade legislation opens up some potentially thorny tax issues – for example, the tax treatment of "free" allowances under a cap-and-trade program, basis recovery of allowances and offsets, the treatment of income received from the sale or exchange of allowances or offsets, and issues arising from creation and sale of offsets in a cross-border setting – tax has been largely absent from the debate.
As approved, the House bill does not include any substantive tax provisions. Ways and Means Committee Chairman Charles Rangel, D-N.Y., waived a formal markup of the legislation so that taxwriters could focus on health care reform. Rangel's decision to forgo making tax changes to the cap-and-trade legislation does not mean that he has surrendered the opportunity to put his mark on it later – for example, during conference negotiations with the Senate in the event that chamber approves its own legislation.
For its part, the Senate Finance Committee has spent minimal time examining tax issues in a cap-and-trade program. At a brief June 16 hearing, members primarily focused on whether IRS guidance that was issued in 1992 (Rev. Proc. 92-91, 1992-2 C.B. 503) on the tax treatment of sulfur dioxide emission allowances should be leveraged to determine the tax treatment of carbon allowances under a proposed cap-and-trade program. Finance Chairman Baucus has stated, however, that his committee will be holding a markup later this year.
White House lobbying efforts – During the recess, White House officials urged Senate lawmakers to take action on climate change legislation in advance of the upcoming United Nations Framework Convention on Climate Change (UNFCCC) meeting in Copenhagen, Denmark, beginning December 7. Representatives at the meeting are expected to address the issue of developing a new international agreement on climate change to replace the Kyoto Protocol. The Obama administration is hoping to show significant progress at the meeting on U.S. efforts to reduce global warming.
Congress mum on plans for popular tax extenders
Congress may also decide to address the popular tax extenders this fall. In recent years, Congress has approved single-year extensions for the more than three dozen temporary provisions that provide tax benefits to businesses and individuals. A majority of these provisions were extended through December 31, 2009, as part of the Emergency Economic Stabilization Act of 2008.
Among the business tax incentives set to expire this year are:
- The research and experimentation tax credit;
- The New Markets Tax Credit;
- 15-year straight-line cost recovery for qualified leasehold improvements;
- The exception for active financing income under subpart F;
- Lookthrough treatment of payments between related controlled foreign corporations;
- The credit for construction of new energy-efficient homes; and
- The credit for certain expenditures for maintaining railroad tracks.
Among the important individual tax extenders set to expire at the end of 2009 are:
- The additional standard deduction for state and local real property taxes;
- The deduction for state and local sales taxes;
- The above-the-line deduction for qualified tuition expenses; and
- Tax-free distributions from IRAs for charitable purposes.
Also set to expire are the first-time homebuyer tax credit and deduction for state sales tax and excise tax on the purchase of new motor vehicles enacted under the American Recovery and Reinvestment Act of 2009. The first-time homebuyer credit provides a tax credit up to $8,000 to qualified purchasers of homes through November 30, 2009. The deduction for state and excise taxes on motor vehicles will expire at year-end.
It is currently unclear whether Congress will approve extensions this fall, or wait until they return for the new legislative session in January 2010 and extend the provisions retroactively. The debate is likely to pit budget hawks who may insist the extensions be fully offset against legislators eager to continue the tax benefits but avoid the use of controversial revenue raisers.
Avoiding zero estate tax in 2010
Under current law the estate tax is scheduled to be briefly eliminated in 2010 before coming back in 2011 with a top tax rate of 55 percent and a unified credit exemption amount of $1 million (the levels in effect before the Bush tax cuts were enacted in 2001). It is widely expected that Congress will address the estate tax rates and exemption in 2009 to avoid a zero-tax year in 2010.
Ways and Means Committee member Earl Pomeroy, D-N.D., introduced legislation (H.R. 436) in January that would, among other things, impose a maximum estate tax rate of 45 percent and increase the estate tax exclusion to $3.5 million. Senate Finance Committee Chairman Baucus introduced legislation (S. 722) in March to make estate, gift, and generation-skipping transfer provisions in effect in 2009 permanent and adjust estate and gift tax unified credit amounts for inflation after 2010. President Obama's fiscal 2010 budget proposal released in May includes a provision that would make the 2009 estate and gift tax structure permanent and adopt a number of estate tax reforms.
More recently, a Ways and Means Committee staffer indicated that Congress may opt for a short-term fix and extend the 2009 rates and exemption amounts through 2010.
Dire budget forecast may influence congressional decision-making
New budget projections from the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) will undoubtedly weigh on lawmakers' minds as they craft legislation this year and may hint at budget battles to come as costly initiatives take shape. In its mid-year budget update released on August 25, OMB released revised deficit estimates, predicting a $9 trillion deficit over the next 10 years – up almost $2 trillion from the estimate the administration released in May. Moreover, the figures show the public debt doubling by 2019 and reaching three-quarters the size of the entire national economy. OMB Director Peter Orszag commented on August 25 that the new release "underscores the dire fiscal situation that we inherited and the need for serious steps to put our nation back on a sustainable fiscal path."
For its part, the CBO estimated a $7 trillion deficit during the same period, primarily because it assumes the expiration of the Bush tax cuts by 2011. This is approximately 2.7 trillion higher than the baseline projection CBO published in March of this year. The report emphasizes that the economic downturn continues to have a negative effect on tax receipts, with 2009 receipts projected to be nearly $2.1 trillion – $83 billion lower than projected in May and 18 percent lower than actual receipts in 2008. Tax receipts for 2009 are projected to equal 14.7 percent of gross domestic product, the lowest level on record since 1950.
CBO Director Douglas Elmendorf stated on August 25 that "although various indicators suggest that the recession may have ended or is likely to end within the next few months, CBO's economic forecast anticipates a relatively slow and tentative recovery. A number of forces, including global economic weakness, continued strains in financial markets, and households' desire to rebuild their savings, are expected to restrain economic growth for the next few years."
Adjournment may approach quickly
The return from the August recess is traditionally a point in which lawmakers must transform their rhetoric into concrete action on their top legislative proposals. It remains to be seen whether or not this Congress will complete action on its agenda before the end of the legislative session. Various nontax initiatives – such as annual appropriations bills, executive branch nominations, financial markets legislation, and any potential measures to address the economy – may also receive attention and could prolong consideration of other tax bills.
Currently, the House has set a target date for adjournment for Friday, October 30, while the Senate's adjournment date is still to be determined. It is worth noting that in non-election years such as 2009, Congress has remained in session well into December. Lawmakers may decide to extend their schedule to December this year, but with health care negotiations slowing to a crawl, and the remaining list of tasks not getting any shorter, the last months of 2009 may pass even more quickly than expected.
TAX NEWS - SEPTEMber 2009
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