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TAX NEWS - FEBRuary 2010

On Capitol Hill, mixed reactions to Obama's FY2011 budget

Following the release of President Barack Obama's FY2011 budget on February 1, Treasury Secretary Tim Geithner and Office of Management and Budget (OMB) Director Peter Orszag made the rounds on Capitol Hill and faced a barrage of comments, questions, and critiques from Democratic and Republican members of the congressional taxwriting and budget
committees.


LIFO repeal

Notably, Treasury Secretary Geithner was blasted from both sides of the aisle during his appearance before the House Ways and Means Committee on February 3 concerning the administration's proposal to repeal the last-in, first-out (LIFO) accounting method. The proposal is effective for taxable years beginning after December 31, 2011, and would raise $59.1 billion over 10 years.

Rep. Mike Thompson, D-Calif., argued that the LIFO accounting method works well for many U.S. businesses, and if a repeal is enacted, many small businesses will take a big tax hit. He urged Geithner to revisit the issue, and added that foreign companies will have a large advantage over domestic companies in the marketplace if LIFO is repealed. Kentucky Republican Geoff Davis agreed, saying that keeping LIFO in place is necessary for the creation of manufacturing jobs. He asked Geithner if there is a compelling reason to repeal the provision, to which the Secretary replied only that the repeal is "reasonable policy."


Coal

At a February 2 Senate Finance Committee hearing, taxwriter John Rockefeller, D-W.V., hinted at the longstanding regional tensions present in the current energy debate and lambasted the administration's proposed tax changes concerning the coal industry. The budget proposal includes $2 billion in new measures that would repeal current tax incentives for energy production from coal mining activities starting in 2011, including:

- The section 199 domestic manufacturing deduction for the production of coal and other hard mineral fossil fuels;
- Expensing and 60-month amortization of mining exploration and development costs relating to coal and other hard mineral fossil fuels;
- Capital gain treatment of coal and lignite royalties; and
- Percentage depletion with respect to coal and other hard mineral fossil fuels.

Rockefeller contended that his state is very hostile to any changes in the treatment of coal, and though he is trying to change that mindset, the FY2011 budget is "making it really hard," since it unfairly treats the coal industry and is potentially damaging to West Virginia's economy.

Sen. Mike Enzi, R-Wyo., agreed, and expressed concern that eliminating various oil, gas, and coal incentives would lead to higher electric bills and higher gasoline prices for consumers.


Estate tax

Finance Committee member Robert Menendez, D-N.J., expressed anxiety about the current uncertainty surrounding the estate tax, which is repealed for 2010 and scheduled to return in 2011 with a top rate of 55 percent and an exemption of $1 million. (Congress did not complete work on an estate tax fix during 2009.)

Geithner responded that the administration supports reinstating 2009 levels (top rate of 45 percent, with a $3.5 million exemption for singles and a $7 million exemption for joint filers) and making the change retroactive to January 1, 2010.


International and high-income proposals

Other notable responses from lawmakers this week include critiques of the administration's proposed tax hikes on multinational corporations and high-income individuals. Ways and Means member Lloyd Doggett, D-Texas, admonished Secretary Geithner for what he sees as a lack of administrative support for the international tax reforms included in the president's budget last year and this year. He encouraged stronger enforcement of the tax loophole closers.

Additionally, Orszag defended the administration's proposal to allow the 2001 and 2003 tax cuts to expire for families making more than $250,000 a year, but challenged a suggestion by Senator Budget Committee member Bernie Sanders, IVt., that the administration should have pushed for repeal in 2010. Orszag argued that the current economic conditions remain too unstable to consider broad tax increases before 2011.


Bipartisan fiscal commission

Lawmakers were less than receptive to the president's proposed fiscal commission, touted by OMB Director Orszag on Capitol Hill on February 2 and 3. President Obama has proposed creating a bipartisan panel to investigate methods in which to reduce the federal deficit, with orders to report their suggestions to Congress for an up-or-down vote.

The FY2011 budget calls for a combination of revenue increases on targeted groups and a proposed three-year freeze on nonsecurity discretionary spending to reduce the deficit. Orszag explained that a commission is needed to find ways to close the remaining budget gap. In particular, Orszag said a commission's role would be to find viable proposals for reducing the deficit in order for long-term budget projections to be consistent.

Ways and Means Chairman Charles Rangel, D-N.Y., challenged Orszag, arguing that the panel could co-opt the authority and responsibilities of Congress. He cautioned that although House Speaker Nancy Pelosi, D-Calif., may be able to bring a vote on the commission to the floor, "we don't know which way the vote is going to."

For his part, Senate Budget Committee Chairman Kent Conrad, D-N.D., told Orszag that he supports the five-year budget plan, but that he "strongly disagrees with the long term proposals." Conrad expressed concern that the president's budget commission must be bipartisan or its recommendations may have little impact in resolving the fiscal crisis.

Notably, in a White House press conference held on February 2, Orszag indicated that the findings of the president's tax reform commission, established in 2009 and tasked with examining corporate tax reform, enforcement issues, and simplification, may be rolled into this proposed bipartisan fiscal commission. The tax commission was originally slated to present its recommendations at the end of 2009 but that deadline has been postponed indefinitely.
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