House extenders offset list grows as Democratic leaders target Memorial Day agreement

Curbs on perceived foreign tax credit abuses have been added to the growing list of revenue offsets that House taxwriters are considering to pay for an extension of expired and expiring tax provisions, according to House Ways and Means Committee member Chris Van Hollen, D-Md.

Congressional Democratic leaders maintain that they would like to send a final extenders package – which Ways and Means Chairman Sander Levin, D-Mich., is now framing as a jobs bill – to the president by the Memorial Day recess. House Speaker Nancy Pelosi, D-Calif., indicated on May 6 that the Ways and Means Committee could mark up a bill the week of May 10. For his part, Levin told reporters that legislation "will be on the floor in the next two weeks."

Separate bills to extend expired tax provisions for one year cleared the House in late 2009 (10-year cost: $31 billion) and the Senate on March 10 (10-year cost: $33.7 billion), but the two chambers have been unable to reach an agreement on a final package. In the meantime, taxwriters have had to scramble to find new offsets after major revenue raisers in both bills were siphoned off to pay for other legislation that Congress has approved and President Obama has signed into law. Senatepassed provisions to codify the economic substance doctrine and make "black liquor" ineligible for certain renewable energy tax credits – which raise a total of $28 billion over 10 years – were enacted as part of the Patient Protection and Affordable Care Act. An $8.7 billion package of House-approved provisions to curb abuses of offshore financial accounts was signed into law as part of the Hiring Incentives to Restore Employment Act.


Foreign tax credit splitting

Van Hollen told reporters on May 5 that a House extenders bill could address "creative use of the foreign tax credit." Although Van Hollen did not identify a specific provision, Capitol Hill sources have told Deloitte Tax LLP that taxwriters are looking closely at a proposal in the Obama administration's FY 2011 budget for a matching rule that would prevent the separation of foreign taxes from associated income.

According to a Treasury Department explanation, the administration's proposal would allow a credit for foreign taxes "when and to the extent the associated foreign income is subject to U.S. tax in the hands of the taxpayer claiming the credit."

The provision would be effective in 2011 and, according to the Joint Committee on Taxation (JCT) staff, would raise an estimated $9.5 billion over 10 years.


Carried interest, S corp provisions

Echoing remarks made last month by Ways and Means Chairman Levin, Van Hollen also cited changes to the tax treatment of carried interest income as another possible pay-for. The House-approved extenders bill includes a provision – estimated to raise $24.6 billion over 10 years – that would tax income from carried interests as ordinary income. Levin indicated in an April 19 speech at the National Press Club in Washington that he remains committed to a carried interest offset even though it has previously met resistance in the Senate.

Talking to reporters on April 28, Levin said that House taxwriters are also taking a closer look at imposing payroll taxes on service-sector S corporations. No specific proposal has been released, but a comprehensive tax reform bill unveiled in 2007 by then-Ways and Means Chairman Charles Rangel, D-N.Y., would subject S corporation shareholder employees to selfemployment tax on their S corporation distributive share that relates to the provision of services. Conforming changes also would apply to limited partner employees of service partnerships engaged in services. A similar proposal was recommended in January 2005 by the JCT staff as one of many options for narrowing the tax gap. The JCT staff estimated that the Rangel provision would raise an estimated $9.4 billion over 10 years.


Financial institutions tax not an option, Levin says

One item not being eyed as a potential extenders offset, according to Levin, is the Obama administration's proposed fee of 15 basis points (0.15 percent) on certain liabilities of financial firms that hold assets in excess of $50 billion. The JCT staff has estimated the proposal would raise $90 billion over 10 years.

Levin told reporters on May 5 that the proposal "isn't ready" and that "the administration has made it very clear they want it for deficit reduction." (See related coverage on the proposed bank tax in this issue.)


Small-business tax incentives

Across the Capitol, Senate Finance Committee Chairman Max Baucus, D-Mont, indicated on May 6 that Senate taxwriters could mark up a package of small-business tax incentives as early as May 12. He did not discuss specific provisions or possible revenue offsets.

The House on March 24 approved a $16.8 billion small-business jobs bill that would be paid for through limitations on treaty benefits, changes to the rules governing "divisive D" reorganizations, repeal of the 80/20 company rules, and other significant revenue raisers.

Baucus and Levin have indicated that they would like to send a completed small-business bill – as well as an extenders bill – to the president by Memorial Day.