Tax Issues Before Congress


 


Year-End Legislative Summary
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Republican Senators Follow Bush Off a Cliff - 12/21/07

Alternative Minimum Tax - Republican Senators Vow to Choose Offshore Tax Avoidance by Wealthy Elite Over AMT Relief for 23 Million - 12/14/07

The Bush Tax Cuts - Chair of House Tax-Writing Committee Proposes Comprehensive Tax Reform - 10/26/07

Corporate Tax Issues - Chair of House Tax-Writing Committee Proposes Comprehensive Tax Reform - 10/26/07

Education - Using the Tax Code to Promote Postsecondary Education: We Might as Well Do It Right - 5/25/07

Energy
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Senators Block Bid to Make Tax Code Greener - 12/14/07

Estate Tax - House Finally Gets It Right on Estate Tax, But Trouble Is Brewing in the Senate - 10/12/07

Federal Budget - Rep. Obey Proposes Progressive Surtax to Fund Iraq War - 10/5/07

Health Care - Bush Vetoes SCHIP and Continues to Promote His Faulty Proposal - 10/5/07

Immigration - Some Lawmakers May Try to Use Tax System to Withhold Rights from Immigrants - 6/1/07

Internet and Taxes - Note to Congress: Taxes Are Not What's Causing Some Households to Go Without Internet - 9/21/07

Minimum Wage and "Compensation" for Business - President Signs Emergency War Funding Bill that Includes Minimum Wage Increase and Tax Breaks for Business - 6/1/07

Private Equity - Tax Fairness Wins in the House of Representatives; Battle Ahead in the Senate - 11/13/07

Social Security - The Grain of Truth in the Treasury Report's Warning Over Social Security - 9/28/07

Tax Collection
- House Votes to Kill IRS's Use of Private Debt Collectors - 10/12/07

Tax Gap - Senate Finance Committee Approves Agricultural Tax Bill with a Provision to Crack Down on Tax Avoidance Schemes - 10/5/07

Archives - 2006 archives.

 


Year-End Legislative Summary:

Republican Senators Follow Bush Off a Cliff - 12/21/07
 
Congress is hurtling toward adjournment after resolving a series of stand-offs between Democrats and Republicans and between Congress and the President. Republicans in the Senate twice successfully blocked attempts to pay for AMT relief, while the President twice successfully vetoed expanded health insurance for children. Meanwhile, an attempt to shift tax breaks from "dirty" energy to "clean" energy failed by one vote, although Congress did enact some important non-tax-related energy provisions.

Alternative Minimum Tax: Congress Passes "Patch" But Doesn't Pay for It

On Wednesday, the House of Representatives approved a Senate-passed bill to "patch" the Alternative Minimum Tax (AMT). The "patch" is basically a one-year measure that extends through 2007 the exemptions that keep most of us from paying the AMT, which is a sort of backstop tax that ensures the wealthy pay at least some minimum amount of income tax regardless of how many deductions and credits they claim. 

The AMT was originally intended to target only the very wealthy. Over time its reach expanded because the exemptions were never indexed to inflation, and the Bush tax cuts caused the AMT to expand much more. Since the AMT is in fact an alternative tax, if regular income taxes are cut without corresponding cuts in the AMT, more people pay the AMT.
 
In 2001, the President chose not to include corresponding adjustments to the AMT in his tax cut plan, although he surely assumed Congress would prevent the AMT from taking back a large portion of the tax cuts for moderately well-off families. And that's exactly what Congress has done, albeit through temporary patches passed periodically rather than a permanent fix. The cost of these patches was never included in the cost estimates of the Bush tax cuts that were presented to the public when they were being debated, effectively masking the true costs of those cuts.
 
This obviated the need for even a pretense of offsetting those additional costs. Today Congress is still not offsetting those costs.
 
Republicans Block Two Fiscally Responsible AMT Bills
 
The Republicans in the Senate were able to block two attempts to pay for the AMT patch in the last two weeks, both of them approved by Democratic majorities in the House. The first bill (H.R. 3996) would have replaced the revenue, partially by closing the loophole for "carried interest" paid to managers of buyout funds and other types of funds which allows these super-wealthy individuals to pay taxes at a lower rate than middle-income people.
 
Every Democrat in the Senate voted to act on this version (minus the Presidential candidates who almost certainly would have voted for it if they had been present) and every Republican who voted voted against. In the Senate, 60 votes are required to consider most legislation, so the bill could not be acted on despite the support of every member of the majority party. Senate Democrats were then forced to approve the $50 billion patch without any offsets, violating their pledge to adhere to newly reinstated pay-as-you-go (PAYGO) rules.
 
The House passed another version of the AMT patch with offsets (H.R. 4351), this time focusing more on cracking down on offshore tax avoidance by fund managers. The pattern repeated itself in the Senate, as the Republican minority was able to block the bill, choosing to protect wealthy tax evaders who use offshore shell companies rather than paying for AMT relief.
 
On Wednesday the House of Representatives voted to approve the Senate-passed AMT patch without offsets. Ways and Means Chairman Charlie Rangel said that it would be pointless to oppose AMT relief since it is very unlikely that the public would understand why a tax no one had ever heard of was suddenly affecting some families who were fairly well-off but not rich. 
 
Media Neglects Role of GOP Obstruction

The press has focused unfairly on the "failures" of the Democrats to meet all of their goals.

This is unfair partly because the goals were extremely ambitious in retrospect. Democrats promised to provide $50 billion worth of AMT relief and also promised not to increase the deficit. This was while the Republicans in Congress and the President took an extreme stance on tax matters. Closing any tax loophole, even the most blatantly unfair tax loophole, represents a tax increase that will wreck the economy according to the President and his allies in Congress. They even equate stopping offshore tax evasion with tax increases that will discourage investment. In hindsight, it's clear that lawmakers taking this extremist position on taxes were ready to follow their President off a fiscal cliff by obstructing common sense measures.

It's also unfair to say the Democrats "caved" on PAYGO, as some media accounts have it, given that every Democrat in the Senate voted to pay for the AMT relief as did all-Democratic majorities in the House. Thanks to the 60-vote threshold to pass legislation in the Senate, the minority party was able to block the fiscally responsible legislation. Why the press has largely failed to note that Republican obstruction is the root cause of the AMT-PAYGO debacle is entirely unclear.   

Healthcare: Congress Tries Twice to Expand SCHIP, Bush Vetoes Twice

Strong majorities of both chambers twice approved a bill to expand the State Children's Health Insurance Program (SCHIP) and twice the President vetoed these bills. Each would have increased funding for the program by $35 billion over ten years by increasing the federal tobacco tax for cigarettes from 39 cents to a dollar per pack. The President has promoted his own idea for expanding health care -- a change in the tax code that would weaken the employer-based health care system without guaranteeing that it's replaced with a viable alternative. The President's alternative would also shower benefits on more well-off people who would already have health insurance anyway. 

The funding mechanism in the SCHIP bills was not ideal, but reflected the realities of finding consensus on funding sources in a closely divided Congress. It's always better to fund important programs with progressive taxes, and tobacco taxes are inherently regressive. Tobacco taxes also provide less funding over time, since they do not increase with inflation or with the price of cigarettes generally, so they are rarely a "permanent" solution to any funding problem. But expanding health insurance for children is an extremely important priority that requires compromise. Legislation produced by Congress is rarely ideal.
 
Nevertheless, the President vetoed both SCHIP bills, partially because he says he opposes increases in tobacco taxes. In frustration, both chambers this week passed a bill to merely extend the program, without expanding it, through March 31, 2009.
 
Energy: Improvements Made, But Not on the Tax Front
 
This week the House approved an energy bill (H.R. 6) that the Senate passed last week after stripping from it a $21 billion tax title that would have shifted tax breaks away from oil and gas companies to more sustainable energy sources. In the Senate, the bill with the tax package received 59 votes, one short of the 60-vote threshold needed to consider the bill, prompting Democratic Senate leaders to remove the tax provisions.
 
The remaining provisions, which passed easily, are still important. They would increase fuel efficiency standards for automobile manufacturers (known as corporate average fuel economy, or CAFE) to 35 miles per gallon by 2020 and would require gasoline to contain a certain level of biofuels by 2022. The President signed this legislation on Thursday.

 


Alternative Minimum Tax:

Republican Senators Vow to Choose Offshore Tax Avoidance by Wealthy Elite Over AMT Relief for 23 Million - 12/14/07

On Wednesday, December 12, the U.S. House of Representatives passed a bill, H.R. 4351, that would extend the exemptions that keep the Alternative Minimum Tax (AMT) from affecting most Americans and would replace the revenue the AMT is projected to otherwise collect. One provision would help replace the AMT revenue by restricting offshore tax avoidance schemes by wealthy individuals. Another provision would delay the implementation of an unnecessary tax break for multinational businesses which hasn't even gone into effect yet.

Dropped from this bill is a provision that would end the tax subsidy for "carried interest," a type of compensation paid to wealthy fund managers. Carried interest is currently taxed at a special, low 15 percent rate, lower than the tax rate paid by many middle-class families. Last week, Republicans in the Senate blocked a similar House-passed bill that would have ended this tax subsidy because they were committed to defending this break for millionaire fund managers. So, in the spirit of compromise, the House passed H.R. 4351 on Wednesday without the carried interest provision.  

Incredibly, Republican leaders in the Senate are insisting that they will block this new bill even though it lacks the "controversial" carried interest provision. They seem to believe that H.R. 4351 includes "tax increases" that will hurt the economy. By this logic, the economy literally depends on the ability of rich individuals to avoid taxes by using offshore shell companies. Also by this logic, the economy depends on a tax break for multinational companies that has not even gone into effect yet.

Meanwhile, 17 Democratic members of the House, mostly members of the Progressive Caucus, signed a letter sent to House Speak Nancy Pelosi demanding that the cost of AMT relief be fully offset. The letter argues, quoting Citizens for Tax Justice, that "AMT relief, by itself, would not be particularly progressive ... Most of the benefits would go to the richest fifth of taxpayers, and if it's deficit financed, the cost could be borne in the future by middle-income Americans in the form of cuts in public services or higher taxes. But AMT relief can be progressive if the costs are offset with revenue-raising provisions that target the very wealthiest Americans, those who have benefited the most from the Bush tax cuts." The leadership of the 48-member Blue Dog Coalition of Democrats in the House also has stated repeatedly that any AMT relief that is not paid for will be unacceptable.

For more information about the House bill and how it offsets the cost of AMT relief, see the new short paper from Citizens for Tax Justice describing the legislation.

Republican Senators Block Bill to Pay for AMT Relief; Force Senate to Turn to Borrowing $50 Billion - 12/7/07

New Paper from CTJ Criticizes Turn to Borrowing

On Thursday, December 6, Republicans in the Senate voted en masse against consideration of a bill (H.R. 3996) passed last month by the House of Representatives to provide relief from the Alternative Minimum Tax (AMT) and offset the cost by closing loopholes for extremely wealthy financial managers. Instead, Republican leaders demanded that the federal government borrow the $50 billion. They got their way later in the evening, when the chamber passed a bill simply extending AMT relief without paying for it.

This sets the stage for a standoff with the House, where Democratic leaders are adamant that no laws be enacted to increase the federal deficit, in keeping with the pay-as-you-go (PAYGO) rules that were reinstated when the Democrats took control of Congress earlier this year. But in the Senate, because 60 votes are needed to pass most legislation, the Republicans were able to block the fiscally responsible approach even though it was supported by every member of the majority party.
Citizens for Tax Justice released a two-page paper today with figures explaining why this is a bad deal for middle-income Americans.

"I'm willing to accept a tax cut for people making upwards of $100,000 a year, if we send the bill to people making millions," said CTJ director Robert S. McIntyre. "But I can't support cutting taxes for such well-off people and sending the bill to people who make $50,000. Yet sadly, it's exactly those ordinary taxpayers who will likely bear the cost of the increased debt -- through higher taxes or reduced public services in the future."

Republicans Manage to Preserve Loophole for "Carried Interest" -- for Now

In the AMT relief bill passed by the House last month, one of the revenue-raising provisions to offset the cost would have closed the loophole for "carried interest," a type of compensation paid to buyout fund managers. Republican leaders have demanded that this loophole allowing wealthy fund managers to pay taxes at a lower rate than middle-income families be preserved. They appear to have gotten their way for now, as House Ways and Means Committee Chairman Charles Rangel has said he would drop the carried interest provision and replace it with some potentially more palatable revenue-raising provision.

But the battle over carried interest is far from over. In September, CTJ sent to the House and Senate a letter signed by around 300 organizations from every state urging that the loophole be closed. Lobbyists for the industry have acknowledged that the issue is likely to come up again in the next couple of years as Congress considers broader tax reform.
CTJ would like to thank all those who helped begin the fight to close the carried interest loophole. As a result of these efforts, the majority party in both chambers has, after some initial hesitation, completely adopted the position that the loophole should be eliminated. We will continue to build on these efforts as Congress turns to broader tax reform.

President Bush Relied on Expanding Reach of AMT to Mask Cost of His Tax Cuts

Republican congressional leaders claim that Congress should eliminate the AMT without paying for it because no one ever intended to collect the AMT's revenues. But that's not true.
 
When George W. Bush proposed his tax cut plan, he and his tax advisors were well aware that, since the AMT is an alternative tax, lowering the regular tax rates without adjusting the AMT would push tens of millions of people into the AMT. But they needed the added AMT revenues to significantly reduce the projected cost of Bush's tax cut program. In fact, Bush's chief economic advisor was adamant that Bush's plan contemplated a huge increase in the AMT.
 

"Having created most of the AMT problem, Bush and his congressional allies are now trying to rewrite history so they can get away with loading even more debt on our children," said McIntyre. "They shouldn't be allowed to get away with it." 

 

Tax Fairness Wins in the House of Representatives; Battle Ahead in the Senate - 11/13/07

On Friday, the U.S. House of Representatives voted 216-193 to pass H.R. 3996, a bill to extend relief from the Alternative Minimum Tax and other tax breaks for one year and offset the costs by reducing tax loopholes for private equity fund managers and others. All but eight Democrats present voted for the bill, while all the Republicans present voted against it.

The AMT provision is known as a "patch" because it prevents the AMT from reaching millions of more taxpayers (as the AMT is scheduled to do under current law) for a year but does not permanently address this problem. A larger bill (H.R. 3970) was introduced by Ways and Means Chairman Charles Rangel (D-NY) on October 25 to repeal the AMT entirely and offset the costs, mostly with a surtax that would reduce the Bush tax cuts for those families with incomes above half a million dollars a year. This bill is a major tax reform that would make the tax code simpler and more progressive without making the fiscal situation worse than it already is.

But because Republicans seem sure to block any provision that would reduce tax breaks even for the richest Americans, Rangel introduced the smaller bill (H.R. 3996) to patch the AMT for just one year, giving Congress more time to consider his more comprehensive tax reform. H.R 3996 borrows many of the good ideas from the larger bill, like closing the loophole for "carried interest" and a loophole that allows private equity fund managers to set up deferred compensation arrangements in offshore tax havens to avoid taxes. H.R. 3996 would also extend some business tax breaks (such as the research credit) for one year. Smaller provisions in the bill would make the Child Tax Credit more accessible for poor families and would create an additional standard deduction for property taxes for those who do not itemize their tax deductions.

Surprising Amount of Focus on "Carried Interest"

The Republicans chose the counter-intuitive strategy of rallying around one of the most offensive and blatantly unfair loopholes in the tax code, the loophole for "carried interest," which is a form of compensation paid to certain types of fund managers. This loophole essentially allows these fund managers to earn hundreds of millions of dollars and yet pay taxes at a lower rate than their middle-income receptionists.

Citizens for Tax Justice sent members of Congress a new fact sheet explaining that the loophole is a subsidy paid to millionaires, through the tax code, and funded by the rest of us who are paying income taxes at ordinary rates. The loophole is enjoyed by those who manage other people's money but are allowed to pretend that they're investing their own money -- which entitles them to the low, 15 percent rate for capital gains. Contrary to the confusion sowed by fund managers, the capital gains rate for those who actually invest would not be altered.

Citizens for Tax Justice also issued a statement responding to the claim that the real estate industry would be damaged if the carried interest loophole is closed. The vast majority of people who are affected by what goes on in the real estate industry -- realtors, construction workers and home-buyers -- pay income taxes at ordinary rates like everyone else, meaning that they are paying for this loophole rather than benefiting from it.

Most important, however, was the willingness of hundreds of state and local organizations from around the country to tell Congress that this loophole is simply unfair to ordinary taxpayers in their states. Thanks to all the organizations that joined the sign-on letter urging Congress to close the loophole.

Battle Ahead in the Senate

Several in the Senate have suggested that it will be difficult to secure the 60 votes needed to avoid a filibuster in their chamber and approve this bill. Many Republican Senators, including the ranking Republican on the Finance Committee, Charles Grassley (R-IA) have made clear that they would rather increase the federal budget deficit than pay for AMT relief. We would suggest that any anti-tax conservative in the Senate who wants to take responsibility for filibustering AMT relief for millions of taxpayers should go ahead and do so to make his or her position clear to the public.

 

Ways and Means Committee Approves Bill to Fix AMT for another Year and End Unfair Tax Breaks for Private Equity - 11/5/07 

By a party-line vote, the House Ways and Means Committee on Thursday approved legislation (H.R. 3996) that would prevent the Alternative Minimum Tax (AMT) from expanding its reach to millions of more families for one year. Ways and Means Chairman Charles Rangel (D-NY) had hoped earlier this year to pass his larger plan to address the AMT permanently, as discussed above, but some lawmakers oppose his provisions to pay for AMT reform and would rather increase the budget deficit. As a result, Chairman Rangel introduced this smaller bill, which includes a "patch" of the AMT for one year at a cost of about $50 billion, and hopes the larger plan will be acted on sometime in the next couple years.
 
The smaller bill approved Thursday also includes one-year extensions of some special interest tax breaks that are technically temporary but whose extension by Congress has become so routine that Hill insiders refer to them as the "extenders." The extenders cost about $21 billion.

Help for Low-Income Included

Also included is a change in the Child Tax Credit rules to make it easier for poor families to benefit from the credit, as well as a small additional standard deduction for middle-income homeowners. These two provisions combined cost about $4 billion over ten years.

Rangel Stands Firm -- Tax Cuts Will Be Paid For By Closing Carried Interest Loophole, Among Others

The smaller bill borrows some very good ideas from the larger plan in order to pay for the one-year AMT relief and the extenders. One of these provisions would eliminate the "carried interest" loophole for private equity fund managers, which would raise about $26 billion over ten years. Another provision would limit the ability of private equity fund managers to set up deferred compensation arrangements in offshore tax havens to avoid taxes, and would raise about $24 billion over ten years.

Another provision would delay the implementation of a tax break that was passed in 2004 but is not yet in effect. The 2004 tax break essentially expands a loophole allowing multinational corporations to take U.S. tax deductions for interest payments that are really foreign expenses. The provision delays this tax break several years and raises $25 billion over ten years.

Republicans Say Their Own Tax Laws Will Lead to the Biggest Tax Increase in History

Republicans members of the committee were hostile to the offsets and argued during the markup of the bill that the AMT should be repealed and the revenue should not be replaced because it was never intended to be collected. This ignores the fact that the Bush Administration intentionally decided not to permanently fix the AMT when it enacted tax cuts in order to mask the true cost of those tax cuts. It also ignores the fact that the Bush Administration, like Congress during both Republican and Democratic control, has budget plans that assume the expanded AMT revenue (based on current law under which the AMT will expand its reach) will be collected.

Congressman Earl Blumenauer (D-OR) pointed out the irony of the minority party's argument. Republicans at the hearing seemed to say that the expiration of the Bush tax cuts -- which was written into the laws enacted by President Bush and the Republican Congress, along with the scheduled expansion of the AMT that was intentionally left in place when Republicans controlled Congress and the White House -- would lead to the "biggest tax increase in history." Even if we believed that allowing the tax laws to exist as they're currently written could constitute a tax increase, it would be hard to understand why the complaints are coming from the party that held power and passed a major tax bill every year for six years.

Meanwhile, even the conservative Washington Times has editorialized that "it seems disingenuous" for the GOP to call Rangel's plan a tax hike.

 

Chair of House Tax-Writing Committee Proposes Comprehensive Tax Reform - 10/26/07

Congressman Rangel's Tax Bill Would Make the Tax Code Simpler, More Progressive, and the Changes Are All Paid For
 
House Ways and Means Chairman Charles Rangel introduced his proposal Thursday to address the Alternative Minimum Tax and simplify the tax code without increasing the federal budget deficit. One title of the bill would address the income tax for individuals, including the AMT reform which would be paid for by reducing the Bush tax cuts for the wealthiest Americans and closing some unfair loopholes that benefit the very richest taxpayers. The other title of the bill would simplify the corporate tax by trading a lower corporate tax rate for the elimination of some inefficient loopholes. Lawmakers may take some of the provisions, such as a one-year fix for the AMT, and pass them more quickly as a separate, smaller bill.
 
Individual Income Taxes Would Be Simpler and More Progressive
 
Several Republican lawmakers demand that Congress repeal the AMT without replacing the revenue because it was never "intended" to be collected. This is nonsense, because the Bush Administration very intentionally declined to address the AMT when it passed tax cuts. The President's most recent budget assumes that the AMT will, in fact, expand its reach to millions of families after 2007.
 
Congressman Rangel's bill includes a "patch" for the AMT for this year and then repeals it altogether. The revenue is replaced largely with a surtax on families with incomes over $200,000. These families have benefited the most from the Bush tax cuts. Nearly half of the benefits from the Bush tax cuts flow to the richest five percent of taxpayers, whose income is above $170,000. In 2010 well over half of the benefits will flow to this group if the Bush tax breaks are not repealed. So Congressman Rangel's bill would reduce the bonanza of tax cuts enjoyed by this elite group of families to help pay for AMT relief for families who are somewhat more likely to be middle-class.
 
In addition, the bill would eliminate the loophole for "carried interest" as many advocates have urged because it allows wealthy fund managers to pay a lower tax rate than middle-income people.
 
Congressman Rangel's bill also includes important improvements in the Child Tax Credit and the EITC for childless workers. The Child Tax Credit is currently structured so that the poorest families cannot benefit from it, while the EITC for childless workers is currently so low that childless workers can live in poverty and still pay federal income taxes, in addition to federal payroll taxes.
 
Corporate Taxes Would Be Simpler and More Efficient
 
The bill reduces the corporate rate from the current 35 percent to 30.5 percent and replaces the revenue lost from this change by eliminating certain loopholes. Corporations should consider themselves lucky to be offered this lower rate. CTJ has argued recently that Congress should close corporate tax loopholes and not lower the corporate rate but instead use the new revenue for deficit-reduction or to address the many needs this country faces right now.
 
It's often said that the U.S. corporate tax rate of 35 percent is among the highest in the world, but really the effective rate is much lower because of the loopholes that corporations use to lower their taxes. The United States collects less in corporate taxes as a percentage of GDP than all but two OECD countries. In other words, corporations should be thankful they're being offered any tax breaks at all.
 
Wisely, the bill includes changes to offset the costs of the rate reduction. These include eliminating several existing tax provisions, including a tax subsidy for manufacturers, an accounting method that allows oil companies to understate their profits, and another provision that encourages companies to move operations offshore.
 
Republicans Defend Government Interference in the Economy Through the Tax Code, Defend Complexity in the Tax Code
 
Republicans in Congress have placed themselves in the strange position of defending a system that taxes some millionaires at lower rates than middle-class families, defending a tax system that provides subsidies to certain businesses at the expense of the rest of the taxpayers, and defending the complexity in a tax code that causes business decisions to be made for tax reasons rather than economic ones. Treasury Secretary Henry Paulson went so far as to say (subscription required) "The corporate proposals will hurt the ability of our businesses and workers to compete in a global economy." This is despite the fact that closing loopholes to pay for a lower tax rate is an idea that he and others in the Bush administration proposed during the summer.
 
 

DON'T DO IT! Some Senators Consider Borrowing Billions Instead of Paying for AMT Reform - 10/22/07 

It has been reported in several news outlets that Senate Finance Chairman Max Baucus (D-MT) was unable to get a majority of his committee's members to agree, at a meeting Wednesday, on how to pay for a temporary fix for the Alternative Minimum Tax (AMT). As a result, some Senators have suggested that they should waive the pay-as-you-go (PAYGO) rules that were reinstated at the start of this session and which are supposed to prevent Congress from expanding the national debt.
 
The Bush tax cuts increased the number of people subject to the AMT and the Republican-led Congress never permanently indexed for inflation the exemptions that keep most of us from having to pay it. As a result, 23 million taxpayers (17 percent of all taxpayers) will pay the AMT for 2007 if Congress makes no change to the law.
 
Not Worth Breaking the Bank
 
But the AMT is not exactly the greatest threat right now to the average American. Even if Congress does nothing (which is extremely unlikely) around 60 percent of the AMT would still be paid by the richest 5 percent of taxpayers. In other words, if there was ever a good reason to borrow billions of dollars and have to pay it back with interest, this is not it.
 
Several Measures Would Be Good Policy AND Could Pay for AMT
 
That is especially true because there are plenty of options that Congress can pursue to offset the cost of temporarily or permanently fixing the AMT. For starters, Congress could scale back the Bush tax cuts for the wealthiest people, who are reaping most of the benefits.
 
Congress could also close the loophole for "carried interest" paid to billionaires who run investment funds, and who are currently allowed to pay a lower tax rate than their secretaries. Several hundred organizations signed a letter in early September urging Congress to close this loophole. Congress could also crack down on tax avoidance associated with offshore schemes, stock options and misreporting of business income, and limit tax breaks for the deferred compensation of millionaire executives.
Early this year CTJ pointed out that one simple solution would be to close the loopholes within the AMT itself for capital gains and dividend income.
It's expected that a bill to "patch" the AMT for one year will be introduced in the House by Ways and Means Chairman Charles Rangel in the coming weeks and will likely include some combination of revenue-raising provisions to offset the cost. Rangel has, however, said members of the House may also disagree over how to do so. (Rangel also plans to introduce a larger bill to repeal the AMT entirely, and offset the costs, but that may not be acted upon until next year.)
 
Deficits Are Not a Progressive Solution
 
Congress should not waive PAYGO. The more money we borrow, the more we have to pay to make interest payments. Currently nine cents of every dollar we send to Washington goes just to interest payments -- just to pay for the privilege of borrowing. Besides that, budget deficits can endanger vulnerable families since the public services they depend on are often targets of cuts whenever conservative politicians decide it's time for "deficit-reduction" measures.
 

Republicans Call for Replacing Alternative Minimum Tax with Alternative Maximum Tax - 10/12/07

House Republicans have called for replacing the complicated Alternative Minimum Tax with a potentially even more complicated Alternative Maximum Tax. The plan, which also proposes permanent extension of the Bush tax cuts, would add more than $5 trillion to the national debt over the 2011-20 period.

Under the GOP plan, taxpayers could choose to continue to pay taxes under the current tax code -- but with no Alternative Minimum Tax and with all of the Bush tax cuts permanently extended. Or they could switch to the new Alternative Maximum Tax, with lower rates than current law and no credits or deductions except for a large standard deduction and personal exemptions similar to those under current law.

Because the plan would repeal refundable tax credits now available to low-income working families, it would be of no benefit to the poorest one-third of Americans. Wealthy families, however, would get huge tax reductions.

To maintain or enhance complexity, the plan would allow couples to switch between the two tax systems annually by divorcing or remarrying. Single taxpayers would be allowed only one lifetime switch between the two systems after their initial choice, unless they get married.

The bill's lead sponsor, Rep. Paul Ryan (R-Wisc.) calls his plan "The Taxpayer Choice Act." But budget-deficit hawks have condemned it as "The Bankrupt America Act," while others have dubbed it "The Divorce Lawyers' Relief Act."

 

Battle Only Beginning Over the "Carried Interest" Tax Loophole for Billionaire Fund Managers - 10/12/07

On Tuesday, the Washington Post created a great deal of confusion by reporting that Senate Majority Leader Harry Reid (D-NV) has told lawmakers and lobbyists that the Senate will not have time this year to consider legislation eliminating the "carried interest" loophole, which allows billionaire fund managers to pay a lower tax rate than their middle-income receptionists. This was seen in some quarters as an indication that the issue is dead for this year, provoking several editorials blasting the Senate Democrats for choosing campaign contributions from lobbyists over tax fairness. The reality is that whether the Senate addresses the carried interest issue is largely up to the Senate Finance Committee, not Senator Reid.

Carried Interest Issue Wound Up in Debate Over Alternative Minimum Tax

Whether or not the Senate is unduly influenced by lobbyists is certainly a question worthy of debate, but some clarification is in order. It's true that the Senate is not likely to consider a stand-alone bill that does nothing but close the carried interest loophole. But every member of Congress already knows that. No one in Congress is talking about a stand-alone bill. The question everyone is considering is whether or not a provision to close the loophole should be used to offset the cost of other legislation Congress wants to pass. For example, Congress needs to pass a bill to keep the Alternative Minimum Tax (AMT) from affecting more taxpayers.

The number of people affected by the AMT will increase from around four million last year to 23 million this year if Congress does not act, and just fixing the AMT for this year alone would cost over $50 billion since Congress and the administration have always assumed that this revenue would be collected. A provision closing the carried interest loophole would raise some revenue (although an official estimate has not yet been made) and could therefore be used to offset part of the cost of dealing with the AMT. Over in the House, Ways and Means Chairman Charles Rangel (D-NY) has long said that he will likely try to close the loophole to help offset the cost of fixing the AMT.

Ball Is in the Finance Committee's Court

What types of "offsets" are attached to an AMT bill in the Senate is not decided by Senator Reid. It's decided by the Senate Finance Committee, and Finance Chairman Max Baucus (D-MT) has not yet said whether or not he'll include a provision to close the carried interest loophole. But he and ranking member Charles Grassley (R-IA) have both shown interest. An AMT bill needs to include offsets now that Congress operates under pay-as-you-go (PAYGO) rules that prevent it from increasing the budget deficit. Once the Finance Committee approves an AMT bill and sends it to the full Senate, Senator Reid will make time for a floor vote, since it will shield over 20 million families with voting members from an increase in their Alternative Minimum Tax.

Carried Interest Issue Won't Die Regardless of What Happens This Year

Regardless of what happens this year, there's enough public anger over the carried interest loophole to keep the issue alive for some time. Presidential candidates Hillary Clinton, John Edwards and Barack Obama have come out in favor of eliminating the loophole. Edwards and Obama even made a point of expressing their outrage that the issue hasn't been resolved by now. Even a chief lobbyist for the private equity industry said Wednesday that "It's not over; it's only just beginning."

For now, all eyes should be on the members of the Senate Finance Committee, particularly its chairman, Max Baucus.

 

Crunch Time for Congress - 7/27/07

Among those items pushed back to September is the Alternative Minimum Tax reform plan being developed by the House Ways and Means Committee. While no actual bill has been released, it is known that the House Democrats want to exclude families with incomes of up to $250,000 a year (or $125,000 for singles) from the AMT, reduce the AMT for those between $250,000 and $500,000, and pay for the reform with a surtax on those with incomes above $500,000. Anti-poverty advocates are excited that the plan would also include improvements in the child tax credit and Earned Income Tax Credit. While there is some question of whether or not the President would sign such a bill, it's possible the White House would find it risky to veto a bill that saves millions of middle-income taxpayers from the AMT (which is scheduled to expand its reach from about 4 million to 23 million this year if Congress does not act) in order to protect the very wealthiest Americans, who have received most of the Bush tax cuts.

The Senate Finance Committee is said to be interested in simply passing a one-year or two-year "patch," or temporary extension of the exemption that keeps most people from paying the AMT. This would cost around $50 billion just for one year. Finance Chairman Max Baucus (D-MT) has implied that he might increase the federal budget deficit by this amount rather than find revenue to pay for it. The Finance Committee has not tried to introduce a bill before the August recess.

 

Even Conservative Groups Now Say AMT Reform Should be Paid for; Grassley Still Wants to Increase the Deficit - 6/29/07

The Senate Finance Committee held a hearing Wednesday on the Alternative Minimum Tax (AMT), the backstop tax for the very wealthy that will reach many Americans who are not so wealthy if it is not changed. Because the exemptions that keep most of us from paying the AMT are not indexed for inflation and were not permanently increased in any of President Bush's tax cut packages, the AMT would go from affecting 3.5 million taxpayers in 2006 to affecting 23 million this year if Congress does not act. That is very unlikely however, as Finance Chairman Max Baucus (D-MT) said during the hearing that one can assume Congress will enact a "patch," the term given to a temporary increase in the AMT exemptions that Congress has periodically enacted over the past several years to limit the reach of the tax.
 
Search for Fiscally Sound Solutions that Could Actually be Enacted
 
Baucus asked a panel of witnesses to suggest "realistic" solutions, apparently meaning solutions that would offset any costs. This is important because recent proposals to repeal the AMT without replacing the revenue lost could cost well over a trillion dollars over a decade, meaning a major increase in the deficit with most of the benefits going toward the well-off. It appears that even conservative organizations have realized that AMT reform must be paid for. A witness at the hearing from the American Enterprise Institute suggested reducing tax deductions to pay for reform. The normally anti-tax Tax Foundation released a proposal Wednesday to reform the AMT and partially simplify the tax code in a budget-neutral way (albeit by exempting people who are quite wealthy from the AMT).
 
Nonetheless, the Finance Committee's ranking Republican Charles Grassley (R-IA) still argued that the AMT should be repealed without any offset because the revenues that will be generated from it were never expected. This is factually wrong. The Bush administration in 2001 intentionally chose to leave the AMT in place so as to make the cost of its first tax break appear smaller (since the AMT "takes back" much of the Bush tax cuts from people affected by it). 
 
More Comprehensive Approach in the House
 
As consensus builds around the idea that any change in the AMT should be paid for, the real question becomes whether Congress should continue with temporary, expensive and poorly targeted patches or reform the AMT in a more comprehensive way. As reported in previous Digests, the House Ways and Means Committee is widely reported to be working on a plan to do just that, along with important improvements in the Child Tax Credit and the Earned Income Tax Credit. Members of the Senate Finance Committee need to take a serious look at this plan when it becomes available.

 

House Democrats to Include Tax Improvements for Low-Income People in AMT Reform Bill - 5/11/07

House Democratic leaders and Ways and Means Chairman Charlie Rangel will soon introduce a plan that will help low- and middle- income people by expanding the Earned Income Tax Credit, the Child Tax Credit and the standard deduction. These provisions would be included in a long-awaited plan to permanently shield many upper-middle class taxpayers from the Alternative Minimum Tax. Democrats in the House say that their plan would offer more people tax breaks than would the usual "patch" that the Republican-led Congress has periodically enacted to restrain the reach of the AMT.

Opportunity for Organizations to Support Progressive Changes in the Tax Code 

Several advocacy groups have begun circulating a national sign-on letter for organizations who support improving the tax code for low-income people. The final deadline to sign on is Friday, May 18, but any organizations signed on earlier can be included in a partial list that will be presented to some members of Congress during lobbying activities by advocates. Click here to sign your organization onto the letter.

For anyone who does not represent an organization but wants to get involved, you can send a quick email that will go to your Representative and Senators in support of tax changes that will help low-income people. Click here to send an email.

Advocacy Community Focuses on Tax Credits 

As the Coalition on Human Needs explained in its appeal to organizations, a working family with an income below $11,750 this year is too poor to get the refundable Child Tax Credit.  (For a family of three, that's 43 percent below the poverty line.)  That leaves out 10 million poor children who would benefit from improvements in this credit.

Another credit that can be improved is the EITC, especially as it affects poor childless adults, a group of people who are usually eligible for no federal assistance of any sort. Low-income workers between ages 25-64 who are not raising children are eligible for a very small EITC (last year the maximum was $412; the average credit was only $230). Their average annual earnings were $6,050 in 2005 (about 40 percent below the poverty line for a single individual).

 

House Democrats' Goal: Alternative Minimum Tax Reform by Memorial Day - 3/27/07 

Democrats in the House of Representatives are hoping to pass legislation by Memorial Day that will permanently reform the Alternative Minimum Tax (AMT) and prevent it from reaching millions of more taxpayers. The Bush tax cuts increased the number of people subject to it and the Republican-led Congress never permanently indexed for inflation the exemptions that keep most of us from paying the AMT. As a result, 23 million taxpayers (17 percent of taxpayers) will pay the AMT if Congress makes no change to the law. The AMT is not exactly the greatest threat right now to the average American. Even if Congress does nothing (which is extremely unlikely) more than half of the AMT would still be paid by the richest 4 percent of taxpayers.

But it's widely accepted that Congress will simply not allow a tax to begin affecting millions of people who have never even heard of it, so more responsible members of Congress have focused on how to change the AMT in a way that is fiscally sound and progressive. There are several ways to do this. Democrats on the House Ways and Means Committee are said to be interested in exempting people with income below $250,000 from the AMT, lowering the AMT for people with incomes between $250,000 and $500,000, and and shifting the cost of the change to those with incomes above $500,000. How exactly the cost would be shifted to those taxpayers with incomes over half a million dollars is yet undetermined. This could be done through the regular income tax. The Tax Policy Center has recently shown the impact of doing this by raising the top AMT rate from 28 percent to 35 percent. Another proposal, made by Citizens for Tax Justice in December, would close the main loophole in the AMT, the lower AMT rate for capital gains and dividends, extend the exemptions and index them to inflation.

What's most important is that AMT reform should not increase the federal budget deficit and that the costs should be borne by those who were the original target of the AMT in the first place, the super-rich.

 

Congress Begins to Consider Reform of the AMT - 3/9/07

Earlier this week, the House Ways and Means Subcommittee on Special Revenue Measures held its first hearing this year on the Alternative Minimum Tax (AMT), which is supposed to ensure that extremely wealthy people pay some minimal amount of taxes regardless of what loopholes they enjoy. But unless Congress acts, the AMT will soon affect some households who are upper-middle income but not super-rich. This is because the exemptions that shield most people from the AMT have never been permanently indexed for inflation, and because the Bush tax breaks changed the regular income tax calculation but not the AMT. Congress has enacted temporary "patches" in recent years that extended the exemptions and increased them to keep up with inflation, but continuing this process would cost over $250 billion over the next four years. This cost would have to be offset if Congress is to stay within the PAYGO rules revived by the Democrats in the House shortly after they took control of Congress. The problem is that Republicans are responding to the situation by proposing to repeal the AMT entirely without paying for it, which could cost well over a trillion dollars over a decade. 

Fingers Crossed for a Progressive, Budget-Neutral AMT Reform 

Subcommittee Chairman Richard Neal (D-MA) indicated that a permanent reform will be proposed by the Democrats in a few weeks. It is not yet clear what that will look like, but Ways and Means chairman Charlie Rangel (D-NY) has hinted that a bill shielding more moderate-income families from the AMT could be paid for by redirecting some tax breaks away from the wealthiest taxpayers. Citizens for Tax Justice has proposed an AMT plan along those lines that would not change anything in the normal income tax rules, but other proposals have been suggested that would use new or higher regular income taxes on the wealthiest to pay for AMT reform.

Six Years Wasn't Long Enough for the Republicans to Fix the AMT 

The subcommittee's ranking member, Phil English (R-PA), took the opportunity to argue that the AMT problem was the Democrats' fault. He pointed out that President Clinton vetoed an AMT repeal bill passed by the Republican Congress (that proposal would have repealed the AMT without offsetting the cost at a time when the administration was trying to balance the budget). Representative English did not explain how the Republicans managed to control every branch of government for six years without enacting a permanent solution in any of their six major tax bills. He also did not respond to the explanation that the Bush administration in 2001 intentionally chose to leave the AMT in place so as to make the cost of its first tax break appear less than it would really be after accounting for the AMT patches that Congress would inevitably enact. The AMT essentially threatens to take the Bush tax breaks away from many Americans but leave them in place for the very richest (who, ironically, are not as likely to be affected by the AMT). Nonetheless, Representative English argued that any plan that would close loopholes used by the wealthy or raise taxes on the wealthy to pay for AMT reform would be "class warfare" and would be opposed by the Republicans.

 

White House May Be Negotiating With Itself on the Alternative Minimum Tax - 2/23/07

By now many people know that the Alternative Minimum Tax (AMT) is likely to be modified because it was meant to be a back-stop tax for the super-rich but will start affecting the more moderate-income families if the existing AMT exemptions are not extended. By now, most people in government know that "fixing" the AMT is not cheap. Continuing Congress's recent practice of applying a one-year "patch" each year will cost $250 billion over the next four years.
 
What nobody knows, however, is whether the President thinks AMT reform should paid for or not. Since some members of Congress have proposed repealing the AMT altogether (which could cost $1.5 trillion over a decade), the possible implications for the federal budget deficit are alarming. Tony Snow's recent response to questions about paying for AMT reform were not exactly crystal clear. In a long explanation of the White House position that clarified little, he said that "the President is not for tax increases," but later said "We don't think it needs to involve tax increases, but we're certainly open to hearing what other people have to say." The CTJ Talking Taxes Blog has more.
 

Analysis from CTJ Shows AMT Can Be "Fixed" in a Progressive, Revenue-Neutral Way - 12/14/06

The alternative minimum tax (AMT), which was originally intended to ensure that the wealthiest Americans pay at least some tax regardless of how many tax breaks they could otherwise claim, will affect 17 percent of taxpayers in 2007, rising to 23 percent of taxpayers in 2010. This is partially because President Bush's tax cuts were not accompanied by adjustments to the AMT and also partially because the exemptions that keep the AMT from applying to most people have not kept pace with inflation. A new analysis from Citizens for Tax Justice shows that there is a way to adjust the AMT -- without increasing deficits -- to ensure that the majority of it is paid by the richest one percent of taxpayers. 

 
Many Democrats have expressed an interest in changing the AMT in the next Congress. Several lawmakers have expressed alarm that a significant number of voters will suddenly have to pay a tax that never applied to them before if Congress does not act. The problem is that the AMT is expected to bring in $250 billion in revenue in the next four years, so repealing it altogether would be outrageously irresponsible. The solution offered by CTJ allows for the same amount of AMT to be collected and also ensures that the tax will serve its original purpose -- to guarantee that the very wealthiest pay their fair share.
 
Senate Finance Committee Leaders Propose Repealing the AMT at a Cost of Hundreds of Billions
 
It would be comforting to believe that the Democrats who are now running Congress don't need to be convinced to support tax fairness. It would be comforting, but not entirely right. Senator Max Baucus (D-MT), the new chairman of the Senate Finance Committee, has joined forces with the now-ranking member Charles Grassley (R-IA) to again propose fully repealing the Alternative Minimum Tax (AMT). The Center on Budget and Policy Priorities finds that full repeal, if not offset by other revenue, could cost $790 billion over ten years and even more if the Bush tax cuts are extended past their expiration date in 2011.
 

It's true that if Congress doesn't do something, the AMT, which was originally intended to ensure that the wealthiest Americans pay at least some tax, will start applying to people it was never intended to affect. This is partially because President Bush's tax cuts were not accompanied by adjustments to the AMT and also partially because the exemptions that keep the AMT from applying to most people have not kept pace with inflation. But the solution to this problem is to reform the AMT in a way that is budget-neutral and concentrates the costs among the very wealthiest households, who were the targets of the AMT in the first place. Citizens for Tax Justice has proposed such a solution (see above), which is both budget-neutral and progressive.


The Bush Tax Cuts:

Chair of House Tax-Writing Committee Proposes Comprehensive Tax Reform - 10/26/07

Congressman Rangel's Tax Bill Would Make the Tax Code Simpler, More Progressive, and the Changes Are All Paid For
 
House Ways and Means Chairman Charles Rangel introduced his proposal Thursday to address the Alternative Minimum Tax and simplify the tax code without increasing the federal budget deficit. One title of the bill would address the income tax for individuals, including the AMT reform which would be paid for by reducing the Bush tax cuts for the wealthiest Americans and closing some unfair loopholes that benefit the very richest taxpayers. The other title of the bill would simplify the corporate tax by trading a lower corporate tax rate for the elimination of some inefficient loopholes. Lawmakers may take some of the provisions, such as a one-year fix for the AMT, and pass them more quickly as a separate, smaller bill.
 
Individual Income Taxes Would Be Simpler and More Progressive
 
Several Republican lawmakers demand that Congress repeal the AMT without replacing the revenue because it was never "intended" to be collected. This is nonsense, because the Bush Administration very intentionally declined to address the AMT when it passed tax cuts. The President's most recent budget assumes that the AMT will, in fact, expand its reach to millions of families after 2007.
 
Congressman Rangel's bill includes a "patch" for the AMT for this year and then repeals it altogether. The revenue is replaced largely with a surtax on families with incomes over $200,000. These families have benefited the most from the Bush tax cuts. Nearly half of the benefits from the Bush tax cuts flow to the richest five percent of taxpayers, whose income is above $170,000. In 2010 well over half of the benefits will flow to this group if the Bush tax breaks are not repealed. So Congressman Rangel's bill would reduce the bonanza of tax cuts enjoyed by this elite group of families to help pay for AMT relief for families who are somewhat more likely to be middle-class.
 
In addition, the bill would eliminate the loophole for "carried interest" as many advocates have urged because it allows wealthy fund managers to pay a lower tax rate than middle-income people.
 
Congressman Rangel's bill also includes important improvements in the Child Tax Credit and the EITC for childless workers. The Child Tax Credit is currently structured so that the poorest families cannot benefit from it, while the EITC for childless workers is currently so low that childless workers can live in poverty and still pay federal income taxes, in addition to federal payroll taxes.
 
Corporate Taxes Would Be Simpler and More Efficient
 
The bill reduces the corporate rate from the current 35 percent to 30.5 percent and replaces the revenue lost from this change by eliminating certain loopholes. Corporations should consider themselves lucky to be offered this lower rate. CTJ has argued recently that Congress should close corporate tax loopholes and not lower the corporate rate but instead use the new revenue for deficit-reduction or to address the many needs this country faces right now.
 
It's often said that the U.S. corporate tax rate of 35 percent is among the highest in the world, but really the effective rate is much lower because of the loopholes that corporations use to lower their taxes. The United States collects less in corporate taxes as a percentage of GDP than all but two OECD countries. In other words, corporations should be thankful they're being offered any tax breaks at all.
 
Wisely, the bill includes changes to offset the costs of the rate reduction. These include eliminating several existing tax provisions, including a tax subsidy for manufacturers, an accounting method that allows oil companies to understate their profits, and another provision that encourages companies to move operations offshore.
 
Republicans Defend Government Interference in the Economy Through the Tax Code, Defend Complexity in the Tax Code
 
Republicans in Congress have placed themselves in the strange position of defending a system that taxes some millionaires at lower rates than middle-class families, defending a tax system that provides subsidies to certain businesses at the expense of the rest of the taxpayers, and defending the complexity in a tax code that causes business decisions to be made for tax reasons rather than economic ones. Treasury Secretary Henry Paulson went so far as to say (subscription required) "The corporate proposals will hurt the ability of our businesses and workers to compete in a global economy." This is despite the fact that closing loopholes to pay for a lower tax rate is an idea that he and others in the Bush administration proposed during the summer.
 
 

Pollsters Tell GOP Tax Breaks No Longer Priority for Independents - 9/14/07

A story from Roll Call reveals that Republican Senators have been advised by their pollsters that tax breaks are no longer a priority for independent voters. Most now rate health care reform and government spending as more pressing matters.
 
It's not actually clear that tax breaks ever were the most important priority for many Americans. It's often been the case that survey respondents would say they support tax breaks and oppose tax increases generally. But when asked whether they would prefer an improvement in health care, education or some other public service or a tax cut, most choose the improvement in public services. Support for public services has probably increased in recent years. A recent poll shows that two thirds of Americans support universal healthcare even if it means a tax increase. (Perhaps this is because many people realize that what they pay in taxes for healthcare may very well be less than what they pay now under our health care system, which is less efficient than that of almost every other developed country). 
 
The Roll Call story does imply that there is polling to show that independent voters have some vague sense that government spending is too high, but we suspect that as with taxes, respondents would answer very differently when presented with choices about the actual government programs that cost the most money. About a fifth of federal spending goes toward healthcare, another fifth toward Social Security, and another fifth toward defense. That means most federal spending goes towards things most Americans support. Another nine percent goes toward paying the interest on the national debt, which the Bush administration has actively increased, largely with tax breaks. 
 
Americans express very different views when they are confronted with the trade-offs involved when vague calls for "smaller government" are turned into specific legislative plans to cut services. For example, the previous Congress's efforts to slash Medicaid and other federal services didn't seem to win it many supporters. Conservative politicians have in the past been able to appeal to voters by offering stark choices between "small government" and "large government" or between "lower taxes" and "higher taxes" but they find it difficult to get Americans to agree on specific services to cut rather than expand.

 

Should Wealthy Investors Have Lower Tax Rates than the Rest of Us?

Warren Buffet attacked the federal tax preference for the rich over the middle-class Tuesday, arguing that it is an outrage that his receptionist pays a higher effective tax rate than he does. A major cause of the problem is the special low tax rate (15 percent) for capital gains and dividends, which mostly benefits the wealthy. Conservatives often argue that repealing this tax break or allowing it to expire (it currently is scheduled to expire at the end of 2010) would cause investment to dry up and lead to a loss of jobs. Unfortunately for proponents of the tax break, there has been no relationship between low capital gains tax rates and economic growth over the past 50 years. The lower rate can just as easily lead to greater inefficiency in the economy, since it can result in tax shelters that have no real economic rationale (as investments are made purely to transform ordinary income into capital gains). 

 
Congress May Take a Small Step in the Right Direction
 
For those members of Congress who get a little weak-kneed at the thought of allowing the President's favorite tax cut to expire or be repealed, there are smaller steps that can be taken in this direction. For one thing, private equity fund managers making millions or even billions of dollars are taking advantage of the special capital gains rate even though they are not actually investing their own capital. 
 
The House Ways and Means Committee is expected to hold hearings in July to consider a bill (H.R. 2834) that would close this loophole. Meanwhile, Senate Finance Committee chairman Max Baucus (D-MT) and ranking member Charles Grassley (R-IA) are sponsoring a narrower bill that would require publicly traded partnerships that get their income from investment services to pay the corporate income tax rate of 35 percent (which is what other publicly traded partnerships almost always must pay) instead of the capital gains rate they currently pay. The Finance Committee is expected to hold hearings later this summer and it is not yet clear if Baucus will add the provisions the House includes in its version relating to the taxing of the fund managers' compensation. 
 
Citizens for Tax Justice director Robert McIntyre has recently appeared on television twice to debate this issue, once on May 7 and a second time on June 21.

 

Hedge Fund Managers May Finally Face Fair Taxes - 6/15/07

The visibility of a tax dodge for hedge fund managers continued to grow this week, as former Treasury secretary Robert Rubin spoke Tuesday at a forum arranged by the Hamilton Project about why hedge fund and private equity managers ought to be taxed at a higher rate. Currently, these managers charge a fee for their investment and money management services and report their fee as a capital gain, making it subject to a tax rate of just 15 percent. Fees are assessed as 20 percent of profits.
 
Private equity firms, and increasingly hedge funds, operate by using independent investor money to purchase companies, improve them, and then sell them for a profit. The overall investment process, which may take up to seven years, does constitute a capital gain. However, fund managers are performing a management service, not risking their own money, so any capital gains are not really theirs to report.


Rubin argued that the managers are performing a basic service, and "fees for that service would ordinarily be thought of as ordinary income." Income for these wealthy managers, he argued, should be subject to the regular income tax rates of up to 35 percent. Manager income has skyrocketed recently with earnings ranging from $500 million to $2 billion a year. With an already quite low capital gains rate, fund managers are clearly not paying their fair share, and a new plan could bring in additional revenue and create a more progressive tax system. On a related issue, Democrat Max Baucus and Republican Charles Grassley of the Senate Finance Committee proposed on Friday that some private equity firms should be taxed under the corporate tax rate rather than being taxed as partnerships as they currently are. We look forward to hearing more about this proposed legislation.

 

Bush Tax Cuts Reduced President's Taxes by 14 Percent, Cheney's by 21 Percent, in 2006 - 5/4/07

A new paper from Citizens for Tax Justice shows that President George W. Bush and his wife Laura received a $31,037 income tax reduction for 2006 due to the President's tax cut program. Vice-president Dick Cheney and his wife Lynne, whose income was much higher, saved $110,932.

CTJ director Bob McIntyre notes, "At a time when our nation is running huge deficits and spending hundreds of billions of dollars and thousands of American lives on the Iraq war, you'd think such people would be asked to sacrifice a little rather than receiving such largesse."

 

Democratic Congressmen Propose Estate Tax Break for Farms - 4/27/07

Last week U.S. Representatives John Salazar and Tim Mahoney introduced the "Save the Family Farm and Ranch Act of 2007," which would exempt family farms that provide 50 percent or more of a family's income. This seems unnecessary. The American Farm Bureau Federation famously admitted to the New York Times in 2001 that they could not cite a single example of a farm that was lost due to the estate tax. Moreover, as a Citizens for Tax Justice paper explained last summer, family farms receive several additional breaks (beyond the $2 million dollar exemption in effect this year) from the estate tax and can pay off estate taxes over a period of 14 years.

The Nonsensical "Tax Freedom Day" - 4/6/07

If it's April, it must be time for... Tax Freedom Day. According to the folks at the Tax Foundation, Tax Freedom Day is the day on which "the nation has finally earned enough to pay all the taxes that will be due for that year." The calculation is a pretty simple one: as the Foundation describes it, they're just "dividing the nation's total tax payments by the nation's income." In 2007, that figure is 32.7%. So, the report concludes, Tax Freedom Day is 32.7% of the way through the year in 2007, which would be April 30.
 
The Center on Budget and Policy Priorities explains why Tax Freedom Day is a meaningless concept. For one thing, the average percentage of income paid towards federal taxes, as reported by the Tax Foundation, is actually higher than the percentage that all but the highest income quintile really pay. The wealthiest have incomes so high that they pull up the average above what people in the middle pay. The statistic also fails to capture certain sorts of income. Also, if the percentage has gone up as the Tax Foundation claims, it's because of rising income at the very top (which leads to more taxes paid in higher income brackets), not because of higher taxes.
 
Unfortunately, every year a few media outlets gullibly (or knowingly) write this story in a way that makes readers think the statistic says something about the "typical" American's tax level. Some media outlets use the Tax Freedom Day as a rhetorical tool to assert that our taxes are too high. Others simply regurgitate the report's results without making the faintest effort to evaluate what it all means. And a few worthy reporters bring up the topic just to point out that the data doesn't mean anything.

 

CTJ Tells Appropriation Subcommittee Bush's Tax Proposal Will Cost Over $5 Trillion in Second Decade - 3/9/07

In testimony Monday before the House Appropriations Subcommittee on Financial Services and General Government, Citizens for Tax Justice Executive Director Bob McIntyre presented the latest CTJ data on the Bush tax cuts. He explained that the administration's proposal to make the tax cuts permanent will cost a total of $5 trillion dollars from 2011 through 2020. This total includes the added interest on the national debt accumulated as a result of the tax breaks. While the President's proposed budget does not include permanent AMT reform, this calculation assumes that Congress will be forced to change the AMT (either through consecutive "patches" or through legislation that permanently reforms the AMT).

 

Latest Data From CTJ Shows Over Two Trillion Spent this Decade on Tax Cuts;
Majority Goes to Richest One Percent - 3/2/07

Citizens for Tax Justice has released the latest data showing the cost and distribution of the Bush tax cuts enacted through 2006. The projected total cost of the tax cuts from 2001 through 2010 is either $2.4 trillion or $2.6 trillion, depending on whether or not Congress chooses to extend temporary higher exemptions from the Alternative Minimum Tax (AMT). The top one percent of taxpayers would receive 53 percent of the benefits of the tax breaks in 2010 under the President's budget proposal (which does not include extending AMT exemptions). Extending AMT relief through the end of the decade would cost an additional $278 billion.

 


Corporate Tax Issues:

Chair of House Tax-Writing Committee Proposes Comprehensive Tax Reform - 10/26/07

Congressman Rangel's Tax Bill Would Make the Tax Code Simpler, More Progressive, and the Changes Are All Paid For
 
House Ways and Means Chairman Charles Rangel introduced his proposal Thursday to address the Alternative Minimum Tax and simplify the tax code without increasing the federal budget deficit. One title of the bill would address the income tax for individuals, including the AMT reform which would be paid for by reducing the Bush tax cuts for the wealthiest Americans and closing some unfair loopholes that benefit the very richest taxpayers. The other title of the bill would simplify the corporate tax by trading a lower corporate tax rate for the elimination of some inefficient loopholes. Lawmakers may take some of the provisions, such as a one-year fix for the AMT, and pass them more quickly as a separate, smaller bill.
 
Individual Income Taxes Would Be Simpler and More Progressive
 
Several Republican lawmakers demand that Congress repeal the AMT without replacing the revenue because it was never "intended" to be collected. This is nonsense, because the Bush Administration very intentionally declined to address the AMT when it passed tax cuts. The President's most recent budget assumes that the AMT will, in fact, expand its reach to millions of families after 2007.
 
Congressman Rangel's bill includes a "patch" for the AMT for this year and then repeals it altogether. The revenue is replaced largely with a surtax on families with incomes over $200,000. These families have benefited the most from the Bush tax cuts. Nearly half of the benefits from the Bush tax cuts flow to the richest five percent of taxpayers, whose income is above $170,000. In 2010 well over half of the benefits will flow to this group if the Bush tax breaks are not repealed. So Congressman Rangel's bill would reduce the bonanza of tax cuts enjoyed by this elite group of families to help pay for AMT relief for families who are somewhat more likely to be middle-class.
 
In addition, the bill would eliminate the loophole for "carried interest" as many advocates have urged because it allows wealthy fund managers to pay a lower tax rate than middle-income people.
 
Congressman Rangel's bill also includes important improvements in the Child Tax Credit and the EITC for childless workers. The Child Tax Credit is currently structured so that the poorest families cannot benefit from it, while the EITC for childless workers is currently so low that childless workers can live in poverty and still pay federal income taxes, in addition to federal payroll taxes.
 
Corporate Taxes Would Be Simpler and More Efficient
 
The bill reduces the corporate rate from the current 35 percent to 30.5 percent and replaces the revenue lost from this change by eliminating certain loopholes. Corporations should consider themselves lucky to be offered this lower rate. CTJ has argued recently that Congress should close corporate tax loopholes and not lower the corporate rate but instead use the new revenue for deficit-reduction or to address the many needs this country faces right now.
 
It's often said that the U.S. corporate tax rate of 35 percent is among the highest in the world, but really the effective rate is much lower because of the loopholes that corporations use to lower their taxes. The United States collects less in corporate taxes as a percentage of GDP than all but two OECD countries. In other words, corporations should be thankful they're being offered any tax breaks at all.
 
Wisely, the bill includes changes to offset the costs of the rate reduction. These include eliminating several existing tax provisions, including a tax subsidy for manufacturers, an accounting method that allows oil companies to understate their profits, and another provision that encourages companies to move operations offshore.
 
Republicans Defend Government Interference in the Economy Through the Tax Code, Defend Complexity in the Tax Code
 
Republicans in Congress have placed themselves in the strange position of defending a system that taxes some millionaires at lower rates than middle-class families, defending a tax system that provides subsidies to certain businesses at the expense of the rest of the taxpayers, and defending the complexity in a tax code that causes business decisions to be made for tax reasons rather than economic ones. Treasury Secretary Henry Paulson went so far as to say (subscription required) "The corporate proposals will hurt the ability of our businesses and workers to compete in a global economy." This is despite the fact that closing loopholes to pay for a lower tax rate is an idea that he and others in the Bush administration proposed during the summer.
 
 

Senator Levin Targets Deductions for Stock Options - 10/5/07

Senator Carl Levin (D-MI) introduced a bill this week to end the disparity between deductions taken by companies for stock options and the expenses that are actually reported on the companies' books for those options. Corporations sometimes compensate employees (particularly executives) with options to buy stock at a set price. The employee can wait to exercise the option until after the value of the stock has increased beyond that price, thus enjoying a substantial tax benefit.

When stock options are exercised, employees report the difference between the value of the stock and the exercise price as taxable wages. The employer reports the fair value of the option at the date it's granted in its financial statements, yet takes a deduction for the value of the option on the date it is exercised, which is often much greater. This "book-tax gap" means that how the options are valued for accounting purposes and reported to stock-holders is different from how they're valued and reported to the IRS. Levin's bill would make the amount deducted for tax purposes equal to the value accounted for in financial statements.

According to calculations made by his staff using IRS data and released in June, firms deducted $43 billion that was not included in financial books in this manner between December 2004 to June 2005. CTJ's 2004 study of corporate taxes cited stock options as one of the key reasons corporations were able to avoid taxes.

 

Senate Finance Committee Examines Tax Strategy Used by Offshore Insurers - 9/28/07 

American insurance companies came to the Hill Wednesday to complain about a tax-avoidance strategy that they say is giving Bermuda-based insurance companies an unfair competitive advantage. The general idea is that an insurance company can locate or relocate in Bermuda, which has a tax treaty with the United States allowing premiums paid to Bermuda-based insurers by U.S. customers to be free of U.S. tax, except for a 1 percent excise tax. The company's U.S. affiliate sells insurance to U.S. customers and then buys reinsurance (which is common for insurers) from the parent in Bermuda, so that income from premiums is effectively shifted to Bermuda where it can be invested tax-free.
 

In reality the affiliates are operating as one company just shifting money around on paper. The strategy apparently requires very little in the way of actual employees of facilities physically located in Bermuda.

A U.S.-based insurer will generally pay the corporate tax rate of 35 percent on its income, and thus is put at a competitive disadvantage relative to the Bermuda-based insurer. The strategy available to the Bermuda-based insurers should be eliminated for moral reasons, but thankfully there are some powerful U.S.-based insurers that have found it in their own interest to start lobbying for reform.  

While some members of the Finance Committee have expressed concern and an interest in a legislative solution, no proposal has been made public yet. The Bermuda-based companies have formed their own lobbying coalition to block reform.

 

Experts Agree that Corporate Tax Loopholes Should Be Closed, But What Should Be Done with the Revenue? - 9/21/07
Bush Administration Says Lower the Corporate Rate; CTJ Says Use the Revenue for More Pressing Priorities

Earlier this summer, the Bush Administration floated the idea of closing corporate tax loopholes and using the resulting revenue to offset a reduction in the corporate tax rate. There is even a possibility that a tax bill being developed by House Ways and Means chairman Charles Rangel (D-NY) could include some variation on this theme to win Republican votes. A recent op-ed by CTJ director Robert McIntyre argues that the first half of this plan is a great idea -- close the loopholes that allow corporations to avoid paying their fair share. But there are many pressing needs (healthcare, Social Security, paying off the national debt or just closing the budget deficit during a costly war) that this revenue could be used for rather than a rate reduction for corporations.
 

And it's not the case that corporations are paying so much in U.S. taxes that it puts them at a competitive disadvantage. In 2005, the most recent year for which data are available, U.S. corporate tax revenue as a share of GDP was only 2.6 percent, lower than in all but two developed countries.

 

A Lower Corporate Tax Rate?
Loopholes Turn Corporate Tax into Swiss Cheese

The U.S Treasury has been causing some business investors heartburn this week by suggesting that some cherished loopholes in the tax code could be closed and the resulting revenue used to lower the corporate tax rate. The argument was made in a report published by the Treasury and then discussed at a conference yesterday. Among the tax subsidies mentioned were the research credit, which Citizens for Tax Justice has criticized in the past, as well as several others that we noted last week in our "Hidden Entitlements in the Federal Tax Code" feature. The report finds that loopholes reduce the Federal corporate tax base by around 25 percent.
 
It's certainly true that there are plenty of business-oriented loopholes in the tax code that need to be closed. As the report points out, many of these are quite inefficient and result in business decisions based on tax reasons rather than cost-effectiveness.
 
But it's not at all clear that the revenue generated by closing loopholes should be used to lower the corporate tax rate. If federal revenue is not increased at some point, Congress may have to cut public services that Americans from all walks of life depend on. Further, if the corporate rate falls far below the top personal income tax rate, this may encourage wealthy people to use corporate entities to avoid the personal income tax.
 
International Tax Avoidance Also a Major Issue
 
But the report does not address another factor that is seriously eating away at corporate tax revenue: tax avoidance associated with multinational firms involving transfer pricing. Transfer pricing is basically the accounting that must take place when divisions of a corporation that are based in different countries "sell" and "buy" products or services to and from each other. In theory, if an American division of a company buys something from its division in another country, then that purchase can be deducted for American federal tax purposes. The foreign division has revenue and may have a profit, but in theory, the foreign government will tax that profit.
 
The problem is that a multinational corporation can exploit this system. For example, it may transfer its patents and trademarks to a division in a low-tax foreign country with little transparency (a tax haven) and then have that division "charge" the American division for the use of these "intangibles." The accounting can be done in such a way that the American division appears to have no profits after making these payments, and all the profits appear to go to the division in the tax haven.
 
A recent report from the Hamilton Project of the Brookings Institution explains the inefficiencies in this system and cites a study finding that a 35 percent reduction in corporate tax revenue results. The report argues that the United States and its major trading partners should switch to a system in which a company's total global expenses and profits are calculated and then tax is apportioned to the various countries where it does business based on sales in each country.
 
The problems with the current system are evident. The New York Times recently reported on how drug companies are particularly likely to take advantage of transfer pricing. Eli Lilly, for example, only paid about 6 percent in U.S. federal taxes on its profits of around three and a half billion dollars last year.

 

Should Wealthy Investors Have Lower Tax Rates than the Rest of Us? - 6/29/07

Warren Buffet attacked the federal tax preference for the rich over the middle-class Tuesday, arguing that it is an outrage that his receptionist pays a higher effective tax rate than he does. A major cause of the problem is the special low tax rate (15 percent) for capital gains and dividends, which mostly benefits the wealthy. Conservatives often argue that repealing this tax break or allowing it to expire (it currently is scheduled to expire at the end of 2010) would cause investment to dry up and lead to a loss of jobs. Unfortunately for proponents of the tax break, there has been no relationship between low capital gains tax rates and economic growth over the past 50 years. The lower rate can just as easily lead to greater inefficiency in the economy, since it can result in tax shelters that have no real economic rationale (as investments are made purely to transform ordinary income into capital gains). 

Congress May Take a Small Step in the Right Direction
 
For those members of Congress who get a little weak-kneed at the thought of allowing the President's favorite tax cut to expire or be repealed, there are smaller steps that can be taken in this direction. For one thing, private equity fund managers making millions or even billions of dollars are taking advantage of the special capital gains rate even though they are not actually investing their own capital. 
 
The House Ways and Means Committee is expected to hold hearings in July to consider a bill (H.R. 2834) that would close this loophole. Meanwhile, Senate Finance Committee chairman Max Baucus (D-MT) and ranking member Charles Grassley (R-IA) are sponsoring a narrower bill that would require publicly traded partnerships that get their income from investment services to pay the corporate income tax rate of 35 percent (which is what other publicly traded partnerships almost always must pay) instead of the capital gains rate they currently pay. The Finance Committee is expected to hold hearings later this summer and it is not yet clear if Baucus will add the provisions the House includes in its version relating to the taxing of the fund managers' compensation. 

Citizens for Tax Justice director Robert McIntyre has recently appeared on television twice to debate this issue, once on May 7 and a second time on June 21.

 

Senate Investigates Stock Options - 6/8/07

 
The Senate Homeland Security & Governmental Affairs Permanent Subcommittee on Investigations held a hearing Tuesday focusing on stock options and the "book-tax accounting gap." Corporations sometimes compensate employees (particularly executives) with options to buy stock at a set price. The employee can wait to exercise the option until after the value of the stock has increased beyond that price, thus enjoying a substantial benefit.

When stock options are exercised, employees report the difference between the value of the stock and the exercise price as taxable wages, and corporations take a corresponding tax deduction. Until recently, however, companies didn't have to reduce the profits they report to their shareholders by the cost of the stock options.

Many people, including us, complained that it didn't make sense for companies to treat stock options inconsistently for tax purposes versus shareholder-reporting purposes. As a result of these complaints, new rules now require companies to lower their "book" profits somewhat to take account of options. But the book write-offs are still considerably less than what they take as tax deductions. That's because the oddly-designed rules require the value of the stock options for book purposes to be calculated or guessed at when the options are issued, while the tax deductions reflect the actual value when the options are exercised.

Senator Carl Levin (D-MI), chair of the subcommittee, stated in a press release that "Companies pay their executives with stock options in part because, right now, those stock options often generate huge tax deductions that are 2, 3, even 10 times larger than the stock option expense shown on the company books." According to calculations made by his staff using IRS data, firms deducted $43 billion that was not included in financial books in this manner between December 2004 to June 2005. He argued that this is especially problematic now because it seems to fuel the widening difference in pay for executives compared to rank and file workers. Levin said he plans to introduce legislation this fall to require companies to treat stock options the same for both book and tax purposes.

 


Education:

Using the Tax Code to Promote Postsecondary Education: We Might as Well Do It Right - 5/25/07

Several members of Congress are considering how to improve tax provisions that are designed to help people obtain postsecondary education and training, and recent reports on this topic has been issued by the Center on Budget and Policy Priorities and the Tax Policy Center. The Senate Finance Committee is expected to mark up legislation on education tax benefits after the Memorial Day recess. Currently taxpayers paying college or training expenses, including those who are not itemizers, can deduct up to $2,000 ($4,000 for married couples) for tuition and fees. Also, the Hope credit is available at a maximum of $1,650 per student this year (indexed for inflation) and the Lifetime Learning Credit (LLC) is available at a maximum of $2,000 per family. There are also several tax-preferred savings vehicles for education (Coverdell Education Savings, Accounts, Qualified Tuition Programs, and education savings bonds).
 
Lack of Progressivity
 
There are several problems with these tax benefits. For one, they're not very progressive. This is particularly troubling because we usually think the whole point of these tax breaks is to encourage people to obtain postsecondary education who otherwise would not, and wealthier families will typically send their children to college regardless of what tax benefits are available. Lower-income families, who are more likely to respond to subsidies for education, are not well-targeted by the tax benefits.
 
The tuition and fees deduction and the Hope credit and LLC are unavailable for people without income tax liability, so a sensible reform would be to provide a refundable credit. Most families of modest means pay federal payroll taxes but are not wealthy enough to owe federal income taxes (a family of four with an income of $42,000 won't pay federal income taxes in 2007). For these families, only a credit that is refundable (that results in negative income tax liability and a check from the IRS) can help.
 
The maximum LLC cannot be used unless a family spends at least $10,000 on education (because it credits 20% of the first $10,000 in expenses, up to a maximum credit of $2,000). One speaker at a forum on this topic hosted by the Tax Policy Center on Wednesday pointed out that 90 percent of students have expenses below $10,000. The tuition and fees deduction is regressive because its value depends on the tax rate the taxpayer is subject to. A family subject to a 35% tax rate can deduct $4,000 and reduce their taxes by $1,400, but a family subject to the 10% rate could deduct $4,000 and reduce their taxes by only $400.   
 
Complexity
 
Another problem is that many families may find the rules governing these tax breaks too confusing and may not even realize that these benefits are available. A taxpayer must choose to use either the tuition and fees deduction, the Hope credit, or the LLC.  A GAO report in 2005 found that over a fourth of taxpayers eligible don't take advantage of any of these tax benefits, and those who do use them often don't use the most advantageous tax break for their situation.
 
New Proposals Could Solve Some of These Problems
 
A bill sponsored by Rahm Emanuel (D-IL), Dave Camp (R-MI) and others in the House and Evan Bayh (D-IN) in the Senate would combine the three main tax benefits into one credit of up to $3,000 for postsecondary education expenses, including a much broader range of expenses (such as room and board, books, supplies and transportation). These expenses other than tuition often make up the bulk of costs for students of modest incomes in community colleges. The credit would cover 50% of the first $3,000 and 30% of the next $5,000 of these expenses. Up to half of the credit calculated based on expenses would be refundable, adding to the progressivity of the proposal.
 

Other proposals are being discussed, including one from Senator Charles Schumer (D-NY) for a simplified credit that would not be refundable, and which the Finance Committee is likely to consider. Advocates for making postsecondary education more accessible are hopeful that the Finance Committee can be pushed to move in the direction of the bill being sponsored by Emanuel, Camp and Bayh.

 

 

Energy:

Senators Block Bid to Make Tax Code Greener - 12/14/07

On Thursday, the Senate failed by one vote to agree to consider legislation that would shift tax breaks away from oil and gas companies and towards more sustainable forms of energy. The move to invoke cloture on the energy bill received only 59 votes, one short of the 60-vote threshold needed to consider the bill. The sticking point for many Republicans is the $21 billion tax title, which Senate Majority Leader Harry Reid (D-NV) then removed from the bill to ensure passage. The bill, (H.R. 6) minus the tax title passed the Senate, 86-8, the same day.

The remaining provisions of the energy bill would increase fuel efficiency standards for automobile manufacturers (known as corporate average fuel economy, or CAFE) to 35 miles per gallon by 2020 and would require gasoline to contain a certain level of biofuels by 2022.

The tax provisions stripped from the bill include an extension and expansion of the renewable energy production tax credit (known as the Section 45 credit), which is a tax subsidy for deriving energy from wind, geothermal sources, hydropower or several other specific renewable sources. This provision would have cost $6.2 billion over ten years. Other provisions would encourage cleaner coal facilities, greener commercial buildings, electronic energy meters and the use of electricity from wall sockets to power automobiles, among many other advances.

The tax title included revenue-raising provisions to offset these costs, which the President and the Republicans disingenuously claim are tax increases that would hurt the economy.

The biggest offset would have barred the big oil and gas companies from using the deduction for domestic manufacturing (often called the Section 199 deduction). A legislative slight-of-hand in the tax break law enacted in 2004 redefined manufactured goods to include oil and gas so that energy companies could enjoy this tax break. (The deduction is 6% of the cost of domestic manufacturing activities this year, rising to 9% in 2010.) This tax break should arguably have never applied to oil and gas in the first place.

Other offsets included new basis reporting requirements for securities transactions to prevent avoidance of taxes on capital gains, restrictions on foreign tax credits for oil and gas, and several other provisions.

As we've argued here before, experts can certainly debate whether or not energy policy should be implemented through the tax code, but perhaps the more important point is that Congress has already showered oil and gas companies with numerous tax breaks that CTJ has criticized in the past. The tax title that has been dropped from the energy bill would have merely shifted some tax breaks away from oil and gas towards more sustainable types of energy.

 

Senate Passes Energy Bill Without Tax Provisions - 6/22/07

On Thursday, the Senate fell three votes short of the 60 needed to end debate and pass a $32 billion dollar energy tax package that was intended to be attached to a broader energy bill. The broader bill includes changes in Corporate Average Fuel Economy standards, fuel price gouging, ethanol and other related matters, and was passed with 65 votes. The tax package, which the Finance Committee approved on Tuesday, could be revived in the days to come. Meanwhile, the House Ways and Means Committee marked up its own energy tax package on Wednesday which, at $16 billion, costs about half as much as the Senate's version. The two packages create and expand several tax breaks that purportedly encourage energy efficiency and the production of energy from alternative sources and both include revenue-raising provisions to offset the costs.

Experts can certainly debate whether or not energy policy should be implemented through the tax code, but perhaps the more important point is that Congress has already showered oil and gas companies with numerous tax breaks that CTJ has criticized in the past. The energy tax legislation being debated now would generally shift some tax breaks away from oil and gas towards more sustainable types of energy. Lobbyists from the oil and automotive industries convinced many Senators that the tax package would "raise taxes" on oil and gas companies, but most of the provisions would really close loopholes for these companies that have no justification.

Tax Breaks to Encourage Energy Efficiency and Independence

According to the Congressional Joint Committee on Taxation, the biggest item in both versions is the expansion of the tax credit for electricity production from renewable resourceswhich costs $6.6 billion over ten years in the House version and $10.1 billion over ten years in the Senate version. This credit is currently available for the production of wind, geothermal, solar and many other types of energy. The Senate version would allow more energy sources to qualify (such as tidal energy) and would extend the credit for a longer period of time.

Some noteworthy provisions appear in the Senate package but not in the House package. One is a $3.8 billion expansion and modification of the tax credit for coal gasification, a process by which coal is broken down into a gas which can be burned. The CO2 that results can be more easily separated from the gas and stored, thereby reducing CO2 emissions. Groups like Environmental Defense support coal gasification, particularly since the use of coal in the US and the world is projected to rise a great deal over the next few decades.

Other provisions that appear only in the Senate version include about $1.5 billion in tax breaks for "carbon mitigation," including a credit for capturing and storing CO2 resulting from industrial processes, at a cost of just over $1 billion. The Senate extends certain credits for longer periods and in some cases offers larger credits, such as a tax credit for production of cellulosic alcohol, which is basically alcohol produced from parts of plants that are not edible, at a cost of $828 million over ten years in the Senate version but only $24 million in the House version. 

Both versions include incentives to purchase hybrid vehicles, including a provision for "plug-in" hybrids, which are said to use even less gasoline than the hybrids currently in use because plug-in hybrids can be charged up from an electrical socket. This provision would cost $706 million in the Senate version and $1.2 billion in the House version. Both versions also include several billions of dollars to encourage the use of energy-efficient buildings and energy-saving devices and appliances.

Revenue-Raising Provisions

One of the offsets included in both tax packages is the elimination of the "section 199" domestic manufacturing tax deduction for oil and gas companies. (The House included the elimination of this deduction in the energy bill it passed earlier this year.) The deduction was made available to energy companies in 2004 when Congress redefined manufactured goods to include oil and gas. (The deduction is 6% of the cost of domestic manufacturing activities this year, rising to 9% in 2010.) The House version would eliminate this deduction for all oil and gas companies and raise $11.4 billion over ten years. The Senate would eliminate it only for large oil and gas companies and would raise $9.4 billion over ten years. The Senate package has more offsets since it includes more tax breaks. Among them are a 13 percent tax on the production of oil and gas in the Gulf of Mexico, projected to raise $10.6 billion over ten years. While criticism of this provision from some Republican Senators was fierce, it is designed merely to obtain payments from those oil companies who are drilling on public lands without paying royalties, which can be used as a credit against the tax. Other offsets include restrictions on foreign tax credits for oil and gas and an increase and extension of the excise tax on oil for the Oil Spill Liability Fund, among other provisions.

Amendment Adopted Includes Controversial Offsets

While marking up the Senate tax package, the Finance Committee adopted an amendment introduced by Ron Wyden (D-OR) that would fund the Secure Rural Schools and Community Self-Determination Act, which provides what are often called "county payments," at a cost of $3.6 billion. The amendment included two revenue-raising provisions to fully offset this cost. One takes aim at tax shelters known as sale-in, lease-out (SILOs). These arrangements, which can involve an American bank buying something like a subway or sewer system in another country and "leasing" it back to the foreign government for tax advantages, were already banned starting in 2004 but that ban would retroactively apply to deals made before 2004 under this provision. Some members of Congress oppose any such retroactive changes in tax laws, but the Senate Finance Committee earlier this year tried to include this change in the tax provisions that were attached to the minimum wage legislation.

 

Energy Bill Debated in U.S. Senate - 6/15/07

The U.S. Senate began debate this week on H.R. 6, a bipartisan energy bill that promises to protect consumers from price gouging, strengthen the economy, increase energy efficiency and develop clean alternative fuels. Senate Majority Leader Harry Reid spoke Monday morning at the Center for American Progress about America's "oil addiction" that has resulted in tax breaks and record profits for the oil-industry while low-income consumers still face higher energy prices.

Senator Reid claims that too few resources are being devoted to the development of clean, efficient, and renewable alternative fuels. The multi-part bill would set new green standards for federal buildings, raise Corporate Average Fuel Economy (CAFE) standards for new cars and trucks to 35 mpg by 2020, reduce crude oil consumption by 10 percent over 15 years by producing renewable fuels, and set new energy efficiency standards. It would also punish companies that "price gouge," provide research funds for carbon sequestration programs, and seek to improve relations with worldwide energy partners.

Debate has been moving swiftly but not without protests from the auto, coal and oil industries who stand to be the hardest hit by reductions in subsidies and the higher CAFE standards. Questions are being raised as to whether or not the bill can garner enough support and still create policies that will prevent consumers from seeing energy prices rise.

As the week ended, Senate Finance Committee Chairman Max Baucus (D-Mont.) released a proposed $13.7 billion package of tax incentives to go along with the energy bill aimed at improving energy efficiency and expanding production. More than $9 billion of the package's cost would be offset by eliminating the manufacturing tax deduction for major oil producers. Baucus expects that the committee markup next week will add another $10-12 billion in additional amendments. Reid hopes to finish the bill by next week.

 

Carbon Emissions Reduction Plans Debated - 6/8/07

Several bills have been introduced in the U.S. Senate to create a cap-and-trade system to reduce carbon emissions. At a recent forum on the topic hosted by the Urban Institute in Washington, DC, debate over the regulation of greenhouse gases focused on the advantages and disadvantages of implementing either a carbon tax or a cap-and-trade program, both of which are market-based approaches to reducing global warming.

A carbon tax is straightforward in that it requires firms to pay a fixed amount for each unit of carbon emissions they produce. This increases the cost of fuels for the producers and is passed down in the form of higher prices to consumers. Both producers and consumers then have the incentive to either consume less, consume more efficiently or find alternate fuels. Firms that use these alternatives avoid paying the tax and reduce their emissions. Firms that don't use the alternatives pay the tax. As with any tax on consumption, a carbon tax burdens people of low incomes disproportionately, making this tax regressive. The tax revenue generated could go toward compensating those impacted most harshly, although it might be difficult to target such compensation towards those affected.

A cap-and-trade program works by setting a limit on total emissions and then distributing allowances for firms to pollute corresponding to that limit. The firms can then trade these allowances, the idea being that this will lead to a more efficient outcome. Firms that can reduce emissions cheaply will do so, and then sell excess permits to firms for which it is costly to reduce emissions. As with a carbon tax, the added cost to firms of buying allowances would cause the price of fuels to increase. This would force consumers to alter their behavior, and also place a heavy burden on low-income families, making this option just as regressive as a tax. However, the government could initially auction off allowances, which would be extremely valuable, and use the revenues to try to target those hardest hit by increased prices.

Both programs are flexible in that the amount of tax, emissions cap, or amount of allowances could be adjusted after implementation. Both programs are likely to have regressive impacts since they would raise consumer prices, and it remains to be seen how this problem might be resolved. The cap-and-trade program seems to be more politically acceptable to many lawmakers who fear anything resembling a tax increase, while many economists favor the carbon tax because it requires less bureaucracy to implement.

 

Energy Buzz on the Hill - 5/4/07

While the 110th Congress has not yet passed any major tax legislation related to energy, the level of interest among members is so intense that it seems likely that some legislation will be sent to the President's desk. There are plenty of options. A paper from Citizens for Tax Justice from December pointed out that at very least Congress could repeal several tax subsidies that provide billions of dollars to oil and gas companies at a time when energy prices are at record highs. 
 
Legislation Passed in the House is Only the Beginning
 
Back in January the House passed the Creating Long-Term Energy Alternatives for the Nation (CLEAN) Act (H.R. 6), which repealed two of the tax subsidies criticized by CTJ.  The first is the domestic manufacturing deduction for gas and oil, and the second is the five-year amortization of geological and geophysical expenditures, or, in plain English, the faster write-off of the cost of exploring for oil and gas. Other provisions would close loopholes that have allowed companies drilling on public lands to avoid paying royalties. Revenues raised through these provisions would go into a fund used to increase the development of alternative energy sources. The House Ways and Means Subcommittee on Select Revenue Measures held hearings last week on further steps the House could take, and members spoke of several possible measures. One that came up frequently was extending the Section 45 Renewable Electricity Production Credit, which is a credit for the production of energy from various alternative sources. 
 
Different Direction Possible in the Senate
 
Things move more slowly in the Senate, which has not acted on H.R. 6, but some Senators have indicated that they might add provisions from that bill to other energy legislation. Last week Senator Robert Casey (D-PA) introduced a bill (S. 1238) with several energy tax provisions. An accounting method that reduces taxes for oil companies ("last in, first out" or LIFO) would be curtailed. The faster write-off for exploring for oil and gas would be repealed, as in the House bill, as would several loopholes allowing companies to escape paying royalties when they drill on public lands. The bill would also repeal another tax break criticized by CTJ, the foreign tax credit for energy companies that aren't really paying foreign taxes. The revenue raised from these provisions would go towards research on ethanol and biodiesel and towards alternative energy infrastructure.
 
A Windfall Profits Tax?
 
A more controversial part of Casey's bill would raise a "windfall profits tax" on oil companies equal to 50 percent of the portion of sales prices exceeding $50 per barrel. Companies would be able to lower or eliminate the tax by making certain investments, including investments in alternative energy production. The revenue raised would be put in a fund to help low-income people purchase gasoline or pay for public transportation.  

 

Carbon Tax - 4/20/07
Dodd Becomes the First Presidential Candidate to Endorse Tax on Emissions  

Presidential candidate and Senator Chris Dodd (D-CT) announced his support this week for a tax on carbon emissions as a way to reduce global warming. Other candidates have avoided any talk of raising taxes as a way to combat CO2 emissions and most have avoided talk of tax increases altogether. But even conservative economists have been publicly promoting the carbon tax for some time now. While most Democrats in Congress have been considering several "cap-and-trade" programs that would limit the overall amount of CO2 emissions and allow companies to trade rights to pollute amongst themselves, several economists and even business leaders have lately argued that a carbon tax would be less burdensome. Part of the reason is the great bureaucracy required to measure emissions from individual plants under a cap-and-trade system. Another reason is that a carbon tax would create more certainty about how much it costs to pollute. Some environmental groups, however, worry that a carbon tax sets no overall limit on pollution the way a cap-and-trade system would. The challenge for proponents of the carbon tax is to design it in a progressive way. Otherwise, it would be passed onto consumers and therefore act much like a consumption tax, which is always regressive. Working families probably don't use less gasoline than rich families, but if they pay the same carbon taxes (indirectly) that means the carbon tax will take a greater percentage of a working family's income. A progressive version might have to somehow target offsetting tax cuts towards those hardest hit by the carbon tax. 

 

Democrats Target Tax Loopholes for Big Oil, CTJ Names the Biggest Loopholes - 12/19/06

A paper from Citizens for Tax Justice describes some of the biggest tax loopholes enjoyed by Big Oil and what steps members of Congress have proposed to deal with them. When the price of oil and oil industry profits are at an all-time high, it's hard to imagine why the United States should subsidize Big Oil through the tax code. The new Congressional leadership understands this, and we hope the President does as well.

House of Representatives Passes CLEAN Act, First Step in Ending Subsidies to Big Oil

In what some Democratic members of Congress are calling a first step towards a larger change in energy policy, the House of Representatives on Thursday passed the Creating Long-Term Energy Alternatives for the Nation (CLEAN) Act (H.R. 6). The legislation only repeals two of the tax subsidies directed at oil and gas companies that CTJ has criticized. One is the domestic manufacturing tax deduction, which is available for oil and gas companies only because a provision of the 2004 tax cut bill redefined manufactured goods to include oil and gas. The White House has argued that it would be unfair for manufacturing companies, but not energy companies, to take advantage of this tax subsidy. The other is the five-year amortization of geological and geophysical expenditures (the faster write-off of the cost of exploring for oil and gas, in other words), which would be changed to a seven year amortization. Other provisions would close loopholes that have allowed companies drilling on public lands to avoid paying royalties. Around $14 billion of savings would be reallocated towards the development of alternative energy sources.

 

Estate Tax:

House Finally Gets It Right on Estate Tax, But Trouble Is Brewing in the Senate - 10/12/07

Before the House passed the bill ending the private debt collection program, Republican members used procedural rules to force a vote on a complete, unpaid for repeal of the estate tax. The measure was defeated 212-196, a major setback for the handful of super-rich families that have been funding a repeal campaign for several years. The House has voted several times during the Bush years to repeal the estate tax. According to a statement from Republican Whip Roy Blunt (R-MO) 42 Democrats voted to repeal the estate tax the last time it came up for a vote while this time only ten did, indicating that several have decided for the first time to stand up to the extreme anti-tax rhetoric used by opponents of the estate tax.

Supporters of a fair estate tax needed this news after developments in the Senate last week. As the Senate Finance Committee marked up its tax package for the agriculture bill reported on last week, Senator Jon Kyl (R-AZ) offered an amendment to significantly reduce the estate tax without paying for it. Senator Kyl only withdrew his amendment after Senate Finance Chairman Baucus agreed to hold a hearing on the estate tax sometime this year and mark up a bill in the spring.

Fewer Than One Percent of Estates Subject to Tax

The most recent data released from CTJ show that the percentage of estates subject to the tax was less than 1 percent in most states in 2005. Even fewer estates are likely to be taxable this year because the exemption is larger ($2 million for a single taxpayer vs. $1.5 million in 2005). Under the estate tax cut enacted by the Bush and the Republican-led Congress, the estate tax is gradually reduced until it disappears in 2010, but then returns in 2011.

Some lawmakers want to compromise and essentially freeze in place the estate tax rules that will be in effect in 2009, including a $3.5 million exemption for single taxpayers and a 45 percent rate. The budget resolution Congress adopted for fiscal year 2008 assumes that this compromise will be enacted. The amendment offered by Kyl last week would have gone much farther because it would increase the exemption to $5 million, tax the value of the estate between $5 million and $25 million at 15 percent and then tax the rest at 30 percent.

In Search of the Elusive Family Farm Threatened by the Estate Tax

Much of the rhetoric used by estate tax opponents revolves around family-owned small businesses, especially farms, that they claim are endangered because of the estate tax. Contrary to what the anti-tax advocates claim, very few farms or small businesses, if any, would ever have to be sold because of estate taxes.

According to the Congressional Budget Office, there were only 1,659 farm estates that were taxable in 2000 (when the estate tax was steeper because the exemptions were smaller and the rate was a little higher) and of these, only 138 did not have enough liquid assets to pay their estate taxes immediately, meaning some part of the estate could conceivably be sold in order to pay the tax. The CBO also found that if the exemption level was as high as it is today only 15 farm estates would have been both taxable and lacking the liquid assets to pay the tax. 

Those 15 farm estates would likely weather the estate tax just fine. This CTJ paper describes the extra breaks that family farms get from the estate tax (in addition to the exemptions all estates get) including a provision that allows the tax to be paid off over a period of 14 years. The American Farm Bureau Federation famously admitted to the New York Times in 2001 that they could not cite a single example of a farm that had to be sold due to the estate tax.

 

 


Federal Budget:

Rep. Obey Proposes Progressive Surtax to Fund Iraq War - 10/5/07

In 2003, then-Speaker of the House Republican Denny Hastert argued for the first major tax cut during a war in U.S. history, saying, "Nothing is more important in the face of war than cutting taxes." During that year, the centerpiece of President Bush's tax cut plan was enacted, the low 15 percent rate for capital gains and dividends. In 2005, this break cost about $92 billion and three fourths of it went to the richest 0.6 percent of taxpayers. Instead of asking Americans to make a sacrifice, the President guaranteed Americans that our economy depended on deficit-financed tax cuts aimed at the wealthy.
 
Four years later, has anything changed? On Tuesday, Congressman David Obey (D-WI), chairman of the House Appropriations Committee proposed a surtax to raise $145 to $150 billion a year to pay for the war in Iraq. Under his proposal, low- and middle-income taxpayers would see a two percent increase in their federal income tax bills, while wealthier people would see a 12 to 15 percent increase.
"Some people are being asked to pay with their lives or their faces or their hands or their arms or their legs," Obey told the Washington Post. "If you're going to ask for that, it doesn't seem too much to ask an average taxpayer to pay 30 bucks for the cost of the war so we don't have to shove it off on our kids."
 
Even though such temporary taxes have been used to fund wars in the past, the anti-tax establishment pounced immediately. White House press secretary Dana Perino said, "Well, we've always known that Democrats seem to revert to type and they are willing to raise taxes on just about anything. There's no need to increase taxes." When asked to compare the President's refusal to fund an expansion of SCHIP with his willingness to spend hundreds of billions of deficit-financed dollars on the Iraq war, she called the Democrats "completely irresponsible" for wanting to raise taxes to pay for children's health care and the war.

In other words, the White House's fun-house mirror version of fiscal realities has not changed since the outset of the war. In their eyes, the responsible thing to do is have tax cuts and a war that are both deficit-financed, while paying for these things would be "completely irresponsible."
 
Meanwhile, Congress just raised the limit on the amount of debt the federal government can rack up for the fifth time since Bush took office.

 

President's Reckless Tax and Fiscal Policies Force Congress to Raise National Debt Limit Again - 9/14/07

A new short paper from Citizens for Tax Justice examines the debt accumulated under President Bush in light of the Senate Finance Committee's vote to raise the national debt ceiling again. President Bush has added $3 trillion to the national debt so far, despite inheriting a balanced budget when he took office in 2001. Since then, Congress has been forced to raise the statutory limit on the total amount the federal government is allowed to borrow four times - in 2002, 2003, 2004 and 2006.

On Wednesday the Senate Finance Committee approved legislation to raise the debt limit a fifth time, to an unprecedented $9.815 trillion, to prevent the federal government from defaulting on its debts and being unable to borrow any more. In contrast, when Bush took office, the debt limit was $5.950 trillion - $3.9 trillion less than the new amount.

What has caused the budget deficits over the past six years? The largest cause is the cuts in federal income taxes enacted by President Bush and Congress. The total cost of the Bush tax cuts, including interest on the money borrowed to finance them, has been just over $1.4 trillion so far about half of the total increase in the national debt under Bush so far.

 

Bush Administration Struggles to Present Deficit Numbers as Evidence that Tax Cuts Help the Economy - July 13, 2007

The Administration has reduced its economic growth projections but is still arguing that its tax policy is stimulating the economy. President Bush is now touting projections that the federal budget deficit for fiscal year 2007 will be only $205 billion as proof. The projections came Wednesday in the Mid-Session Review from the Office of Management and Budget. The Center on Budget and Policy Priorities rightly points out that revenues have increased, reducing the deficit from its high of $413 billion in 2004, but that always happens in an economic recovery, and usually revenues increase by more (by around 12 percent, as opposed to the 3 percent increase that we've seen since the beginning of this economic cycle in 2001). What's more, revenue increased by 16 percent in a similar period in the economic cycle during the 1990s after taxes were increased. Finally, the Administration actually reduced its growth forecast for this year from what it projected back in February.

 
The only thing we would add is that the real deficit is bigger than $205 billion. The Mid-Session Review clearly indicates (on page 32) that the Administration will borrow $180 billion from the Social Security Trust Fund this year to keep the total deficit as low as $205. Social Security is projected to collect $180 billion more in payroll taxes than it will pay out in benefits this year. Social Security was changed back in the 1980s to collect a surplus that would make it easier to pay benefits later on, when the baby boomers retire in large numbers and more Social Security benefits must be paid out. The Social Security Trust Fund is essentially the accounting mechanism that keeps track of this, and it was never intended to be used to make budget deficits appear smaller than they really are. Not counting the Social Security surplus, this year's budget deficit is really $385 billion.

 

Congress Passes Budget that Revives PAYGO - 5/18/07

Yesterday, Congress passed the final budget resolution for fiscal year 2008 which foresees $2.9 trillion in spending, including $954 billion for annually appropriated programs. This is $21 billion more than requested by the President's plan, which was criticized by many Democrats and advocates for short-changing human needs services.
 
PAYGO Rule Revived, But Plans to Waive It for Some Tax Breaks
 
The effect of the budget resolution on future tax cuts is a little confusing to people who are not budget experts. The budget revives the "pay-as-you-go" rule, or PAYGO, which creates a point of order in the Senate against new entitlement spending or tax breaks that are not paid for. (This can be waived with 60 votes.) At the same time, the budget does assume that Congress will agree to waive PAYGO to spend $180 billion over 5 years on extending some of the Bush tax breaks that are being called middle-class tax breaks (even though they include estate tax reduction for very large estates). 
 
Also in the $180 billion tax cut package are extensions of the child credit, marriage penalty relief, the 10 percent tax rate and a one-year "patch" for the Alternative Minimum Tax (which essentially extends the exemption that keeps most people from paying for the AMT for another year). (Click here for a list of all the Bush tax cuts.) This tax break language originated in the Senate at the behest of Finance Committee chairman Max Baucus (D-MT). The budget plan projects that if Congress followed PAYGO for the next five years, a surplus of $156 billion would appear in fiscal year 2012, but the tax breaks in that year alone would whittle that surplus down to $41 billion. 
 
A "trigger" provision applies to the House, which adds another point of order (besides PAYGO) against tax breaks if the surplus is not still projected to appear a couple years into this five-year period. The Senate was adamant that this provision should not apply to them, apparently because they want to vote for tax breaks regardless of whether there is a surplus that can be used to pay for them. Even if the surplus appears in 2012, it is calculated to include the Social Security surplus, which was never intended to be used to finance tax breaks and should not be seen as money available for that purpose.  
 
Resolution Does Not Raise Taxes
 
Republican opponents of the budget resolution have been quick to say that it raises taxes. As CTJ has pointed out, the resolution does not raise a cent of taxes but says that any tax cut must be paid for under PAYGO. (Even Baucus's extension of "middle-class" tax breaks would require a waiver of PAYGO). The Republicans are complaining because when they held the majority in Congress they structured their tax breaks to expire after 2010. They know they cannot extend them without increasing the federal budget deficit, which PAYGO is geared to prevent.
 
Most Responsible Budget in Years
 

PAYGO is one reason why this is the most responsible budget we've seen in six years. The President has no role to play in the budget plan because it's a resolution (not a law) that Congress uses to set the overall spending level and to create procedural rules that will guide them as they craft bills to meet the targets spelled out in the resolution. However, the administration has threatened that the President may veto individual spending bills that implement the higher spending goals. 

 

Congress Considers Taking Money from Social Security to Extend Tax Breaks - 5/4/07

House and Senate leaders are hoping to overcome some disagreements so that they can appoint conferees and finalize a budget plan before the middle of May. Democratic leaders in both the House and Senate initially proposed budget plans that would supposedly produce a budget surplus by 2012. The Senate plan was amended before it was passed, at the urging of Max Baucus (D-MT), to spend that alleged surplus on tax breaks and, to a much lesser degree, on expanded children's health care.

Members of the House passed their plan without any such amendment. Now the two budget proposals must be reconciled and the House must decide whether to accept the Baucus amendment in the final budget plan. Few have noted that the surplus they're talking about doesn't really exist. The "surplus" money that would be spent on tax cuts and so forth would really be taken from funds that are supposed to be used to shore up Social Security.

In 2012, the Social Security surplus, which is supposed to be separate from the rest of the federal budget, is projected to be $248 billion. The Senate budget plan, as initially proposed, would produce a surplus of $132 billion in 2012  but that includes the Social Security surplus. So clearly the federal government is relying on the Social Security surplus to stay in the black. If the Baucus amendment is adopted in the final budget, that would essentially mean the Social Security surplus is being spent, mostly on tax cuts.

Of course the House and Senate budget plans are far more responsible than the President's since at least they revive the "pay-as-you-go" rule, or PAYGO, which helped us balance the budget in the 1990s. But the Baucus amendment, if adopted in the final budget, will be a pledge to waive PAYGO to spend the projected "surplus" that's supposedly coming in 2012.

 

The Myth of the "Biggest Tax Increase in History" - 4/2/07

Critics of the budget resolutions recently passed by the U.S. Senate and House of Representatives are claiming that these budget plans include the "biggest tax increase in history." The truth is that they don't raise a single cent in taxes.

Citizens for Tax Justice released a response to these claims today explaining that the real cause of angst among these critics is the pay-as-you-go (PAYGO) rules that Congress wisely has decided to revive to prevent the federal government from digging itself into deeper debt.

Recently Passed Budget Resolutions Do Not Increase Taxes Despite Accusations of "Biggest Tax Increase in History"

"The President's allies in Congress understand that they have no serious plan to balance the budget while also extending their cherished tax cuts," said Robert S. McIntyre, director of Citizens for Tax Justice. "That's why they want to exempt their new tax cuts from the PAYGO rules. In other words, what they really want is the biggest deficit increase in history."

http://www.ctj.org/pdf/budgetres040207.pdf

House Approves Budget Resolution - 3/30/07
Like the Senate Version, It's More Responsible Than the President's Budget

The U.S. House of Representatives approved a budget resolution Thursday that would require any extension of the Bush tax cuts, which expire at the end of 2010, to be offset with new revenues or spending cuts to avoid increasing the deficit. Like the Senate version, this budget resolution includes pay-as-you-go (PAYGO) rules and is supposed to balance the budget by 2012 (at which point it claims to produce a surplus of $153 billion). The plan is not perfect. Like the Senate version and the budget proposal offered by the President, this "balanced budget" projection includes the Social Security surpluses, which are really supposed to be counted separately from other revenues as explained in last week's Digest. 

Nonetheless, the House should be commended for passing a budget that shrinks deficits and does not assume that tax cuts will be extended without being offset, as the President's budget does. Republicans are trying hard to portray the budget plan as a tax increase because it requires extension of the tax cuts to be paid for. The tax cuts enacted over the past six years (when Republicans controlled the House, Senate and White House) were written to expire at the end of 2010, so any extensions will in fact be new tax breaks. Prohibiting new tax breaks or new spending that is funded by increased borrowing is a common sense reform that helped balance the federal budget in the 1990s.

 

Senate Passes Budget - 3/23/07

Irresponsible Amendments Added But It's Still Better Than the President's Budget
 
The Senate voted 52-47 on Friday to pass a budget resolution (S. Con. Res. 21) requiring any extension of the Bush tax cuts to be paid for. The vote marked a victory for Democrats, who seek to avoid the embarrassments of the Republican-controlled Congress that failed to pass a budget last year. However, several amendments were added to the budget resolution on the floor that, if they survive the conference committee and remain in the final version passed by the House and Senate, will make it more difficult for Congress to end budget deficits. Nonetheless, the Senate budget still can be viewed as far more responsible than the budget plan proposed by President Bush. The main reason for this is that the Senate plan maintains the pay-as-you-go, or PAYGO, rules that require any new entitlement spending or any new tax cuts including any extension of the Bush tax cuts which expire at the end of 2010  to be offset with spending cuts or revenue increases elsewhere in the budget.
 
Spending the Social Security Surplus
 
Both the President's plan and the Senate plan rely on some flawed assumptions in order to appear to balance the budget within five years. The President's budget proposal was far more irresponsible, since it assumed the Bush tax cuts would all be made permanent and huge cuts would be made in public services. One problem with both plans is that they would continue the practice of borrowing the Social Security surplus (the Social Security taxes collected in excess of the Social Security benefits paid out in a given year). This money is supposed to be used to pay down the national debt to free up money in the future so that we can more easily pay the benefits of the baby boomers when they retire. (This is the idea behind the Social Security Trust Fund.) The Senate budget plan as originally presented by Budget Committee Chairman Kent Conrad was supposed to produce a "surplus" of $132 billion in 2012, but if you don't count the Social Security surplus that year, the budget would not quite be balanced.
 
Amendments Make Matters Worse
 
But even this illusion of responsible budgeting was more than the Senate could handle this week. An amendment offered by Senator Max Baucus (D-MT) was adopted 97-1 to spend this imaginary "surplus" on extending certain parts of the Bush tax cuts. If this provision remains in the final version approved by the House and Senate, it would not change the fact that any such proposal to extend the tax cuts without offsetting the costs would still violate PAYGO and thus require 60 votes in the Senate to overcome a point of order. But with the support of 97 Senators, it could signal that the Senate's commitment to PAYGO is shaky. 
 
The Senate also voted 63-35 to adopt an amendment offered by Senator John Cornyn (R-TX) which would require a supermajority of 60 votes in the Senate to increase tax rates. This provision could prove problematic if, for example, Congress wants to pay for reform of the Alternative Minimum Tax (AMT) by rolling back some part of the Bush tax cuts for the wealthiest taxpayers.
 
Worst Case Scenario Avoided 
 
Fortunately, the worst proposed amendments were turned away by the Senate. For example, an amendment to exempt extensions of the Bush tax cuts from PAYGO rules was defeated. The Senate also rejected amendments to further cut the estate tax and repeal the AMT without paying for it.

The House of Representatives will likely vote on their budget resolution next week, and a conference will likely take place after the Congressional recess to work out differences between the Senate version and the House version.

 

Senate Democrats' Budget Plan Would Block Tax Cuts if Not Paid For - 3/16/07

The Senate Budget Committee approved a plan Thursday that would allegedly bring the budget into surplus by 2012. The resolution would also require any extension of the Bush tax cuts or reform of the Alternative Minimum Tax (AMT) to be paid for. The budget resolution is the blueprint for spending and revenues in fiscal year 2008 and also sets goals for a five-year period. The resolution revives a PAYGO requirement, meaning any new entitlement spending or new tax cuts must be offset with either increases in revenue or cuts in spending. The Bush tax cuts were specifically written to expire in 2010 so the baseline used by the Congressional Budget Office also assumes a 2010 expiration. By retaining this assumption and reviving PAYGO, the resolution would force Congress to either let the tax breaks expire in 2010 or come up with money to offset whatever parts of the tax breaks they want to extend.
 
The budget resolution would allow discretionary programs (programs for which Congress must approve funding each year) to receive $16 billion more than the President's proposed budget in fiscal year 2008. But the President's proposed discretionary funding level is actually a $10 billion cut below what would be needed to keep up with inflation, so the Senate Budget Committee is only suggesting a very modest increase in spending. The budget resolution would also allow for an expansion of the State Children's Health Insurance Program (SCHIP) if Congress finds a way to pay for it.
 
Is Requiring a Balanced Budget the Same Thing as Hiking Taxes?
 
The proposal has been criticized by opponents like the ranking Republican on the Senate Budget Committee, Judd Gregg (R-NH) (who did not oversee any budget improvement during his time as the Budget Chairman). Gregg claims that the proposed resolution is dodging important decisions by not specifying where the extra revenues for SCHIP expansion and other initiatives will come from, but budget resolutions under the Congressional process established in 1974 are not supposed to instruct the appropriations committees or the tax-writing committees exactly what to do. Rather, the resolution is to only provide the overall spending and revenue goals for the committees. Gregg and others are also saying that any requirement that tax cuts be paid for is a tax increase that must be opposed. This logic seems to favor increasing the national debt, and the interest payments on it, indefinitely or making massive (and politically unlikely) cuts in services Americans currently depend on.
 
In Search of a Free AMT Fix 
 
The critics also have attacked the proposal's assumption that revenue will be needed to "fix" the AMT only for two years, when no one really thinks Congress will allow the AMT to revert to current law and start reaching tens of millions of taxpayers. But this is actually consistent with the desire to stick to PAYGO. Any change from current law (and the AMT will reach tens of millions more people under current law) that loses revenue must be offset to avoid increasing deficits. Perhaps the first step in countering these criticisms would be for Congress to fix the AMT in a budget-neutral manner as proposed by Citizens for Tax Justice. The House Democrats will present their budget propsal next week.

 

President's "Balanced Budget" Plan Ignores Borrowing from Social Security and Assumes Unrealistic Spending Cuts - 2/9/07.

On Monday the White House released the President's proposed $2.9 trillion federal budget for fiscal year 2008 along with proposals the administration says will balance the budget by 2012. As a new analysis from Citizens for Tax Justice explains, the President's plan relies on various tricks in order to come to the conclusion that Congress can make permanent the Bush tax breaks while also balancing the budget. First, the President includes in his revenue estimates the Social Security surplus, which is projected to be $248 billion in 2012. But that surplus, which is officially saved in the Social Security Trust Fund, is supposed to be used to pay down the national debt so that the federal government is better able to keep paying benefits when the huge baby-boom generation retires. That's the reason Social Security is currently taking in more money than it pays out in benefits. Keeping Social Security separate would show, according to the President's numbers, a deficit of $187 billion in 2012.
 
But it gets worse. The second trick the President uses is an assumption that Congress will pass massive cuts in vital services - even bigger cuts than were ever enacted when the Republicans ran Congress. The plan actually assumes that spending on defense and homeland security in 2012 will be down 22 percent, as a share of GDP, from its 2006 level, and all other appropriations will be down 29 percent, as a share of GDP, from its 2006 level. Even though Congress is unlikely to make such cuts, they should be taken very seriously in the sense that they begin to show the true costs of the tax breaks. If the Bush tax breaks are made permanent, cuts in government services of this magnitude are only the begining of what will inevitably follow. The Coalition on Human Needs provides a description of these proposed cuts in services. 

There are several other faulty assumptions used in the administration's projections. One is that revenues will grow more than they have over the past six years. The more realistic revenue projections from the Congressional Budget Office for 2012 are $155 billion lower than the administration's revenue projections.

 


Health Care:

Bush Vetoes Children's Health Care Bill, Continues to Promote His Faulty Tax Proposal - 10/5/07

This week President Bush vetoed the bill to expand the State Children's Health Insurance Program (H.R. 976) that was approved by the Senate and House of Representatives last week. The bill would increase funding for the program by $35 billion over ten years by increasing the federal tobacco tax for cigarettes from 39 cents to a dollar per pack. The President has promoted his own idea for expanding health care -- a change in the tax code that would weaken the employer-based health care system without guaranteeing that it's replaced with a viable alternative.
 
The President's own proposal would eliminate the deduction for employer-provided health insurance and instead offer a deduction for health insurance purchased on the individual market (for the purchase of coverage that is not employer-provided). The President's proposal would basically make the tax code biased towards individually purchased health care and even high-deductible health care. There would no longer be any tax incentive for employers to provide health care, so many could "cash out" the health care benefits they currently offer, meaning some employees would receive additional monetary compensation instead of health insurance. The problem is that these employees would have to turn to the individual health insurance market, where plans offered are much more expensive and less generous. The Center on Budget and Policy Priorities explains this and other problems with the concept.
 

None of this is to say that the way the tax code currently treats health care is optimal. The deduction for employer-provided health insurance provides the greatest benefit for those in the highest income brackets and the lowest benefit for those in the lowest income brackets, making it an undeniably regressive policy. Also, it does nothing for the estimated 45 million Americans lacking health insurance.

 

Bush Prepares to Veto Expansion in Children's Health Care- 9/28/07

A bill to expand the State Children's Health Insurance Program (H.R. 976) was approved by the House of Representatives on Tuesday and the Senate on Thursday. The bill would increase funding for the program by $35 billion by increasing the federal tobacco tax for cigarettes from 39 cents to a dollar per pack.

President Bush has threatened to veto the bill, which did not pass the House by the two-thirds majority needed to override a veto. The White House argues that expanding SCHIP will "crowd out" private insurance. The Congressional Budget Office has found that two thirds of the children receiving health care as a result of an SCHIP expansion would be those who would otherwise not have health insurance.
 
Health care economist Jonathan Gruber has pointed out that the "crowd-out" effect of SCHIP is probably the lowest of any health care proposal. He has argued that, in comparison, the President's tax proposals to expand health care have benefits much more concentrated among those who already have health insurance.
 
Citizens for Tax Justice has noted that cigarette taxes (whether on the federal or state level) are regressive, meaning they take a larger proportion of income from a poor family than from a wealthy family, but they may nevertheless be the most viable option for funding an important health care initiative at this time.
 
It's true that if two smokers, one poor and one wealthy, are smoking the same amount and paying the same tax of one dollar a pack, that one dollar equals a larger percentage of total income for the poor smoker than for the wealthy smoker. It's always better to fund important programs with progressive taxes, but the health care crisis among low- and middle-income families requires compromise. Unlike President Bush, Democrats and many Republicans in Congress have shown that they are willing to make such a compromise.

 

President Claims His Proposal Will Fix Inequity in Tax Code, Research Shows SCHIP Can Do Better - 8/3/07

The federal government's primary approach to helping the middle-class access healthcare is through the tax code. Most importantly, employers can deduct funds used to provide health insurance to employees, who generally exclude the benefits from income. This is not the most rational or comprehensive approach but has helped middle-class people obtain health insurance.

The deduction for employer-provided health insurance is projected by the Congressional Joint Committee on Taxation to cost the federal government $534 billion from 2006 through 2010. Deductions for health insurance premiums available to the self-employed will cost another $22.6 billion between 2006 and 2010. While many middle-class families have obtained health insurance through this route, there are many ways in which it may not be an efficient or equitable policy. For one thing, the tax benefit is greatest for those in the highest income brackets and lowest for those in the lowest income brackets, making it an undeniably regressive policy. Also, it does nothing for the estimated 45 million Americans lacking health insurance. The rising high cost of health care has caused many employers, particularly small businesses, to decide to not provide health insurance to their workers, despite the tax break that would benefit the employees.

White House Proposal Could Make Matters Worse

President Bush argues that his health care tax proposal would remedy this situation. He would eliminate the deduction for employer-provided health insurance and instead offer a deduction for health insurance purchased on the individual market (for the purchase of coverage that is not employer-provided) The reality is that his plan could weaken employer-provided health insurance without ensuring that an adequate alternative takes its place. The President's proposal would basically make the tax code biased towards individually purchased health care and even high-deductible health care. There would no longer be any tax incentive for employers to provide health care, so many could "cash out" the health care benefits they currently offer, meaning some employees would receive additional monetary compensation instead of health insurance. The problem is that these employees would have to turn to the individual health insurance market, where plans offered are much more expensive and less generous.  

A recent summary of research from the Center on Budget and Policy Priorities notes studies showing that most low-income people trying to obtain coverage on the individual health insurance market have difficulty and over a quarter are denied coverage or are charged much more because of a pre-existing condition. The types of coverage available on the individual market often result in greater out-of-pocket expenses that will cause some low-income people to forego necessary health treatments.

Public Programs Like SCHIP More Efficient than Tax Subsidies - Yet Face Presidential Veto

The President has claimed his proposal would be more efficient than the House and Senate bills to expand the State Children's Health Insurance Program (SCHIP), which the two chambers approved this week. The White House argues that expanding SCHIP will "crowd out" private insurance. The Congressional Budget Office has found that two thirds of the children receiving health care under either bill would be those who would otherwise not have health insurance. Health care economist Jonathan Gruber has pointed out that the "crowd-out" effect of SCHIP is probably the lowest of any health care proposal, and that the majority of benefits from the President's health care proposals go to those who would have health insurance anyway.

On August 2, the Senate passed its SCHIP bill, which increases the federal cigarette tax by 61 cents to one dollar per pack to offset the costs. The House passed its broader bill, which increases the federal cigarette tax by 45 cents per pack and includes other revenue-raising provisions, on August 1. The President has indicated that he would veto either version.

 

Crunch Time for Congress - 7/27/07

Democratic leaders in the House and Senate hope to bring an expansion of the State Children's Health Insurance Program (SCHIP) to the floor next week. The Senate Finance Committee has approved a $35 billion expansion that would be funded by a 61 cent increase in the federal tobacco tax (bringing the tax to a dollar per pack of cigarettes). Many have pointed out that cigarette taxes are regressive, but others have argued that this is the only funding mechanism that will produce anything close to bipartisan agreement in Congress.

 
The House Ways and Means Committee worked into Thursday night and Friday morning to approve a broader bill (H.R. 3162) that would include a $50 billion SCHIP expansion and a 45 cent increase in the federal tobacco tax. The House bill also would end the federal government's practice of paying more for people using Medicare Advantage (HMOs within Medicare that tend to attract healthier people) than it does for traditional Medicare. The House Energy and Commerce Committee, which has jurisdiction over SCHIP, was also working on the bill as of this writing.
 
The President has threatened to veto this legislation, saying it represents an expansion of the government that will "crowd out" private insurance. The Center on Budget and Policy Priorities has pointed out that most of the children who would get health insurance under the bills are those who already meet the eligibility requirements but are not enrolled, and that the majority by far are children who would otherwise not have health insurance.

 

President Opposes Expanding Health Insurance Program for Children, Supports Tax Changes that Shift Health Risks to Individuals - 6/29/07

President Bush stated Wednesday that he opposed expanding the State Children's Health Insurance Program (SCHIP) and would rather Congress enact his proposal to create a standard deduction from federal taxes for health insurance, whether it's employer-provided or purchased in the individual health insurance market. The President's proposal, which he first announced during his State of the Union address in January, has little chance of being enacted. It is widely opposed by many in Congress because it could undermine employer-based health insurance without guaranteeing that an adequate alternative would take its place. 
 
President's Proposal would Shift Risk onto Individuals and Families
 
The stated purpose of the proposal is to "even the playing field" between those with employer-provided coverage (which is currently subsidized through the tax code) and those who purchase coverage in the individual health insurance market (which is mostly not subsidized under the tax code). Unfortunately, rather than evening the playing field, the President's plan would make the tax code more biased towards individually purchased health care and maybe even high-deductible health care. There would no longer be any incentive for employers to provide health care, so many could "cash out" the health care benefits they currently offer and employees would have to turn to the individual health insurance market, where plans offered are much more expensive and less generous. Since the amount of the new deduction would be indexed to regular cost inflation but not to health care inflation (which is steeper) more and more people over time would find that their coverage costs more than the new deduction.
 
Little Effort at Practical Solutions in the White House 
 
The President's words seemed geared towards satisfying certain ideological interests rather than finding practical solutions. He cast the issue as a choice between government intrusion in people's lives and the freedom of individuals to make choices in the market. As the Center on Budget and Policy Priorities has pointed out, most SCHIP and Medicaid recipients already choose between different private health plans that have contracted with their state and that have agreed to meet certain standards.
 
The President also invoked the fear that public health insurance "crowds out" private health insurance. The preeminent health economist whose work is often used to make such claims, Jonathan Gruber, has said that the public programs like SCHIP result in an increase in coverage among children who would otherwise go without health insurance and this far outweighs any "crowding out" of private insurance. 
 
As reported in last week's Digest, one proposal being considered by Congress would pay for an SCHIP expansion with increased federal tobacco taxes.

 

Federal Tobacco Tax Hike May be Used to Partially Fund SCHIP Expansion - 6/22/07

Should federal tobacco taxes be raised from their current level of 39 cents a pack to help pay for health insurance for uninsured children? That question may be addressed soon, as the Senate Finance Committee and the House Ways and Means Committee are expected sometime this summer to mark up legislation to fund an expansion in the State Children's Health Insurance Program (SCHIP) that will cost $50 billion over five years. In February Senator Gordon Smith (R-OR) proposed raising the federal tobacco tax to about a dollar per pack, which he has recently said would raise as much as $35 billion of the $50 billion needed for the SCHIP expansion. The Campaign for Tobacco-Free Kids released a survey recently showing that two thirds of voters support hiking the federal tobacco tax by as much as 75 cents a pack if the funds go towards health care for uninsured children.
 
As the Campaign for Tobacco-Free Kids has pointed out, cigarette taxes are an effective policy if the goal is simply to reduce smoking or to prevent young people from taking up the habit. But using this revenue source to fund important programs is more problematic. Cigarette taxes (whether on the federal or state level) are regressive, meaning they take a larger proportion of income from a poor family than from a wealthy family. (If two smokers, one poor and one wealthy, are smoking the same amount and paying the same tax of one dollar a pack, that one dollar equals a larger percentage of total income for the poor smoker than for the wealthy smoker). It's always better to fund important programs with progressive taxes. Tobacco taxes also provide less funding over time, since they do not increase with inflation or with the price of cigarettes generally, so they are rarely a "permanent" solution to any funding problem.
 
Nevertheless, expanding health insurance for children is an extremely important priority that may require compromise. Tobacco taxes are not an ideal funding source, but then again, legislation produced by Congress is rarely ideal.

 

The Benefits of Closing the Tax Gap - 3/9/07

Congressmen Rahm Emanuel (D-IL) and Ray Lahood (R-IL) have put forward a bipartisan proposal to use revenues collected through better enforcement of capital gains taxes to double the funding of the State Children's Health Insurance Program (SCHIP) over the next 5 years to $60 billion. Ten billion dollars of this increase would go to children not currently covered by SCHIP. Families whose income is between 200% and 350% of the federal poverty level ($20,000 for a family of 4) would receive an advanceable and refundable tax credit to purchase health insurance for children.

The proposal to improve capital gains enforcement has already been presented as a bill by Representative Emanuel (H.R. 878) that would require securities brokers to report a customer's basis (generally the purchase price) in securities transactions to prevent understating the capital gains on such transactions. This step was one the suggestions offered by Citizens for Tax Justice to the Senate Budget Committee in January. The President included a similar proposal in his budget for fiscal year 2008. As reported in last week's Tax Justice Digest, another proposal to expand SCHIP would use revenue from an increased federal cigarette tax. The Center on Budget and Policy Priorities has a new report that outlines various ways of paying for an SCHIP expansion.

 

Should Cigarette Taxes Be Used to Pay for Healthcare? - 3/2/07

Twelve states are considering proposals to hike cigarette taxes, mostly in order to pay for healthcare initiatives, while a proposal in the U.S. Senate would hike the federal cigarette tax to fund an expansion of the State Children's Health Insurance Program (SCHIP). Of the 12 states, seven would use the money for healthcare. The increase may now be off the table in one of those states, Indiana. Governor Mitch Daniels's proposal to increase the tax from 55.5 cents to 80.5 cents was just rejected by the State House of Representatives. In the U.S. Senate, Gordon Smith (R-OR) claims that using cigarette taxes for SCHIP would be justified by the link between cigarettes and healthcare, which is not exactly a watertight argument since the vast majority of children served would not be smokers. Of course, efforts to find revenue sources for SCHIP, which currently faces a shortfall, are welcomed. Smith has not put forth specific legislation but says he wants to make clear that he's open to such a move, and Senate Finance Chairman Max Baucus (D-MT) is said to be supportive.

But there are two problems with cigarette taxes. First, as is the case with sales taxes generally, they are highly regressive, taking a far greater percentage of income from poor households than the wealthy. Second, they are bound to be a declining revenue source. The value of the tax is reduced over time with inflation, and if smoking really does decline as a result of the tax increases, then the revenue also declines, leaving important health programs in a lurch. Of course, if the real purpose is simply to reduce smoking, then cigarette taxes can be quite effective in that regard. For more, see the ITEP policy brief on cigarette taxes. 

 

President's State of the Union Address Includes Tax Proposal to Weaken Employer-Provided Health Care Without Providing an Affordable Alternative - 1/23/07.

In his State of the Union address on Tuesday, the President proposed a change in tax policy that would end the link between employment and health care but that could make health care less affordable overall. The stated purpose of his proposal is to "even the playing field" between those with employer-provided coverage (which is currently subsidized through the tax code) and those who purchase coverage in the individual health insurance market (which is mostly not subsidized under the tax code). This would be accomplished by giving all taxpayers a new deduction if they have health insurance, whether it's through an employer or otherwise. The deduction would be $7,500 for an individual and $15,000 for a family, regardless of how much the health insurance costs, and would reduce both income and payroll taxes. In addition, health insurance benefits provided by an employer would be counted as income for the first time. But most of the families receiving health insurance through their employer would get a tax break initially, since for most (although certainly not all), coverage costs less than $15,000 for a family or $7,500 for an individual.
 
Unfortunately, rather than evening the playing field, the President's plan would make the tax code more biased towards individually purchased health care and maybe even high-deductible health care. The new health care deduction could encourage some employers to "cash out" the health insurance benefits they currently offer to their employees, since the tax subsidy would no longer be limited to employer-provided insurance. If their employees try to buy health insurance individually, they will find that the plans offered on the individual market are much more expensive and less generous. Since the amount of the new deduction would be indexed to regular cost inflation but not to health care inflation (which is steeper) more and more people over time would find that their coverage costs more than the new deduction. And many people in more expensive plans are those with more critical health care needs or those who live in a part of the country where health care is simply more expensive. In the end, this plan is another attempt to shift risks back onto individuals who have little ability to cope with it on their own.

Immigration:

Some Lawmakers May Try to Use Tax System to Withhold Rights from Immigrants - 6/1/07

The immigration reform bill that the Senate is expected to return to after the Memorial Day recess may become a vehicle for tax provisions that would deny immigrants who are working and paying taxes the rights that other workers have. The bill, which aims to create a process by which undocumented immigrants can obtain legal status and eventually become citizens, already includes some provisions geared to placate conservative members of the Senate. Many advocates for immigrants' rights are nonetheless hoping that negotiations lead to a bill that improves life for foreign-born workers and their families.
 
Legislation Would Take Social Security from Legalized Immigrants Who Paid into It
 
The legislation being negotiated is Senate Amendment 1150 (which is expected to be adopted as a substitute for the placeholder bill S. 1348). It includes language that would reduce or deny Social Security benefits to immigrants who paid Social Security taxes before becoming documented. In a departure from current law, an immigrant who is working and paying Social Security taxes and then becomes documented (and even becomes a citizen) would not get credit for Social Security taxes paid while she was undocumented. This would mean the person could, upon reaching retirement age or becoming disabled, either have drastically reduced benefits or no benefits at all even if she has become a citizen. Since older immigrants are likely to depend on Social Security benefits during old age, this could increase poverty and increase the sense that they are actually second class citizens. 
 
Also, a bedrock principle of Social Security  and a reason people continue to support the program is that paying into the system earns the guarantee of a benefit. Taking benefits away from people who actually paid for them would obviously call into question how serious that guarantee really is. A report from the National Immigration Law Center explains the various negative effects that could result from this provision.
 
Amendments to Take Tax Credits from Immigrant Taxpayers
 
There is no rational reason to fear that immigrants are going to somehow take federal benefits that they did not pay for. Undocumented immigrants are barred from using federal benefits programs. Also, the Senate adopted an amendment last week that requires that undocumented immigrants who owe back taxes must pay them or enter into an agreement to pay them before they can change their status. But this has not deterred some Senators from trying to deny immigrant workers and their families the rights that workers typically have in America. Next week, Jeff Sessions (R-AL) is expected to introduce amendments related to the Earned Income Tax Credit, one of which would prevent immigrants who are working and paying taxes (paying federal payroll taxes and possibly also federal income taxes) from receiving the EITC until they have had a green card for five years. 
 
Report Shows the Immigration Reform Would Actually Increase Revenues
 
There is also no rational reason to fear that immigrants will drain the federal government's resources. A preliminary report issued by the Congressional Budget Office and the Congressional Joint Committee on Taxation explains that the net fiscal impact of the immigration reform bill would be positive. The figures released show that the legislation, if enacted, would cause the deficit to actually decrease by $2 billion over five years and by $37 over 10 years, compared to current law.
 
Uncertain Future in the House
 
Even if the Senate does pass an immigration bill, it's not clear how it would fare in the House of Representatives, where several Democrats have voiced concerns that it moves away from unifying families and towards having immigrants come to America to work only on a temporary basis. One proposal introduced by Republican Representative Dan Lungren (CA) would designate some immigrants as seasonal workers who must pay payroll taxes into a trust fund and then return to their country of origin to recoup that money at a U.S. consulate. Advocates for immigrants' rights and tax experts would probably agree that the tax system was not designed to be used as a tool to extract labor from immigrants while preventing them from settling in America.

 


Internet and Taxes:

Note to Congress:
Taxes Are Not What's Causing Some Households to Go Without Internet - 9/21/07
 
Some voices from the tech world are making dire predictions because the Internet Tax Freedom Act expires on November 1. The law bans states from taxing internet access providers. This means states currently cannot tax, say, the monthly fee you might pay to AOL or another internet provider -- but technically could after November 1 if Congress does not act. 
 
(This is not to be confused with the issue of sales taxes for online purchases. The U.S. Constitution has been interpreted to say that states cannot require out-of-state online retailers or other out-of-state retailers to collect sales taxes from customers unless Congress gives the states permission to do so).
 
When the Internet Tax Freedom Act was first enacted in 1998, the argument made in its favor was that the internet was a new industry and states needed some time to figure out what constituted internet access. Now, the industry says that the internet must continue to be tax-free so that it can more easily reach the many communities and households that have limited access. 
 
As the Center on Budget and Policy Priorities points out, there are a lot of things that might prevent a household from having access to the internet but taxes are not one of them. The cost of a computer is the obvious bar for many households. As for communities where the proper infrastructure hasn't been developed by telecommunications providers, that has nothing to do with taxes. In several states that do tax internet access (states that did so in 1998 and were grandfathered in the law) more advanced fiber-optic networks are being built.
 
Identical bills have been introduced in the House and Senate (H.B. 743 and S. 156) to make the ban permanent. There had been talk that a compromise was reached in which another extension would be passed instead of making the ban permanent, but the outcome now looks unclear because provisions unrelated to the internet have become part of the bill. Rep. Linda Sanchez (D-CA), chairwoman of the Judiciary subcommittee that has jurisdiction, supports finding a compromise to temporarily extend the ban.

 


Minimum Wage:

President Signs Emergency War Funding Bill that Includes Minimum Wage Increase and Tax Breaks for Business - 6/1/07

Last Friday, the President signed the emergency war spending bill, which included the long-awaited increase in the minimum wage as well as $4.8 billion in tax breaks for businesses to "compensate" them for the increased labor cost they will allegedly sustain. The wage increase followed a torturous procedural path for months. After the House passed a "clean" increase in the minimum wage bill in January, the Senate passed a package of tax breaks for business based on the idea that they would need to be compensated. CTJ and other organizations found this argument extremely troubling since businesses have received hundreds of billions in tax breaks since the last minimum wage increase in 1996. 
 
Senate Strategy Questioned
 
The strategy of attaching tax breaks was sometimes presented by Democratic Senate leaders as a pragmatic approach, but the wisdom of that must be questioned now that several Senators and even a majority of House members who supported increasing the minimum wage felt forced to vote against the final bill because it continued funding for a war they oppose. In the end, most advocates for working people are probably just relieved that the minimum wage increase is finally signed into law.
 
The Tax Provisions 
 
The individual tax break and revenue-raising provisions are the same as those included in the emergency war funding bill that the President vetoed a month ago (H.R. 1591) because of the provisions related to withdrawing from Iraq. The largest tax break, at a cost of over $2.5 billion over ten years, is the three-and-a-half year extension of the Work Opportunity Tax Credit (WOTC), an incentive for businesses to hire welfare recipients and individuals from other at-risk groups. Other tax breaks would loosen various tax rules relating to Subchapter S corporations (which pay no corporate level tax), at a cost of $892 million over 10 years. Also included is a change in the Alternative Minimum Tax (AMT) paid by restaurants, allowing them to use a tax credit for FICA taxes paid on tipped workers and the Work Opportunity Tax Credit to reduce their AMT.

 

House and Senate Headed Towards Agreement on Minimum Wage Increase and "Compensation" for Business - 4/24/07

A standoff between the chairs of Congress's main tax-writing committees over tax breaks and efforts to hike the minimum wage ended this week. Senate Finance chairman Max Baucus (D-MT) and House Ways and Means chairman Charlie Rangel (D-NY) agreed to include a package of $4.8 billion (over 5 years) in tax breaks in legislation increasing the minimum wage, which was passed this week in both chambers as part of an emergency war funding bill. Rangel originally sided with Democrats in the House who pushed for and passed a "clean" minimum wage increase (without tax breaks). The Senate passed a package including $8.3 billion in business tax breaks on February 1, and Rangel compromised somewhat and passed a package of $1.3 billion that was approved and added to the minimum wage legislation. 
 
Matters became more complicated when Democratic leaders in both chambers attached their respective minimum wage packages (including both the wage hike and tax breaks) to the emergency war spending bills they each passed. The President has vowed to veto this legislation because it includes timelines for withdrawing troops from Iraq, but the minimum wage and the accompanying tax breaks may be included in another emergency war spending bill that might not prompt a veto from the President.   
 
Does Business Need to be "Compensated?"
 
While the new $4.8 billion level that both Baucus and Rangel have agreed to is a breakthrough, it is nonetheless disconcerting that several Senators on both sides of the aisle seem to believe that business should be "compensated" for raising the minimum wage from its lowest real purchasing power in 50 years. As we've pointed out before, business has received $276 billion in tax breaks since the last minimum wage hike in 1996. Remarkably, some members of Congress who are hostile to minimum wage legislation, such as Charles Grassley (R-IA), are actually complaining that the tax breaks are not big enough.
 
What's in the Tax Package
 
More than half of the tax breaks would take the form of a three and a half year extension for the Work Opportunity Tax Credit (WOTC), an incentive for businesses to hire welfare recipients and individuals from other at-risk groups, at a cost of more than $2.5 billion over ten years. Other tax breaks would loosen various tax rules relating to Subchapter S corporations (which pay no corporate level tax), at a cost of $892 million over 10 years. Also included is a change in the Alternative Minimum Tax (AMT) paid by restaurants, allowing them to use a tax credit for FICA taxes paid on tipped workers and the Work Opportunity Tax Credit to reduce their AMT.
 
 
Tax Breaks Technically Paid For 
 
The best that can be said for the tax cuts is that they're technically offset so that they will not add to the federal budget deficit. The most significant offset would allow the IRS to charge interest on delinquent payments for a longer period of time before it must give notification and suspend interest. Another provision would require that people under 19 years of age be taxed at the income tax rate their parents are subject to (which currently applies to people under 18). Other changes relate to how deficiency payments are treated as well as penalties and user fees.


Minimum Wage, Maximum Delay - 3/30/07
Senate Says Business Now Needs Even Bigger Bribes Before Minimum Wage Can Be Increased

The U.S. Senate, which has been holding a long-anticipated minimum wage hike ransom for months, has just increased its demands and now insists that $12 billion in tax breaks are needed to "compensate" businesses for the alleged costs of paying a higher wage to those at the bottom of the wage scale.
 
On February 1, the Senate approved a bill pushed by Senate Finance Chair Max Baucus (D-MT) raising the minimum wage along with a tax cut package costing $8.3 billion over ten years. The Senate had made a half-hearted attempt to pass a "clean" wage increase (without the tax breaks) on January 24 and came six votes short of the 60 needed to end debate. In the House of Representatives, Ways and Means Chairman Charlie Rangel was unenthusiastic about attaching tax cuts (and the offsetting provisions needed to pay for them) to the minimum wage increase, but eventually agreed to a $1.3 billion package that was approved and added to the wage legislation.
 
Ransom Demand Increased 
 
Now the Senate says $12 billion in tax breaks are needed, an increase of around $3.8 billion from its original demand. BNA reports that the additional tax breaks were proposed by Finance Chairman Baucus, ranking member Charles Grassley (R-IA) and Jon Kyl (R-AZ). They include a one-year extension of the bigger write-offs for restaurants and retail stores (the original extension was only for three months) and a further expansion of the Work Opportunity Credit for companies in rural counties that are losing population. The Senate approved by unanimous consent an amendment to include these new additions to the tax cut package. 
 
A Pragmatic Approach to Increasing the Minimum Wage? 
 
It is sometimes said that including the tax breaks is necessary to get the 60 votes needed to prevent a filibuster in the Senate by members who are not generally supportive of increasing minimum wage. But it's hard to believe the current strategy is a politically feasible way to increase the minimum wage. The wage increase and tax package have been added to the emergency war spending bills just passed by the House and Senate, which President Bush has already vowed to veto because they include timetables for withdrawing from Iraq.
 
We've said it before and we'll say it again: The idea that businesses need to be "compensated" after they've received $276 billion in tax breaks since the last minimum wage hike (which was worth only about $13 billion to workers) is absurd. Businesses should not have to be bribed billions in tax cuts so that we can rescue the minimum wage from its lowest purchasing power in half a century. 
 

 

America to Congress: "So, about that raise we were promised..." - 3/16/07

As we've reported previously, the Senate and the House of Representatives have approved different bills that would increase the minimum wage by $2.10 over two years and offer tax breaks to business to "compensate" them for the added cost. The idea that businesses need to be "compensated" after they've received $276 billion in tax breaks since the last minimum wage hike (which was worth only about $13 billion to workers) is absurd. But both chambers have decided that some level of absurdity is acceptable if it helps get the minimum wage increase passed.
 
The problem is that the two chambers are in a spat over the details. The Senate's bill includes $8.3 billion in tax breaks over ten years for business while the House version only includes $1.3 billion over ten years. Both versions have provisions that raise revenues to offset the tax breaks. Predictably, many conservatives and business leaders have decried the offsets as "tax hikes" (since they apparently only support tax breaks that are not paid for). House Ways and Means Chairman Charlie Rangel (D-NY) went so far as to hold a hearing Wednesday on how bad the revenue-raising provisions are in the Senate version and heard testimony only from representatives of business who opposed the "tax hikes" included in it. We would agree that the Senate version is frustratingly illogical, but not because of the revenue-raising provisions. The problem is the tax cuts. Businesses should not have to be bribed with $8.3 billion in tax cuts so that we can rescue the minimum wage from its lowest purchasing power in half a century. 

 

Debate Continues Over "Compensation" for Business - 2/16/07
House of Representatives Willing to Accept Some Tax Breaks as Part of Minimum Wage Deal 

The House Ways and Means Committee on Monday approved a package of small business tax breaks to be combined with legislation to increase the minimum wage. At a cost of $1.3 billion over ten years, the Ways and Means package is much smaller than the $8.3 billion deal approved by the Senate by a vote of 94-3 on February 1. Senate leaders said that the House, which had previously approved a "clean" or stand-alone minimum wage increase, was now showing that it was ready to negotiate and compromise, although significant differences between the two chambers remain. A clean minimum wage hike in the Senate had earlier fallen six votes short of the 60 votes needed to pass in that chamber, as several Republican Senators insisted that the legislation include tax breaks to "compensate" businesses for the added costs. (The last minimum wage increase, back in 1996, is estimated to have cost employers $13 billion while the total tax breaks for businesses since that time cost $276 billion.)  
 
The largest tax break in the House bill would be a one-year extension of the Work Opportunity Tax Credit (the Senate version would extend it for 5 years). The second largest tax break would be a change in the Alternative Minimum Tax (AMT) paid by restaurants, allowing them to use a tax credit for FICA taxes paid on tipped workers and the Work Opportunity Tax Credit to reduce their AMT. A smaller break, but one apparently important to business lobbyists, is a one-year extension of a special expensing provision (section 179) through 2010 and an increase in the amount that can be expensed.
 
Costs of Tax Breaks, Revenue Increases from Offset Provisions, 2007-2017
 
 
Another provision of the package is currently scored as having no cost, but it is noted that it will cost a projected $457 million (over ten years) when the tax package is combined with a minimum wage hike. This provision concerns the tax credit restaurants get for paying FICA taxes on tips above and beyond the amount that brings employee pay up to the minimum wage. This provision enables restaurants to enjoy as much of the credit as they do today, even though the minimum wage will be higher so the credit would otherwise decrease.
 
As for the offsets, the largest in the package would stop children of wealthy families from enjoying special capital gains and dividend tax breaks meant for low-income people. The other significant change would allow the IRS to charge interest on delinquent payments for a longer period of time before it must give notification and suspend interest.
 
The legislation does not include some tax breaks sought by business lobbyists and included in the Senate version, such as increased write-offs for restaurants and retail stores. It also does not include the offsets included in the Senate version. Some of the Senate offsets have been controversial (among business lobbyists) such as the $1 million limit on deferred compensation that can receive tax breaks and retroactive restrictions on sale-in, lease-out arrangements (SILOs).

 

Senate Passes Minimum Wage Hike - With Tax Breaks for Business- 2/2/07

The Senate voted 94-3 yesterday to raise the minimum wage by $2.10 over two years. Unlike the minimum wage hike passed by the House of Representatives a couple of weeks ago, the Senate bill also includes a package of tax breaks and other offestting provisions to replace the revenue.

Polls indicate that at least 80 percent of Americans  including majorities of Democrats, Republicans and Independents  want to see the minimum wage increased. One poll even shows that three out of four small business owners think a minimum wage increase will have no effect on them. Yet President Bush and his Republican allies in Congress have come to the strange conclusion that in order to pass both chambers of Congress, any bill increasing the minimum wage must include new tax breaks for business in order to compensate companies for the alleged damage it will cause them. As Jared Bernstein and Lawrence Mishel explain in the American Prospect, the idea that business needs to be compensated because Congress is raising the minimum wage from its lowest inflation-adjusted level in 50 years is nonsensical.

Republican Senators Hold Minimum Wage Increase Hostage to Tax Breaks for Business
 
During the previous week, Senate Democrats could not convince enough Republicans to join them to end debate on a "clean" minimum wage increase, meaning a minimum wage hike with no tax breaks or other provisions attached to it. Only five Republicans joined all of the Democrats present for a total of 54 votes - fewer than the 60 votes needed in the Senate to close off debate and move on to approve the legislation. House Democrats had hoped the Senate would approve the bill, H.R. 2, which was a key part of the "First Hundred Hours Agenda." 

On the other hand, some Republicans and business lobbyists complain that the tax cut package doesn't do enough for business since a large part of the tax breaks go to hiring welfare recipients, newly disabled veterans and individuals from other at-risk groups, rather than other tax breaks that businesses find more beneficial to their bottom line. They have also complained because the offsets are "tax increases" on business, in their thinking. 

 

Senate Finance Committee Approved Business Tax Break Package to Go with Minimum Wage Hike -
But at Least It's Paid For

The Senate Finance Committee had approved the package of tax "sweeteners" at a cost of $8.3 billion over ten years for small business to be combined with the minimum wage hike. The biggest tax break is an extension and expansion of the Work Opportunity Tax Credit, an incentive for businesses to hire welfare recipients and individuals from other at-risk groups. Other breaks would allow restaurants and retail stores bigger tax write-offs, expand the number of businesses allowed to use the more advantageous cash method of accounting, and loosen various tax rules relating to Subchapter S corporations (which pay no corporate level tax).

To his credit, Chairman Max Baucus (D-MT) also included in his bill several revenue offsets to ensure that the bill as a whole is budget-neutral. The biggest offset would restrict an especially egregious form of tax shelters known as sale-in, lease-out (SILOs). These arrangements, which can involve an American bank buying something like a subway or sewer system in another country and "leasing" it back to the foreign government for tax advantages, were already banned starting in 2004 but that ban would retroactively apply to deals made before 2004 under this provision.

Another offset would increase restrictions on "inversion transactions," in which American companies set up phony offshore "headquarters" to avoid U.S. taxes. The bill would also crack down on wealthy people who renounce their U.S. citizenship and move abroad, by making them pay taxes on their unrealized capital gains when they leave the country.

Projected Costs of Individual Tax Break Provisions and Revenue-Raising Provisions, 2007-2017

 

Deferred Compensation Controversy

One provision, which constitutes a smaller fraction of the offsets but has caused surprising consternation among lobbyists, would end tax advantages for "non-qualified deferred compensation" over $1 million a year. To put this in context, the tax code allows employees to defer paying taxes on money that they or their employer put into "qualified" retirement savings plans, such as 401(k)'s, until they take money out during retirement. But contributions to such "qualified" plans are limited, to no more than $30,000 a year depending on the type of plan.

Many corporate executives, however, have set up "non-qualified" deferred compensation plans, which are not taxable to the executives until they take the money out (and which are not deductible by companies until then either). Currently, there is no limit on how much money executives can defer taxes on through these plans. The Senate bill would limit such tax-deferred compensation to $1 million a year. President Bush admonished business executives this week to "pay attention to the executive compensation packages that you approve" but did not endorse the Senate provision.

Future of Bill Uncertain

Senators from both parties said even before the vote on the "clean" minimum wage hike that it could not get the 60 votes needed to pass if it was not combined with tax breaks for small business, although the rationale for "compensating" small businesses. Under the U.S. Constitution, tax legislation must originate in the House, and House Ways and Means Chairman Charlie Rangel (D-NY) could use this rule to stop this legislation from moving if a deal is not worked out between him and Baucus. 

The offsets are key because one hurdle any new tax breaks would have to overcome is the pay-as-you-go (PAYGO) rules that the Democrats in the House restored. PAYGO rules basically require that any new entitlement spending or any new tax breaks be paid for by either revenue increases or spending cuts. PAYGO was waived and then replaced with weaker rules while President Bush and his allies in Congress enacted deficit-financed tax cuts. Now, as lawmakers consider large tax proposals such as adjustments to the Alternative Minimum Tax (AMT) or large spending proposals, PAYGO will make it harder for Congress to take any action that increases the federal budget deficit.    


Private Equity:

Tax Fairness Wins in the House of Representatives; Battle Ahead in the Senate - 11/13/07

On Friday, the U.S. House of Representatives voted 216-193 to pass H.R. 3996, a bill to extend relief from the Alternative Minimum Tax and other tax breaks for one year and offset the costs by reducing tax loopholes for private equity fund managers and others. All but eight Democrats present voted for the bill, while all the Republicans present voted against it.

The AMT provision is known as a "patch" because it prevents the AMT from reaching millions of more taxpayers (as the AMT is scheduled to do under current law) for a year but does not permanently address this problem. A larger bill (H.R. 3970) was introduced by Ways and Means Chairman Charles Rangel (D-NY) on October 25 to repeal the AMT entirely and offset the costs, mostly with a surtax that would reduce the Bush tax cuts for those families with incomes above half a million dollars a year. This bill is a major tax reform that would make the tax code simpler and more progressive without making the fiscal situation worse than it already is.

But because Republicans seem sure to block any provision that would reduce tax breaks even for the richest Americans, Rangel introduced the smaller bill (H.R. 3996) to patch the AMT for just one year, giving Congress more time to consider his more comprehensive tax reform. H.R 3996 borrows many of the good ideas from the larger bill, like closing the loophole for "carried interest" and a loophole that allows private equity fund managers to set up deferred compensation arrangements in offshore tax havens to avoid taxes. H.R. 3996 would also extend some business tax breaks (such as the research credit) for one year. Smaller provisions in the bill would make the Child Tax Credit more accessible for poor families and would create an additional standard deduction for property taxes for those who do not itemize their tax deductions.

Surprising Amount of Focus on "Carried Interest"

The Republicans chose the counter-intuitive strategy of rallying around one of the most offensive and blatantly unfair loopholes in the tax code, the loophole for "carried interest," which is a form of compensation paid to certain types of fund managers. This loophole essentially allows these fund managers to earn hundreds of millions of dollars and yet pay taxes at a lower rate than their middle-income receptionists.

Citizens for Tax Justice sent members of Congress a new fact sheet explaining that the loophole is a subsidy paid to millionaires, through the tax code, and funded by the rest of us who are paying income taxes at ordinary rates. The loophole is enjoyed by those who manage other people's money but are allowed to pretend that they're investing their own money -- which entitles them to the low, 15 percent rate for capital gains. Contrary to the confusion sowed by fund managers, the capital gains rate for those who actually invest would not be altered.

Citizens for Tax Justice also issued a statement responding to the claim that the real estate industry would be damaged if the carried interest loophole is closed. The vast majority of people who are affected by what goes on in the real estate industry -- realtors, construction workers and home-buyers -- pay income taxes at ordinary rates like everyone else, meaning that they are paying for this loophole rather than benefiting from it.

Most important, however, was the willingness of hundreds of state and local organizations from around the country to tell Congress that this loophole is simply unfair to ordinary taxpayers in their states. Thanks to all the organizations that joined the sign-on letter urging Congress to close the loophole.

Battle Ahead in the Senate

Several in the Senate have suggested that it will be difficult to secure the 60 votes needed to avoid a filibuster in their chamber and approve this bill. Many Republican Senators, including the ranking Republican on the Finance Committee, Charles Grassley (R-IA) have made clear that they would rather increase the federal budget deficit than pay for AMT relief. We would suggest that any anti-tax conservative in the Senate who wants to take responsibility for filibustering AMT relief for millions of taxpayers should go ahead and do so to make his or her position clear to the public.

 

Ways and Means Committee Approves Bill to Fix AMT for another Year and End Unfair Tax Breaks for Private Equity - 11/5/07 

By a party-line vote, the House Ways and Means Committee on Thursday approved legislation (H.R. 3996) that would prevent the Alternative Minimum Tax (AMT) from expanding its reach to millions of more families for one year. Ways and Means Chairman Charles Rangel (D-NY) had hoped earlier this year to pass his larger plan to address the AMT permanently, as discussed above, but some lawmakers oppose his provisions to pay for AMT reform and would rather increase the budget deficit. As a result, Chairman Rangel introduced this smaller bill, which includes a "patch" of the AMT for one year at a cost of about $50 billion, and hopes the larger plan will be acted on sometime in the next couple years.
 
The smaller bill approved Thursday also includes one-year extensions of some special interest tax breaks that are technically temporary but whose extension by Congress has become so routine that Hill insiders refer to them as the "extenders." The extenders cost about $21 billion.

Help for Low-Income Included

Also included is a change in the Child Tax Credit rules to make it easier for poor families to benefit from the credit, as well as a small additional standard deduction for middle-income homeowners. These two provisions combined cost about $4 billion over ten years.

Rangel Stands Firm -- Tax Cuts Will Be Paid For By Closing Carried Interest Loophole, Among Others

The smaller bill borrows some very good ideas from the larger plan in order to pay for the one-year AMT relief and the extenders. One of these provisions would eliminate the "carried interest" loophole for private equity fund managers, which would raise about $26 billion over ten years. Another provision would limit the ability of private equity fund managers to set up deferred compensation arrangements in offshore tax havens to avoid taxes, and would raise about $24 billion over ten years.

Another provision would delay the implementation of a tax break that was passed in 2004 but is not yet in effect. The 2004 tax break essentially expands a loophole allowing multinational corporations to take U.S. tax deductions for interest payments that are really foreign expenses. The provision delays this tax break several years and raises $25 billion over ten years.

Republicans Say Their Own Tax Laws Will Lead to the Biggest Tax Increase in History

Republicans members of the committee were hostile to the offsets and argued during the markup of the bill that the AMT should be repealed and the revenue should not be replaced because it was never intended to be collected. This ignores the fact that the Bush Administration intentionally decided not to permanently fix the AMT when it enacted tax cuts in order to mask the true cost of those tax cuts. It also ignores the fact that the Bush Administration, like Congress during both Republican and Democratic control, has budget plans that assume the expanded AMT revenue (based on current law under which the AMT will expand its reach) will be collected.

Congressman Earl Blumenauer (D-OR) pointed out the irony of the minority party's argument. Republicans at the hearing seemed to say that the expiration of the Bush tax cuts -- which was written into the laws enacted by President Bush and the Republican Congress, along with the scheduled expansion of the AMT that was intentionally left in place when Republicans controlled Congress and the White House -- would lead to the "biggest tax increase in history." Even if we believed that allowing the tax laws to exist as they're currently written could constitute a tax increase, it would be hard to understand why the complaints are coming from the party that held power and passed a major tax bill every year for six years.

Meanwhile, even the conservative Washington Times has editorialized that "it seems disingenuous" for the GOP to call Rangel's plan a tax hike.

 

Battle Only Beginning Over the "Carried Interest" Tax Loophole for Billionaire Fund Managers - 10/12/07

On Tuesday, the Washington Post created a great deal of confusion by reporting that Senate Majority Leader Harry Reid (D-NV) has told lawmakers and lobbyists that the Senate will not have time this year to consider legislation eliminating the "carried interest" loophole, which allows billionaire fund managers to pay a lower tax rate than their middle-income receptionists. This was seen in some quarters as an indication that the issue is dead for this year, provoking several editorials blasting the Senate Democrats for choosing campaign contributions from lobbyists over tax fairness. The reality is that whether the Senate addresses the carried interest issue is largely up to the Senate Finance Committee, not Senator Reid.

Carried Interest Issue Wound Up in Debate Over Alternative Minimum Tax

Whether or not the Senate is unduly influenced by lobbyists is certainly a question worthy of debate, but some clarification is in order. It's true that the Senate is not likely to consider a stand-alone bill that does nothing but close the carried interest loophole. But every member of Congress already knows that. No one in Congress is talking about a stand-alone bill. The question everyone is considering is whether or not a provision to close the loophole should be used to offset the cost of other legislation Congress wants to pass. For example, Congress needs to pass a bill to keep the Alternative Minimum Tax (AMT) from affecting more taxpayers.

The number of people affected by the AMT will increase from around four million last year to 23 million this year if Congress does not act, and just fixing the AMT for this year alone would cost over $50 billion since Congress and the administration have always assumed that this revenue would be collected. A provision closing the carried interest loophole would raise some revenue (although an official estimate has not yet been made) and could therefore be used to offset part of the cost of dealing with the AMT. Over in the House, Ways and Means Chairman Charles Rangel (D-NY) has long said that he will likely try to close the loophole to help offset the cost of fixing the AMT.

Ball Is in the Finance Committee's Court

What types of "offsets" are attached to an AMT bill in the Senate is not decided by Senator Reid. It's decided by the Senate Finance Committee, and Finance Chairman Max Baucus (D-MT) has not yet said whether or not he'll include a provision to close the carried interest loophole. But he and ranking member Charles Grassley (R-IA) have both shown interest. An AMT bill needs to include offsets now that Congress operates under pay-as-you-go (PAYGO) rules that prevent it from increasing the budget deficit. Once the Finance Committee approves an AMT bill and sends it to the full Senate, Senator Reid will make time for a floor vote, since it will shield over 20 million families with voting members from an increase in their Alternative Minimum Tax.

Carried Interest Issue Won't Die Regardless of What Happens This Year

Regardless of what happens this year, there's enough public anger over the carried interest loophole to keep the issue alive for some time. Presidential candidates Hillary Clinton, John Edwards and Barack Obama have come out in favor of eliminating the loophole. Edwards and Obama even made a point of expressing their outrage that the issue hasn't been resolved by now. Even a chief lobbyist for the private equity industry said Wednesday that "It's not over; it's only just beginning."

For now, all eyes should be on the members of the Senate Finance Committee, particularly its chairman, Max Baucus.

 

Carlyle Group, Beneficiary of Carried Interest Loophole, Embarrassed by Protest - 10/12/07

Photograph from New York Times

The Service Employees International Union (SEIU) staged a protest Wednesday in front of the office of the Carlyle Group, the private equity firm that buys up nursing home management operators, defense companies and other businesses that get billions of dollars from the federal government. The partners at Carlyle are able to earn hundreds of millions of taxpayer-provided dollars while paying a lower tax rate than middle-income Americans thanks to the carried interest loophole.
The demonstration included people pushing wheelbarrows full of bags of "cash" from the IRS, which is located across the street, to a "fat cat" sitting on the front steps of Carlyle's office.
In light of this sort of press, it's really no wonder that private equity lobbyists are saying that the controversy over their tax breaks is far from over.

Tax Fairness Advocates Fire Back at Lobbyists for Investment Managers - 9/7/07

Members of Congress returning to Washington this week were greeted with a call from over three hundred non-profits, unions, and faith-based groups to end the "carried interest" tax loophole that vastly reduces the tax bills of certain millionaires and billionaires in the investment industry.
 
Legislation (H.R. 2834) proposed by Rep. Sander Levin (D-MI) would eliminate this loophole. Several progressive national organizations and unions have begun their own lobbying campaigns in support of the Levin bill.
 
letter applauding the Levin bill was signed by the 300 groups from every state and was sent to members of Congress earlier this week. The letter argues that "it's an outrage that Americans who are paid millions or even billions for their labor can be subject to lower federal tax rates than their middle-income receptionists."
 
General partners in private equity funds and other types of funds invest other people's money and are often paid huge sums for their services. Part of this pay is in the form of "carried interest," which is a share of profits. The loophole allows the general partners to pay the low, 15 percent rate for capital gains on their carried interest, even though they have not contributed capital and do not own the capital assets.
 
Private Equity Industry Working Hard to Defend the Indefensible
 
Lobbyists from the private equity industry descended upon House and Senate offices as soon as the Levin bill was introduced. The industry has produced a bewildering variety of arguments, often contradicting themselves, to defend this loophole over the past several months. This pattern continued on Thursday, when the Senate Finance Committee held its third hearing on the issue and the House Ways and Means Committee held a day-long hearing on tax fairness issues, including the carried interest loophole.
 
Representatives for the private equity industry have at times argued that they are developing companies through their hard work, implying that they deserve a tax break for this reason. At other times they have argued that their carried interest is not pay for work, to justify being taxed as if they have capital gains. They have at times argued that pensioners will suffer if the loophole is closed because the fund managers will find the tax increase so odious that they will no longer have an incentive to provide investment management services to pension funds. At other times they have argued that they'll just pass the tax increase onto pensioners and other investors, which would suggest that they won't find anything at all odious about the tax increase and that they should be indifferent to it.
 
Public employee pensions, which often invest a small portion of their assets in private equity, have generally not joined the private equity industry's side in this debate.
 
One novel argument made by the industry is that the carried interest loophole helps African-American and ethnic minorities accumulate assets. It's difficult to imagine how this argument could be effective. Three of the co-sponsors for the Levin bill are members of the Congressional Black Caucus, including Ways and Means chairman Charles Rangel. Chairman Rangel hopes to make legislation to close the carried interest loophole, and possibly other unnecessary tax loopholes, part of a larger bill that would reform the Alternative Minimum Tax.

 

Crunch Time for Congress - 7/27/07

The House Ways and Means Committee has pushed back its plans to hold a hearing on the tax loophole for private equity "carried interest" until September. The loophole allows private equity fund managers to pay only the 15 percent capital gains tax on carried interest, which is the majority of their compensation in many cases, even though they actually don't make capital investments. The result is that fund managers making millions, even over a billion dollars a year, pay a lower tax rate than middle-income people. A bill introduced by Sander Levin (D-MI) (H.R. 2834) would close this loophole and tax carried interest as ordinary income. The industry has begun a fierce lobbying and PR campaign to defend this loophole, and CTJ has issued its own response to the deceptive claims being made.  
 
The Senate Finance Committee is currently considering a more limited bill (S. 1624) that would affect those private equity firms that are publicly traded partnerships, requiring them to pay corporate taxes like other publicly traded companies. Finance Chairman Max Baucus and ranking member Charles Grassley (R-IA) have indicated that they are interested in exploring the possibility of passing another bill in the future along the lines of the Levin bill. The committee held a hearing on the issue on July 11 and will hold another on July 31. Baucus expects to pass S. 1624 in the fall and consider a broader bill sometime after that.

 

New CTJ Fact Sheet Debunks Myths about the Private Equity Tax Loophole

As Warren Buffet recently stated, it's an outrage that Americans who are paid millions or even billions for their labor can be subject to lower federal tax rates than their middle-income receptionists. This is particularly true of private equity fund managers, the multi-millionaires who get a special tax break for the compensation they receive for managing people's money.

A receptionist, a firefighter or a police officer who is unmarried and earns $50,000 a year pays a federal income tax rate of 25 percent on a large share of her income. That's after she pays around 15 percent of all of her income in federal payroll taxes. But thanks to a loophole in the tax code, private equity fund managers pay only the 15 percent capital gains tax on what they call "carried interest," which is usually most of their compensation. This is despite the fact that the capital gains rate was enacted for those who invest and put at risk their own capital, not those who manage other people's money.

Congressman Sander Levin has introduced a bill (H.R. 2834) in the House of Representatives that would close this tax loophole. The private equity industry and its lobbyists have already started an aggressive campaign to confuse the public about this issue. Get the facts in CTJ's new fact sheet.

 


Social Security:

The Grain of Truth in the Treasury Report's Warning Over Social Security - 9/28/07
 
On Monday the Treasury released an issue brief that will be the first of several on Social Security's funding problems. The report explains that, using the assumptions of the Social Security Board of Trustees, the program will not be able to fully pay the benefits that are scheduled starting in 2041. Under law, benefits must at that point be reduced to a level matching revenues in the program, which would be about 25 percent below the full benefit levels scheduled.
 
Balance Issue Overstated
 
It's worth pointing out that the assumptions used to make these projections are considered unreasonably pessimistic by many economists. It's also important to remember that benefits rise with wages, which usually rise faster than inflation. As a result, even if the pessimistic economic assumptions were borne out, the benefits scheduled to be paid in 2041, even after the 25 percent reduction, would still be larger in real terms than those benefits paid today.
 
Which is not to say such a cut in scheduled benefits would be acceptable, since the program is meant to replace a reasonable portion of wages. But the claims by the administration that the program is in grave danger seem overstated. Several measures, such as increasing the payroll tax by a couple percentage points or raising the cap on wages subject to the payroll tax, could ensure that the there is enough money flowing into the program for the next 75 years.
 
The report tries to make the argument that we must look further than 75 years and ensure that the program is in balance over an "indefinite future" -- which is hard to swallow to say the least. The fact that the program is currently scheduled, even using pessimistic assumptions, to be in balance until 2041 probably makes it more secure than most federal programs in the minds of many Americans.
 
Several members of Congress have rightly argued that the report is just one of several attempts by the Administration to convince the public that Social Security cannot function without some radical overhaul, which usually involves private accounts that have nothing to do with making the program solvent.
 
But There Is a Problem if Social Security Surpluses Are Not Saved
 
But there is a problem that deserves our attention. For several decades leading up to 2041, a portion of Social Security benefits will be paid out of the Social Security trust funds, which are basically accounting mechanisms to keep track of the surplus Social Security taxes that have been paid into the program since the 1980s. If the Social Security surpluses are not immediately spent by the government but are instead used to pay down the debt, that can make it much easier for the government to pay Social Security benefits later on as the baby boomers retire in large numbers. But this has only happened during the late 1990s, during the Clinton Administration. At other times, the Social Security surpluses have been used to fund other government spending and tax cuts.
 
This raises an important question. As Citizens for Tax Justice explained in a 2006 report on Social Security funding options, Social Security could be brought into balance -- on paper -- by raising or eliminating the cap on wages subject to Social Security payroll taxes, by increasing the payroll taxes or by broadening the definition of income subject to Social Security taxes. But if future presidents and Congresses cannot restrain themselves from spending the surpluses, it's not clear that the program will truly be any more secure.
 
This issue will be addressed in the next issue brief from the Treasury on Social Security. The authors end this edition by telling us that "Many analysts believe Social Security surpluses do not result in smaller levels of publicly held debt, but instead result in some combination of higher spending or lower taxes in the non-Social Security budget." Perhaps an earlier version included the words "when a President named Reagan or Bush occupies the White House."
 

 


Tax Collection:

House Votes to Kill IRS's Use of Private Debt Collectors - 10/12/07

The House of Representatives voted Wednesday to ban the IRS from using private debt collectors to help collect delinquent taxes after its current contracts with collection agencies expire in March 2008. The IRS's private debt collection program pays contractors a commission of 21 to 24 cents for every dollar of tax debt that they recover, while it's estimated that IRS employees can do the job for about 3 cents for every dollar collected. The private contractors are paid on a commission basis unlike IRS employees, so there is a concern among many that they have an incentive to be overly aggressive and less respectful of taxpayers' privacy rights.

The Senate Finance Committee has not taken up the private debt collection issue although there is a bill (S. 335) sponsored by Senator Byron Dorgan (D-ND) to end the program. Meanwhile, the White House has threatened to veto the House bill (H.R. 3056) if enacted because it will cost the federal government revenues "that are otherwise not likely to be collected by the IRS."

This argument is ridiculous. The ten-year projected cost of the measure is just over $1 billion and that cost is offset in the bill with revenue-raising provisions. But the more fundamental point is that this measure should not be scored as costing anything at all. When Congress cuts back the tax enforcement staff at IRS, this reduction is not counted as a "cost" even though IRS personnel actually collect a lot more in taxes than do the private debt collectors. The private debt collection program seems driven by the ideology that the private sector always works better, even when the facts clearly state otherwise.

 

Would We Want a Firefighter to Have a Part-Time Job as an Arsonist?

Top White House Economic Adviser Involved in Patenting Strategies to Avoid Taxes - 9/21/07
 
Tax Notes, a trade journal for tax experts (sorry subscription required), reports that Edward Lazear, chairman of the President's Council of Economic Advisers, is named on a patent application for a product to help companies avoid taxes. The application was filed 10 months after Lazear began working at the White House.
 
The White House says that, essentially, Lazear's work on the product ended before he came to the White House. Whatever the case may be, it certainly highlights questions over whether tax strategies should be patentable at all. A patent reform bill in the House of Representatives includes provisions that ban patents on tax strategies. Senators Max Baucus (D-MT) and Charles Grassley (R-IA), chairman and ranking member of the Finance Committee, plan to craft a bill that would ban tax patents as well. A bill introduced by Senators Carl Levin (D-MI), Barack Obama (D-IL) and Norm Coleman (R-MN) in February to target offshore tax avoidance also bans tax patents.

As Levin pointed out when he introduced his bill, patent law exists to encourage innovation. There is no lack of innovation when it comes to avoiding taxes and there is certainly no public policy reason to encourage it. 

 

House Committee Votes to End Outsourcing of Tax Collection - 7/20/07 

The House Ways and Means Committee approved a bill (H.R. 3056) on Wednesday that would end the IRS's use of private debt collectors after its current contracts with collection agencies expire in March 2008. The IRS's private debt collection program pays contractors a commission of 21 to 24 cents for every dollar of tax debt that they recover, while it's estimated that IRS employees can do the job for about 3 cents for every dollar collected. The private contractors are paid on a commission unlike IRS employees, so there is a concern among many that they have an incentive to be overly aggressive and less respectful of taxpayers' privacy rights, a concern echoed by Nina Olson, the National Taxpayer Advocate.
 
Unfortunately, earlier efforts to kill the program in an appropriation bill failed on procedural grounds. Part of problem stems from a peculiar wrinkle in the pay-as-you-go (PAYGO) rules that were revived earlier this year by Congress. Ending the private debt collection program counts as a "cost" to the federal government under these rules, since the private agencies are expected to collect over a billion dollars over the next decade if the program is allowed to continue. As a result, the Ways and Means bill just approved includes over a billion dollars of revenue-raising provisions to offset the "cost." The biggest offset would collect $764 million over ten years by making it harder for people to get out of paying their federal taxes by renouncing their U.S. citizenship.
 
But it's absurd that killing the private debt collection program should have to be paid for. Cutting funds for traditional tax collection by the IRS is not counted as a "cost" under budget rules that Congress has to offset with revenue-raising provisions. And traditional tax collectors at the IRS bring in a whole lot more money than these private contractors ever will. The legislative recommendations made by the National Taxpayer Advocate in January start out by noting that on a budget of just over $10 billion the IRS manages to collect over two trillion dollars, a return-on-investment of about 210 to one.
 
In the Senate, a bill (S. 335) sponsored by Byron Dorgan (D-ND) would end the private debt collection program, but it's not clear when this bill will be considered. 

 

House Appropriators to Pull the Plug on Outsourcing Tax Collection - 6/22/07

The House Appropriations Committee approved the "Financial Services" spending bill last week, which includes funding for the IRS and other agencies within the Treasury, as well as for the District of Columbia and several other agencies. Notably, the bill includes language that limits funding of tax debt collection by private collection agencies to $1 million, effectively killing the IRS's practice of outsourcing tax collection.

The IRS's private debt collection program pays private contractors a commission of 21 to 24 cents for every dollar of tax debt that they recover, while it's estimated that IRS employees can do the job for about 3 cents for every dollar collected. The private contractors are paid on a commission unlike IRS employees, so there is a concern among many that they have an incentive to be overly aggressive and less respectful of taxpayers' privacy rights, a concern echoed by Nina Olson, the National Taxpayer Advocate.

 

Tax Day in Congress - 4/20/07 

House of Representatives Uses Tax Day to Approve Taxpayer Protections

The U.S. House of Representatives approved H.R. 1677, the Taxpayer Protection Act of 2007, on Tuesday, Tax Day. As we've explained before, the bill includes several provisions geared towards protecting taxpayers from fraud, identity theft, and predatory banks offering refund anticipation loans (RALs) which often come with interest rates around 90 percent. Interestingly, a provision preventing the IRS from handing over information about people's tax debt to such predatory banks was opposed vigorously by Jackson Hewitt, the tax preparation company, when the bill was in committee. In the past two weeks, the Department of Justice has been trying to shut down around 125 Jackson Hewitt offices in which the owners are accused of fostering an environment "in which fraudulent tax return preparation is encouraged and flourishes."
 

Congress Mulls Several Proposals to Protect Taxpayer Rights - 4/6/07

Members of Congress are currently considering a series of proposals meant to strengthen taxpayer rights. The latest of these, the "Taxpayer Protection Act of 2007" (H.R. 1677) was approved by the House Ways and Means Committee before it adjourned for the Congressional recess. It includes provisions that would
- prevent the IRS from giving third parties information about taxpayers' tax debts,
- require the IRS to notify taxpayers in cases where identify theft may have occurred,
- notify taxpayers that they may be eligible for the EITC,
- clarify rules that prevent deceptive use of the IRS's name (targeting websites like www.irs.com that people may believe belong to the IRS itself.)
 
Of particular note is the provision preventing the IRS from sharing tax debt information with predatory banks marketing refund anticipation loans (RALs). The IRS and some members of the committee argue that it would actually be in the taxpayers' interest to provide banks information helping them to determine whether a taxpayer is likely to repay a loan, and that without this information the interest rate on such loans could be higher to reflect that lack of certainty about repayment. But the provision targets those that are "predatory," which is not defined in the legislation. RALs sometimes have an interest rate around 90 percent.
 
We Should Be Able to File Our Taxes Online Easily Without Paying a Tax Preparation Firm
 
Another taxpayer rights-related bill (S. 1074) has been introduced in the Senate by Daniel Akaka (D-HI) to create a single internet portal that can be used to file taxes online directly with the IRS for free. Currently people who file online must use the services of one of several companies that charge a fee for those with incomes above $52,000 and which subject users to advertisements for other products.
 
Outsourcing of Tax Collection in Congress's Crosshairs
 
A third bill in the area of taxpayer rights is the legislation introduced in the House and Senate (H.R. 695/S. 335) that would end the IRS's use of private debt collectors. The program pays private contractors a commission of 21 to 24 cents for every dollar of tax debt that they recover, while it's estimated that IRS employees can do the job for about 3 cents for every dollar collected. Since the private contractors are paid on a commission unlike IRS employees, there is a concern among many that they have an incentive to be overly aggressive and less respectful of taxpayers' privacy rights, a concern echoed by Nina Olson, the National Taxpayer Advocate. If you haven't already, send your members of Congress a quick email in support of the legislation to end this program. 

 

Our Going-Away Present from the Republican-Controlled Congress: An Unbelievably Confusing Tax Form - 3/9/07

This year our federal tax forms are incredibly confusing, but it's not the IRS's fault, and it's not something that is going to be solved with the latest regressive "flat tax" plan. Rather, this year's tax filing confusion is caused by the previous Congress, which in the months before the Republicans lost power, procrastinated as long as possible before extending several tax deductions and credits. At that point it was too late for the IRS to include these deductions and credits on the tax forms, which were already printed and distributed. (To be honest, Citizens for Tax Justice has never been fond of these particular tax provisions, the "tax extenders," but we'd rather they be enacted permanently or not at all, as opposed to having Congress revisit them every couple years and spending endless amounts of time that could be applied to more pressing matters.)
 
Let's say you have kids in college. The general instructions say that the tuition deduction is expired but may have been extended and refers you to the IRS's web site. The 1040 (printed and on-line) has nothing about the tuition deduction. If you go to the website and look under "What's Hot" you find not a word about the tuition deduction. If you search further you can find information about changes in tax laws that apply and you discover that to take the tuition deduction, you go to line 35, which is for something called the "domestic production activities deduction" and write a "T" on the line if you're taking the tuition deduction. If you happen to be taking the domestic production activities deduction and the tuition deduction, you write "B" on the line for "both." Similar instructions are given for those taking the educator expenses deduction, the DC first-time homebuyer credit and the state and local sales tax deduction.  
 
The good news is that this confusion could create support for tax reform and simplication. The bad news is that a lot of the plans peddled as "tax simplification" do not focus on simplification, but rather remove the progressive rates which have nothing to do with this confusion. (Tax tables are provided to tell you how much you actually owe after you work through all these deductions and credits). Our current President has persuaded Congress to enact six tax break bills in six years but none have simplified our tax code. Broad tax reform might be a good idea in 2009.

 

CTJ Online Letter Campaign Aims to End IRS Use of Private Collection Agencies - 2/23/07 

Citizens for Tax Justice has begun a letter campaign targeting Congress in support of legislation to end the IRS's use of private collection agencies to locate delinquent taxpayers, which began last fall. Click here to send your members of Congress a letter in support of these bills, which have been introduced by Representative Van Hollen (D-MD) in the House and Senator Byron Dorgan (D-ND) in the Senate.

One problem with the program is that the private collectors receive a commission of 21 to 24 cents for each dollar they collect, while IRS employees could do the same work for just 3 cents for every dollar collected. It is also feared that the private debt collectors, driven by large profits, will have a greater incentive than IRS employees to violate the privacy rights of taxpayers in order to increase collections.  

 

Congress May End IRS's Use of Private Debt Collectors - 2/2/07

Two Democrats in the U.S. House of Representatives, Steve Rothman (D-NY) and Chris Van Hollen (D-MD) have introduced a bill that would end the IRS's program using private companies to assist in collecting delinquent taxes. This comes after Nina Olsen, the National Taxpayer Advocate, who heads an independent office within the IRS, called upon Congress to end the private collection program in her annual report. The problem is that the private collectors receive a commission of 21 to 24 cents for each dollar they collect, while it's argued that IRS employees could do the same work for just 3 cents for every dollar collected. IRS Commissioner Mark Everson admitted last year that the IRS staff could collect these debts for less cost but said that the agency lacked the funding to do so.

 
Congress needs a mechanism in its budget process to recognize the increase in revenues that will result from any boost given to IRS enforcement, which only shows up in the budget as a spending increase. This is a problem that comes up in the debate over closing the Tax Gap. One of the suggestions Bob McIntyre offered for closing the Tax Gap in his testimony before the Senate Budget Committee last week was to simply to increase funding for IRS enforcement. The IRS estimates that somewhere between $5 and $30 could be collected for every new dollar of funding for enforcement.

 


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Senate Finance Committee Approves Agricultural Tax Bill with a Provision to Crack Down on Tax Avoidance Schemes - 10/5/07

The Senate Finance Committee voted 17 to 4 Thursday to approve a tax package that will cost $17 billion over ten years and will be added to the reauthorization of the farm bill that the Senate Agriculture Committee will take up in a couple weeks. The tax package includes a $5 billion trust fund for crop disaster assistance as well as $3 billion in tax credits to encourage conservation. These items would replace direct spending programs for these purposes and, since the Finance Committee package includes offsets, will free up funds for other purposes in the larger agriculture bill.

The largest offset is a provision that will reduce tax avoidance schemes by codifying what is known as the "economic substance doctrine," which basically means that transactions having no purpose other than to avoid taxes are void. This provision, which arguably will reduce the economic inefficiency that comes with the exploitation of tax loopholes, will raise $10 billion over ten years.
 
Another revenue-raising provision takes aim at tax shelters known as sale-in, lease-out (SILOs). These arrangements, which can involve an American bank buying something like a subway or sewer system in another country and "leasing" it back to the foreign government for tax advantages, were already banned starting in 2004 but that ban would retroactively apply to deals made before 2004 under this provision. Some members of Congress oppose any such retroactive changes in tax laws, but the Senate Finance Committee earlier this year tried to include this change in minimum wage and energy legislation.
 

Another provision raises $854 million by cutting the tax credit for ethanol from 51 cents to 46 cents a gallon when ethanol production reaches a certain level. Several amendments were approved. Jim Bunning (R-KY) delayed the markup for a couple hours before agreement was reached to include his amendment to create a 50 cent-per-gallon tax credit for fuel made from liquefied coal or natural gas. Environmental organizations point out that use of liquefied coal may actually increase global warming, underscoring the possibility that these matters are not exactly within the expertise of the Congressional tax-writing committees.

 

Senator Levin Targets Deductions for Stock Options - 10/5/07
 
Senator Carl Levin (D-MI) introduced a bill this week to end the disparity between deductions taken by companies for stock options and the expenses that are actually reported on the companies' books for those options. Corporations sometimes compensate employees (particularly executives) with options to buy stock at a set price. The employee can wait to exercise the option until after the value of the stock has increased beyond that price, thus enjoying a substantial tax benefit.

When stock options are exercised, employees report the difference between the value of the stock and the exercise price as taxable wages. The employer reports the fair value of the option at the date it's granted in its financial statements, yet takes a deduction for the value of the option on the date it is exercised, which is often much greater. This "book-tax gap" means that how the options are valued for accounting purposes and reported to stock-holders is different from how they're valued and reported to the IRS. Levin's bill would make the amount deducted for tax purposes equal to the value accounted for in financial statements.

According to calculations made by his staff using IRS data and released in June, firms deducted $43 billion that was not included in financial books in this manner between December 2004 to June 2005. CTJ's 2004 study of corporate taxes cited stock options as one of the key reasons corporations were able to avoid taxes.

 

Senate Bill Would Crack Down on Employers Who Misclassify Workers to Avoid Payroll Taxes - 9/14/07 

A new proposal in the Senate would crack down on employers who misclassify workers as independent contractors to avoid paying federal payroll taxes. Low-income workers who are not knowledgeable about the tax rules can be classified as independent contractors and not realize that this means they must pay both the employer portion and the employee portion of federal payroll taxes to the IRS on their own.
 
Anecdotal accounts from volunteer tax preparers who help low-income families file for the EITC indicate that they have had to tell some people in this situation that they actually owe a huge amount of payroll taxes that they had not planned for. When these workers do not or are not able to make the payment, this results in reduced taxes being paid into Social Security and Medicare. The Government Accountability Office has estimated that the cost each year is at least several billion dollars in lost revenues.
 
The proposal would reform the current rules, which provide a "safe harbor" that lets employers who misclassify workers as independent contractors continue doing so if they had a "reasonable basis" for the classification. Under current law, the reasonable basis can be that the practice is widespread in the particular industry, meaning that construction companies can misclassify workers because so many other construction companies do the same. The misclassification can also lead to the denial of other workers' rights and benefits as well as employer-provided health benefits and pension benefits.
 
The bill (S. 2044) would bar employers from using this "reasonable basis" argument and would allow the IRS to tell employers to reclassify workers in this situation. The bill is sponsored by Senators Barack Obama (D-IL), Edward Kennedy (D-MA), Richard Durbin (D-IL), and Patty Murray (D-WA).

Congress Continues to Prepare Assault on the Tax Gap - 5/11/07

The "tax gap," the difference between the total taxes owed and the total taxes paid in a given year, continues to be an alluring target for members of Congress. The IRS has estimated that in 2001, $345 billion in taxes due was not collected on time, and around $290 billion of that will never be collected. There is possibly much more tax evasion taking place in offshore tax havens. 

A bill has been introduced in the House by Representatives Rahm Emanuel (D-IL), Lloyd Doggett (D-TX) and Rosa DeLauro (D-CT) to crack down on offshore tax havens. A companion bill was introduced a few months ago in the Senate by Senators Carl Levin (D-MI), Norm Coleman (R-MN) and Barack Obama (D-IL). The legislation includes a presumption that offshore trusts and shell corporations in designated tax havens are controlled by the taxpayers funding them or directing them. It would also ban patents on tax strategies and would allow the federal government to order American banks to stop accepting or authorizing credit cards from foreign countries or banks not cooperating with U.S. tax enforcement laws. These reforms are important to anyone who pays her fair share - and is tired of subsidizing people who don't.

 

IRS Avoiding Audits of Offshore Tax Cheaters - 5/4/07  

A new report from the General Accounting Office (GAO) explores the murky waters of overseas tax avoidance by wealthy Americans, and finds that while IRS audits of Americans using offshore tax havens often uncover large tax scams and a great deal of revenue, the government is hampered in its investigative work by rules requiring tax administrators to wrap up most audits in three years. The GAO report was presented in a Senate Finance Committee hearing yesterday, where a Treasury official did not say whether the Bush administration would consider changing the statute of limitations for these particular tax audits. The report examines case studies showing that three years is simply not enough time to effectively catch tax cheats who are running away as fast as they can. The New York Times' Edmund Andrews has the story. The Talking Taxes weblog has commentary.

 

The Benefits of Closing the Tax Gap - 3/9/07

Congressmen Rahm Emanuel (D-IL) and Ray Lahood (R-IL) have put forward a bipartisan proposal to use revenues collected through better enforcement of capital gains taxes to double the funding of the State Children's Health Insurance Program (SCHIP) over the next 5 years to $60 billion. Ten billion dollars of this increase would go to children not currently covered by SCHIP. Families whose income is between 200% and 350% of the federal poverty level ($20,000 for a family of 4) would receive an advanceable and refundable tax credit to purchase health insurance for children.

The proposal to improve capital gains enforcement has already been presented as a bill by Representative Emanuel (H.R. 878) that would require securities brokers to report a customer's basis (generally the purchase price) in securities transactions to prevent understating the capital gains on such transactions. This step was one the suggestions offered by Citizens for Tax Justice to the Senate Budget Committee in January. The President included a similar proposal in his budget for fiscal year 2008. As reported in last week's Tax Justice Digest, another proposal to expand SCHIP would use revenue from an increased federal cigarette tax. The Center on Budget and Policy Priorities has a new report that outlines various ways of paying for an SCHIP expansion.

 

The Economist Endorses Offshore Tax Havens - 3/2/07

The Economist last week presented a 14-page special report on why offshore tax havens are good for us. In 2005 the Tax Justice Network estimated that $255 billion in revenues is lost each year from governments whose citizens hold their funds in offshore tax havens, a figure the magazine says "not everyone believes" even though no one has ever shown this number to be inaccurate. The authors generally downplay the loss of revenues and illegal evasion of tax laws. They seem to feel that the "tax competition" that offshore tax havens provide is healthy, no matter how much this causes democratically elected governments to lose control of their tax and fiscal policies.

Perhaps the most entertaining suggestion is that jurisdictions like the United States lower their taxes to reduce the incentive for tax evasion. By that logic we could reduce speeding on America's highways by raising the speed limits to 150 mph, or reduce stealing by abolishing property rights. If you want real solutions for dealing with tax havens and other causes of the tax gap, see Bob McIntyre's suggestions to the Senate Budget Committee. 

 

Tax Evasion in Congress's Crosshairs - 2/23/07 

Coinciding with a new call from Citizens for Tax Justice for a crack-down on tax evasion, new legislation has been introduced in the Senate to target tax havens and to prohibit the patenting of tax strategies. The bill is sponsored by Senators Carl Levin (D-MI), Norm Coleman (R-MN) and Barak Obama (D-IL). It includes a number of important reforms, including a presumption that offshore trusts and shell corporations in designated tax havens are controlled by the taxpayers funding them or directing them. It would also allow the federal government to order American banks to stop accepting or authorizing credit cards from foreign countries or banks not cooperating with U.S. tax enforcement laws.
 
The bill would also ban patents on tax strategies, of which there are currently 49. Senator Levin noted in his statement that patent law is designed to create an incentive for innovation, but there is hardly a lack of such incentive when it comes to tax avoidance. 

 

President Proposes to Reduce the Tax Gap - By One Percent - 2/9/07

The President's proposed budget released Monday includes some very minor measures that would close the "tax gap," the difference between the amount of taxes owed and the amount paid each year, by $3 billion a year. But this is, at most, 1 percent of the total tax gap. The IRS has estimated that the tax gap was around $300 billion in 2001 and most experts think even that number is an understatement. Senate Finance Chairman Max Baucus (D-MT) and other Democrats criticized the steps as not nearly enough to address the scope of the problem. This is reinforced by the fact that IRS Commissioner Mark Everson told the Senate Budget Committee last year that he could, in a given year, locate some of these taxes and increase collections by "between $50 billion and $100 billion without changing the dynamic between the IRS and the people." Democrats and Republicans have become concerned about the tax gap, because it results in compliant taxpayers effectively subsidizing the tax evasion of the less honest.

 

Senators Propose Legislation to Crack Down on Offshore Tax Havens - 2/2/07.

A bill introduced in the U.S. Senate would make the frequently abused "deferral" of taxes on American-owned corporations unavailable when those corporations are operating in a tax haven, that is, a country that does not cooperate with U.S. tax enforcement efforts. The legislation is sponsored by Senators Byron Dorgan (D-ND), Carl Levin (D-MI) and Russ Feingold (D-WI) and targets a tax provision that should be eliminated according to CTJ Executive Director Bob McIntyre. His testimony to the Senate Budget Committee last week regarding the "Tax Gap" included a proposal to repeal the "deferral" of these taxes, which is more like an exemption for the income that is claimed to be foreign. McIntyre argues that anyone with income that really is taxed overseas gets a credit for foreign taxes paid anyway, so the real effect of such a proposal would be simply to reduce tax evasion.