Senate budget writers endorse middle-class tax relief, extenders, 'loophole closers' in FY 2011 tax-and-spending blueprint

The Senate Budget Committee voted largely along party lines April 22 to approve a five-year budget resolution that calls for $894 billion to cover middle-class tax relief, temporary fixes for the estate tax and the individual alternative minimum tax (AMT), and extension of expired tax provisions, as well as $114 billion in so-called "loophole closers" and other revenue offsets.

As approved, the resolution would reduce the deficit from 9.8 percent in 2010 to 3 percent by 2015, or from $1.4 trillion to $545 billion. This is $671 billion more in deficit reduction than the president proposed in his FY2011 budget earlier this year.

The full Senate is likely to take up the resolution in the months ahead although timing is uncertain because of other legislation currently crowding the agenda. It is also unclear when the House will begin work on its own budget resolution and how closely that chamber's tax priorities will hew to those of the Senate.

In any discussion of congressional budget resolutions it's critical to bear in mind that although these documents set broad outlines for significant tax-and-spending legislation, they do not have the force of law. Authority for drafting tax-andspending bills ultimately rests with the House Ways and Means Committee and the Senate Finance Committee.


Major tax provisions

Of the funds that Senate budget writers have dedicated to tax relief, the largest chunk – $619 billion – is allocated to the permanent extension of the 2001 and 2003 tax cuts for single taxpayers with income below $200,000 ($250,000 for joint filers), including:

- The 10, 25, and 28 percent tax brackets, and part of the 33 percent bracket;
- Marriage penalty relief, the child tax credit, the adoption tax credit, the dependent care credit, the employerprovided child care credit, the deduction for student loan interest, and the exclusion for employer-provided educational assistance; and
- The 15 percent rate on capital gains and dividends for low- and middle-income taxpayers.

The budget resolution also assumes:

- A two-year individual AMT patch (2010 and 2011) to ensure that the number of taxpayers subject to the AMT does not increase above 2008 levels;
- A two-year extension of the 2009 estate tax regime ($3.5 million exemption indexed for inflation, and a 45 percent top rate);
- Extension through 2011 of tax provisions that expired in 2009 or are set to expire in 2010, such as the research and experimentation credit, the subpart F exception for active financing income, various energy incentives, and the deduction for state and local sales taxes; and
- Permanent extension of section 179 small business expensing limits and elimination of capital gains taxation on certain small business stock, among other provisions.

The resolution includes a reserve fund for tax relief that provides for extending expired provisions and refundable tax credits as long as the cost is offset. Another reserve fund is created for comprehensive tax reform. Other reserve funds set aside for infrastructure, education, and energy could also accommodate tax proposals.

Loophole closers – The resolution also calls for the enactment of $114 billion in "loophole closers" and "other raisers" to offset some of the cost of tax relief.


Another reconciliation bill ahead?

The resolution includes a reconciliation instruction to the Senate Finance Committee to report legislation resulting in a $2 billion reduction in the deficit between fiscal years 2010 and 2015. The resolution notes that "the instruction could be used for jobs legislation."

A second instruction directs the Finance Committee to report an increase of no more than $50 billion in the statutory debt limit prior to December 10, 2010.

The inclusion of reconciliation instructions is significant because bills moved under reconciliation – such as the recent health care legislation – are subject to procedural protections in the Senate and can clear the chamber with a simple majority vote. It is important to note, however, that reconciliation instructions become effective only if approved by both the House and
Senate.


Tax amendments

The resolution also includes an amendment offered by Budget Committee member – and Finance Committee ranking Republican – Charles Grassley of Iowa, that would modify the recently enacted Patient Protection and Affordable Care Act to:

- Reinstate the business deduction for expenses allocable to the Medicare Part D employer subsidy;
- Delay the effective date of new health care-related taxes on low- and middle-income taxpayers until January 1, 2014 (to coincide with the effective date of many of the consumer protections and other policy provisions in the new law); and
- Reinstate the prior-law threshold of 7.5 percent of adjusted gross income (AGI) for the itemized deduction for unreimbursed medical expenses. The Patient Protection and Affordable Care Act increased this threshold to 10 percent of AGI for most taxpayers.

These provisions would be paid for through the creation of a deficit-neutral reserve fund. The committee also approved an amendment from Sen. Mike Enzi, R-Wyo., that would create a deficit-neutral reserve fund to "protect business pass-through income from any increase in the statutory 33 percent and 35 percent individual income tax rates promulgated in the Economic Growth and Tax Relief Reconciliation Act of 2001 . . . and amended in the Jobs and Growth Tax Relief Reconciliation Act of 2003. . . ."


What's next?

The resolution now moves to the full Senate, but exactly when it will reach the chamber floor is uncertain. Debate on financial regulatory reform is expected to dominate the agenda throughout the next two to three weeks and Majority Leader Harry Reid, D-Nev., has tentatively scheduled other nontax legislation for consideration following that debate. Across the Capitol, House Budget Committee Chairman John Spratt, D-S.C., and Majority Leader Steny Hoyer, D-Md., are reportedly in discussions about when that chamber may consider a budget resolution of its own.

If both chambers were to pass resolutions, then lawmakers would move to a conference committee to negotiate differences. Once the two chambers agree on a joint resolution, Congress may begin using that budget blueprint to consider legislation addressing their priorities.