Uncertainty Over Tax Bills Continues as Congress Goes Into Recess
Congress recessed on September 22 and lawmakers are not expected to return to work until after the November 6 elections. As anticipated, lawmakers took no action on resolving the fate of the Bush-era tax cuts, a package of tax extenders, the federal estate tax, sequestration, and much more.
Despite reports of some behind-the-scenes negotiations, no breakthrough appears likely before the results of the November elections are known; and even then, stalemate could continue into 2013. Not since late 2010, when the Bush-era tax cuts were last scheduled to expire, has there been so much uncertainty over federal taxes.
Democrats and Republicans floated their respective tax bills this summer and both parties have not moved from their respective positions. The Senate passed the Democratic sponsored bill, the Middle Class Tax Relief Act of 2012 (Sen. 3412), which would extend the Bush-era reduced income tax rates and taxpayer-favorable capital gains and dividends tax rates for taxpayers with adjusted gross income below $200,000 ($250,000 for families), adjusted for inflation, through 2013.
Comment: The income thresholds in the Senate bill reflect President Obama’s proposals in his fiscal year (FY) 2013 federal budget. However, some Democratic lawmakers have reportedly discussed higher income thresholds. Various numbers, including $500,000 and $1 million, have reportedly been mentioned as alternative thresholds to the $200,000 and $250,000 amounts.
Republicans have been nearly unanimous in calling for an across-the-board extension of the Bush-era tax cuts. The GOP bill passed by the House, the Job Protection and Recession Prevention Act of 2012 (HR 8), would extend the reduced income tax rates and capital gain/dividend tax rates for all taxpayers through 2013.
An alternative minimum tax (AMT) patch for 2012 is very likely to be passed by the lame-duck Congress after the November elections. The Senate bill (Sen. 3412) would increase the AMT exemption amount to $50,600 for single individuals for 2012 and to $78,750 for married couples filing a joint return for 2012. The House bill (HR 8) would increase the AMT exemptions for 2012 by the same amounts.
The lame-duck Congress is unlikely to take up corporate tax reform in light of its heavy agenda and its short duration. The next Congress, however, could make corporate tax reform part of a comprehensive tax reform package.
Comment: During 2012, Capitol Hill was abuzz with talk about reforming the U.S. corporate tax system. The House held hearings on moving the United States from a worldwide system of taxation to a territorial system of taxation. A parade of witnesses testified that the U.S. corporate tax rate was causing American companies to lose their competitive edge in the global economy. The White House unveiled a framework for corporate tax reform that proposed to reduce the corporate tax rate in exchange for the elimination of a number of business tax incentives, especially preferences for oil, gas, and fossil fuel producers.
Annual extension of the more than 50 so-called tax extenders was a fairly routine event in recent years, but 2012 may be different. Some lawmakers have balked at the estimated $205 billion price tag for the tax extenders. In August, the Senate Finance Committee (SFC) approved the Family and Middle Class Tax Certainty Act, which would extend many but not all of the tax extenders through 2012 (and some extenders through 2013). Initially, prospects looked good for the full Senate to approve the SFC bill in September, but the bill stalled in recent weeks over concerns about its cost.
Business groups have also been lobbying for an extension of bonus depreciation and a more generous Code Sec. 179 expensing deduction for 2013. Proponents argue that businesses cannot yet afford, without these extended tax breaks, the capital investments needed to grow the economy. Without Congressional action, bonus depreciation drops from 50 percent to zero on January 1, 2013, while Code Sec. 179 expensing would fall from $139,000 with a $560,000 investment ceiling to $25,000 with a $200,000 ceiling.
Comment: The SFC bill could come up for a vote in the Senate after the November elections. The Republican leadership in the House is also expected to bring a tax extenders bill to the floor before year-end, but its makeup and cost are unknown.
Few provisions are as controversial in Congress as the federal estate tax. Under current law as applied to 2012, the maximum estate tax rate is 35 percent with a $5.12 million gift and estate tax exclusion. After December 31, 2012, the maximum estate tax rate is scheduled to reach 55 percent, with a $1 million exclusion.
Several bills have been introduced in the House, and referred to the Ways and Means Committee, to repeal the federal estate tax. Even if one of these bills should pass the House, the likelihood of the Democratic-controlled Senate (at least through the end of 2012 pending the outcome of the November elections) agreeing to repeal the federal estate tax is zero. If not repealed, the federal estate tax is likely to survive after 2012 in some version similar to its current one: a $3.5 million exclusion amount ($1 million for lifetime gifts) with a 45 percent rate has been mentioned as one possible compromise.
Behind the scenes
Throughout 2012, there have been reports of behind-the-scenes negotiations among Democrats and Republicans in Congress. The talks appear to have taken two tracks: (1) discussions on how to avert the across-the-board budget cuts under the 2011 Budget Control Act, and (2), an extension of the Bush-era tax cuts through 2013. The talks also seem to have taken place mostly in the Senate.
Comment: It is unclear to what extent the White House and the GOP leadership in the House are talking, if at all, about taxes and the lame-duck session. Treasury Secretary Timothy Geithner has made several trips to Capitol Hill in recent weeks to brief lawmakers on the European debt crisis. Those discussions may have touched on taxes, but neither side is making any public statements.
The 2011 Budget Control Act imposes nearly $110 billion in spending cuts to federal operations effective January 1, 2013. Approximately one-half of the spending cuts are targeted to defense spending, and these cuts, more than any others, have spurred discussions among lawmakers on ways to avoid them. Earlier this year, there were reports of bipartisan discussions in the Senate to eliminate some oil and gas tax preferences and use the revenue to fund defense spending. That proposal seems to have stalled.
Another group of senators has reportedly been discussing the Bush-era tax cuts. Very few details have emerged other than an acknowledgment that Senate Democrats and Republicans are very far apart in extending all or some of the cuts.
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