Social Security - New CTJ paper addresses raising the cap on taxable wages for Social Security.
Tax Extenders - Lame duck Congress passes "tax extenders."
The Next Congress - Incoming Democrats face choices on taxes, PAYGO.
Election 2006 - Senate candidates debate tax policy.
Healthcare - Health insurance industry offers sham healthcare proposal.
Health Savings Accounts - Provision tax shelter aspects of HSAs passed with "tax extender" legislation.
Estate Tax - "trifecta" bill may be brought to Senate floor sometime in September.
Child Credit and Marriage Penalty Relief - vote may occur in September.
Savings Incentives - Senate passes pension bill.
International Tax Evasion - Senate hearing focuses on tax cheats.
Business Activity Tax - unclear if vote will be scheduled before fall elections.
Budget Process - weak earmark reform rule approved in House Sept. 14, others votes unlikely this month.

Social Security:
CTJ Paper Addresses Raising the Cap on Taxable Wages for Social Security

Tax Extenders:
Lame Duck Congress Passes Tax Extenders

Republican-Controlled Lame Duck Session May See Action on Tax "Extenders"

Legislation passed by the House of Representatives on December 8 and by the Senate on December 9 included the package of tax break extensions commonly called "extenders." The extenders generally have bipartisan support but, as a new paper from CTJ explains, there are doubts about their economic benefits. They include tax breaks for research and development by business, the deduction for state sales taxes, the deduction for college tuition and even tax subsidies for restaurants and many other things. Over the summer the tax extenders were made part of the "trifecta" bill, combining them with a change in the minimum wage and a measure nearly repealing the estate tax, but this bill failed to pass the Senate. The package also included provisions to increase the tax shelter aspects of Health Savings Accounts and provisions related to international trade.

The Next Congress:
Incoming Democratic Leaders Face Choices on Taxes, PAYGO

Once Democrats take charge of the two chambers and the committees, they will have to decide how far to go in extending tax breaks that help the middle-class (as they often pledged to do during the campaigns) and also how to pay for them. Charlie Rangel (D-NY), who will become the chairman of the House Ways and Means Committee that will initiatiate tax policy, has talked of making permanent the research and development credit (which is currently part of the tax extenders that must be renewed every couple years), making college tuition permanently deductible and preventing the alternative minimum tax (AMT) from affecting middle-class families. The last point is one that would get wide agreement in principle but a conflict could easily erupt over how it should be paid for.

The AMT is basically a backstop to the federal income tax designed to ensure that wealthy people with deductions, credits, capital gains or other tax advantages are not able to avoid paying their fair share. Unless it is changed, the AMT will start affecting more middle-class and upper-middle-class people because the exemptions built into it are not indexed for inflation and because the Bush tax breaks generally lowered taxes without changing the AMT. The tax reconciliation bill Congress passed early this year included a "patch" for this problem, increasing the exemption levels through 2006 and extending a rule allowing taxpayers to use non-refundable personal credits to offset the AMT. Extending this patch for one year is estimated to cost $40 billion and providing a permanent fix could cost nearly $1 trillion over a decade.

Democrats' Pledge to Revive Real PAYGO Rules May Complicate Tax Agenda

Whereas the outgoing Republican leadership saw no problems with deficit-financed tax breaks, the new Democratic leadership has pledged to restore pay-as-you-go (PAYGO) rules, meaning any new entitlement spending and any new tax breaks (including changing the AMT) must be paid for. Democratic leaders have discussed ways to offset tax breaks by increasing compliance and closing corporate loopholes. Some compliance-related measures could include provisions of bipartisan bills introduced during this Congress to crack down on business owners who are evading paying Social Security and Medicare taxes on their earnings from partnerships and "Subchapter S" corporations. Legislation targeting loopholes will likely affect energy companies. As BNA reports:

"[Incoming House Speaker] Pelosi has proposed repealing at least $4 billion in tax breaks and new subsidies from the Energy Policy Act of 2005 and another $8.6 billion in tax loopholes for energy and large oil companies... One energy lobbyist told BNA Nov. 13 that it is unclear how the $4 billion figure was determined, given that the tax piece in the 2005 act amounts only to $2.8 billion for oil and gas, with only a small portion of that benefiting large integrated oil companies."

Several pieces of legislation currently have provisions that can be revived in the next Congress for this purpose, including measures reining in excessive write-offs for equipment purchases, a recently enacted tax break for U.S. manufacturers, and tax loopholes for energy companies. Lobbyists for oil companies are already getting ready for a fight even though these measures do not appear to raise massive amounts of revenue by themselves.

Election 2006:
Senate Candidates Talk Taxes

Healthcare:
Health Insurance Industry Offers Sham Healthcare Proposal

Estate Tax:
Senate GOP Leaders May Attempt Again To Pass "Trifecta" Bill Combining Estate Tax Cut, Minimum Wage Change and Corporate Breaks

Senate Majority Leader Bill Frist (R-TN) is considering once again brining to the floor the so called "trifecta" bill that combines a cut in the estate tax with a package of tax break extensions and a change in the minimum wage. No vote is yet scheduled but one could occur before the end of September, when the Senate will adjourn so that members can return to the campaign trail.

On August 3, Senate GOP leaders failed to obtain the 60 votes needed to overcome a filibuster and pass the bill, mainly because it included the massive tax cut for those who inherit multimillion dollar estates.

The estate tax cut was presented as a "compromise" after conservatives failed to obtain the 60 votes needed in the Senate to fully repeal the estate tax on June 8. At a cost of around $62 billion or more per year when fully implemented, the "compromise" estate tax cut actually would have cost at least 75 percent as much as full repeal.

The minimum wage provisions of the bill would have gradually increased the wage floor from its current $5.15 to $7.25. However, the bill would have actually cut wages for tipped workers in seven states, as explained by the Economic Policy Institute. There is some speculation that the provision that harmed tipped workers could be removed so to make the bill more attractive to some Democrats.

The package of tax break extensions are largely aimed at business and may be passed as a separate bill. Some of these tax breaks have questionable value but nevertheless have bipartisan support. The largest is the research and development tax credit followed by the deduction for state sales taxes.

The August 3 vote was 56-42. When it became clear that the bill would not pass, Senator Frist voted against to preserve the right to bring the bill to the floor again in the future.

Child Credit and Marriage Penalty Relief:
Senate May Attept to Make Permanent "Middle-Class" Tax Breaks That Don't Expire Until End of 2010

Senate Majority Leader Bill Frist (R-TN) early this week said he is considering introducing legislation that would make permanent the $1,000 child credit and the provisions mitigating the marriage penalty. These provisions are generally described as “middle-class” tax provisions, although they are applicable in some cases for taxpayers with six-figure incomes. The provisions are not scheduled to expire until 2010.

Democratic leaders in Congress have questioned why Congress should devote time now to consideration of tax breaks that are not about to expire when others, such as the "extenders" that were included in the "trifecta" bill have already expired and need to be extended retroactively.

The child credit is a provision that reduces a family’s tax liability by up to $1,000 per child, is partially refundable and is phased out for families at upper income levels. The credit begins to be phased out at incomes above $110,000 for married couples and $75,000 for single parents.

The credit is not entirely progressive because many families without income tax liability cannot benefit from it at all. This is mitigated by the fact that it is partially refundable (meaning if the child credit exceeds a family’s tax liability then the family can actually have negative tax liability and receive money from the IRS). But the refundable portion of the credit is limited to 15 percent of earnings above $11,300, up to the maximum benefit of $1,000. The minimum earnings needed to qualify for the credit, $11,300, is annually adjusted for inflation but the credit amount and the income thresholds at which it begins to phase out are not, so the credit, with the passage of time, will become increasingly unavailable to those who need it the most.

By the end of this decade, the starting point for the child credit phase-in will rise to an estimated $12,400 in earnings. As a result of the phase-in, in 2010 some 16.9 million low-income children age 16 or under will receive less than the full $1,000 credit according to data from the Institute on Taxation and Economic Policy. That will represent almost one out of four children age 16 or under nationwide. If the phase-in threshold was returned to its original $10,000 level and frozen there (as the phase-out thresholds are frozen), then 8.8 million low-income children would receive higher credits than they will get under current law in 2010. There is no indication that GOP leaders in Congress are considering such a change.

The marriage penalty relief provisions are only partly targeted at the middle-class. The increase in the standard deduction for married couples to twice the amount available for single taxpayers will help mainly middle-income and lower-income families. This is especially true since higher-income families itemize their deductions and therefore do not benefit from an increase in the standard deduction.

The increase in the 15 percent bracket, however, only helps those married people who would have otherwise been in the next highest tax bracket. Back in 2004 the Tax Policy Center argued that this provision only helped the 19 percent of households in higher brackets and not subject to the AMT.

Apparently accelerating marriage penalty relief for low-income families (who use the EITC) is not being considered. The 2001 tax cut law increases the income level where the EITC phase-out begins by $3,000, but the increase is not fully phased in until 2008.

Savings Incentives:
Senate Passes Pension Bill That Includes More Tax Breaks for Wealthy Families Disguised As Savings Incentives

On August 3, the Senate passed a pension reform bill that makes permanent provisions of the 2001 tax break legislation that raised the contribution limits for Individual Retirement Accounts (IRAs) and 401(k) plans. As reported here before, almost no one was making the maximum allowable contributions to these savings vehicles even before the limits were increased. A small number of mostly upper-income families will enjoy a tax break that will likely have no effect on their savings. Since these families are able to save even without help, the most likely effect of IRAs is that money that would have been saved anyway is moved into these accounts to receive the tax advantages. It is therefore very unlikely that IRAs can possibly serve as "savings incentives" as their proponents claim.

One positive aspect of the pension bill is its language making permanent the Saver's Credit. Introduced in the tax break legislation enacted in 2001, it credits up to 50 percent of contributions of up to $2,000 per spouse made to an IRA or 401(k) plan for low-income families. The Saver's Credit does not help families too poor to have tax liability and it was claimed on less than 4 percent of tax returns filed in 2004. But it does certainly correct the regressive nature of savings incentives for those households who can take advantage of it.

The pension bill was passed last week by the House and will now be signed into law by President Bush.

International Tax Evasion:
Super-Rich Tax Cheaters Exposed by Senator Levin

The super-rich are jet-setters in more than one sense; some of them frequently send vast sums of money to offshore tax havens with strict secrecy laws, enabling these fat cat cheaters to buy real estate, paintings, antique furniture and bejeweled watches, without paying tax on the money used to purchase such luxuries. These types of scams, which hurt every honest U.S. taxpayer, were exposed this week in a voluminous report put together by Senator Carl Levin (D-Mich.). The scams often are perpetrated through the use of offshore trust accounts or shell corporations, and complex financial products such as collars or derivatives. Apart from the sheer greed involved, one of the most troubling aspects of the report is the extent to which the cheating was enabled by purportedly reputable legal and accounting professionals. The report was the subject of a hearing this week by the Senate Permanent Subcommittee on Investigations (Levin is the senior Democrat, and Senator Norm Coleman (R-Minn.) is the chair, of the subcommittee). Among the recommendations made by Levin and Coleman:

Business Activity Tax:
House Delays Bill to Help Corporations Escape State Taxes

In the face of opposition from the National Governors's Association and other groups, the House of Representatives delayed until indefinitely a vote on the Business Activity Tax Simplification Act (BATSA), which has the stated purpose of creating simpler and less burdensome rules to determine when a state government can tax the profits of an out-of-state company. While simplification sounds like a good idea, it's not what this bill does. BATSA actually makes it easier for large, multistate companies to avoid paying their fair share of taxes. The bill applies a "physical presence" test to determine whether or not a company selling a service from out-of-state can be taxed, but includes a variety of loopholes that will ensure that many companies' profits are not taxed at all. The Congressional Budget Office has found that by 2011 this bill, if enacted, would cost states $3 billion annually.

What does this mean to people who are not tax attorneys?

First, Congress is basically giving a lot of large, multistate corporations an annual $3 billion tax break through this bill and it’s the states that have to pay for it. This means less money for schools, roads, the DMV and whatever it is that states need to fund, and we know how delicate the states’ fiscal health can be.

Second, under BATSA, large multistate companies would have new opportunities to avoid taxes that smaller home-grown companies would not enjoy, regardless of which carried out a more productive business in the state. Most people would have a hard time understanding why out-of-state companies trying to sell them services should receive more tax advantages than locally-owned businesses in their neighborhoods.

What's wrong with the current rules and how would BATSA change them?

It’s true that there is some confusion and litigation over the current rules, but not as much as there will be if this bill is enacted. Congress passed what was supposed to be a temporary law back in 1959 that said a state can’t tax the income of a company that sells products to people in the state but ships them from out-of-state and takes the orders at an out-of-state location. In other words, the company has to be “physically present” in the state before it can be taxed, but physical presence is defined in a strange way. Say a company takes orders from a location in State A and ships its products from State A. It could sell 90 percent of its products to State B and send hundreds of trucks and thousands of salespeople into State B but it still can’t be taxed by State B. So this was never a great law but it’s still on the books.

For other types of sales, like the sale of services, that law didn’t apply. Many states tax out-of-state companies in proportion to the fraction of the company’s sales that are directed into the state. If 50 percent of a companies sales are to residents of my state I would probably find it reasonable that my state apply its corporate income tax to 50 percent of the company’s income. Since states do have different standards there has been some confusion and litigation but not as much as we would see under BATSA.

Unfortunately, BATSA takes the law enacted in 1959 that currently covers physical goods shipped from out-of-state and extends it to cover other sales and then writes in a bunch of loopholes to shield a lot of corporate profits from state taxes. The basic idea sounds deceptively simple. The income of a company doing business in a particular state can be taxed only if it has a “physical presence” in that state for more than 21 days out of the tax year. But the bill contains many “safe harbors” — exceptions basically. For example, a manufacturer could ship unfinished products into a state to have them completed and then shipped back out without triggering the physical presence rule. Or a company that sends service people into a particular state can create subsidiaries that go into the state for no more than 21 days each to avoid meeting the rule’s physical presence threshold. Companies could maneuver to avoid paying taxes in states where it is clearly doing business.

Budget Process:
Senate Cool to Budget Rules That Would Slash Services Americans Depend On
While Protecting Tax Breaks for the Rich

Despite the fact that tax breaks enacted since 2001 are responsible for almost half of the U.S. federal budget deficit, President Bush and Republican leaders in Congress claim that they need new budget rules that will encourage deep cuts in federal programs — but mandate no changes in tax policy — in order to get deficits under control. Fortunately the full Senate has not approved any such plans at this time but there is a chance they will do so before leaving at the end of September to hit the campaign trail.

Earmarks

On September 14, the House approved a very weak "earmark reform" in the House rules that will affect how legislation is passed in that chamber only until the end of this Congress.

In the last few months commentators and the public have focused on members of Congress earmarking, or slipping in lines of legislation in appropriations bills that designate funds for specific projects for their states or districts. The earmark reform conversation in the House of Representatives shifted away from passing legislation (which is currently held up in a conference committee) to changing House rules in order to change the way earmarks are handled. Negotiations have stumbled for a while over how tax break proposals would be handled.

House leaders successfully pushed for a rule that treats tax break proposals as earmarks, or as "targeted tax provisions" ONLY if they benefit one person or one entity. This means that a spending earmark creating a program to help several thousand low-income people would require identification of the sponsoring member but a tax break that benefits just two people (and probably two extremely wealthy people or business-owners) would not. Republicans on the House Appropriations Committee opposed to this plan because they think it lets the House Ways and Means Committee (which writes the tax proposals) off the hook too easily. But their definition of a "targeted tax provision" that should be considered an earmark is also laughably loose. It would have included any tax break that benefits fewer than a hunder people. So a tax break that benefits only the richest fraction of one percent could never be considered an "earmark" because it benefits more than a hundred people. This is essentially a repeat of the controversy that slowed down the line-item veto legislation, as explained below.

Most Democrats joined the House appropriators in opposing the plan, but the Republicans were able to muster a majority with the help of 45 Democrats, many of whom are in tight races this fall.

Line-Item Veto

On June 22, the U.S. House of Representatives voted to approve a bill that would give the President “line-item veto” authority to strip out certain spending provisions from bills and force Congress to reconsider them while he withholds the funds. Almost no tax-break provisions could be stripped out this way under the bill.

- Unprecedented Presidential power: The legislation would allow the President to single out spending provisions in an appropriation bill (or a bill to expand entitlements), withhold funds and force Congress to vote to approve or reject the rescission (cancellation of the spending). The President would be allowed to withhold funds for a total of 90 days, even if Congress rejects the rescission.

- Tax breaks for special interests protected: The President proposed that he be given the authority to use the line-item veto to strip any spending provision or entitlement increase, but could only strip tax break provisions benefitting fewer than 100 people. For example, a tax break that benefits one half of one percent of Americans would be protected, because it benefits more than 100 people. Even that rule wasn’t enough for the House, which decided that tax breaks needed even more protection. The version passed by the House says that only tax breaks benefitting a single person or company can be stripped. Even then, an exception exists whenever the chairmen of the tax-writing committees (the people who write the tax break provisions in the first place) say they think the tax break should be protected from the line-item veto!

- Little chance of reducing deficits: A recent study of the line-item veto by the Congressional Budget Office concludes that it is not likely to reduce overall deficits anyway. Rather, its real effect would be to increase the power of the executive branch, which could use the threat of the line-item veto to spur legislators to go along with the President’s agenda, even if it involves increasing spending in certain areas or enacting tax breaks that are not paid for.

Additional Spending Restraints Not Moving In Senate

On June 20 the Senate Budget Committee approved a bill sponsored by its chairman, Senator Judd Gregg, that included the line-item veto plus more sweeping budget changes that would, again, aim to reduce spending but protect tax breaks. Like the House bill, Gregg’s proposal gives the tax-writing chairmen enough influence to protect their pet tax break provisions. Realizing that there might not be votes for the line-item veto language, much less other budget restraints, Senator Gregg recently said he was open to supporting the line-item veto by itself without the other provisions he crafted.

House May Take Up Sunset Commission Bill Upon Returning From August Recess

Republican leaders in the House pulled from the floor two bills that would establish "sunset commissions." These commissions would essentially review government programs and agencies and decide what needs to be cut or eliminated. Under one proposal, Rep. Todd Tiahrt's H.R. 5766, the commission would then make proposals to Congress, where they would not be subject to normal legislative procedures. Under the other proposal, Rep. Kevin Brady's H.R. 3282, the commission's decisions would take effect automatically unless Congress voted to stop them.

Both bills present a departure from the bipartisan commissions that have worked effectively in the past. A majority of commissioners could be appointed by Republicans and would not need the input of Democrat-appointed commissioners. Their proposals could pass Congress without a single Democratic vote. Under both bills, the commission would not look at various tax breaks and tax expenditures that cost the American taxpayer hundreds of billions of dollars.

More commissions have been proposed over the summer. In June Rep. Frank Wolf (R-VA) introduced the SAFE (Securing America's Future Economy) Commission Act, H.R. 5552, which would allow a commission to propose massive entitlement cuts or eliminations to Congress with very little Democratic input (although at least one commissioner from the minority party would be needed to issue recommendations) and would ensure that the proposals bypass normal Congressional procedures. Language in the bill seems to invite the commission to use "dynamic scoring" which assumes that tax-breaks actually raise revenues despite all evidence to the contrary. The bill targets entitlement programs like Social Security and Medicare but not the tax breaks which have largely caused budget deficits.

Remarkably, this bill didn't go far enough to protect tax breaks for some lawmakers. Rep. Patrick McHenry (R-NC) introduced legislation in July that is basically like the Wolf bill except that it explicitly says changes in tax policy will not be considered by the commission.

Congress Not Considering The One Proven Budget Reform Measure — PAYGO

The pay-as-you-go (PAYGO) rules helped President Clinton and Congress reduce deficits in the 1990s by requiring spending increases and tax breaks to be offset by either spending reductions or tax increases elsewhere, so that the overall effect would not be an increase in the deficit. Congress allowed the PAYGO rules to expire in 2002 because they endangered President Bush’s tax cuts for the wealthy. Indeed, last year Congress used budget rules to make a budget filibuster-proof even though it increased deficits by including tax breaks benefitting the wealthy that outweighed the cuts in services used by low-income people.