Tax legislation took a small step forward in October with passage of three trade agreements and a related trade bill. Although relatively minor, the tax provisions are the first to pass Congress with support from Democrats and Republicans. Against this backdrop of cooperation, however tense negotiations continue over more expansive tax proposals, such as individual and corporate tax reform.
The trade agreements with Colombia, Panama and the Republic of Korea, which President Obama signed on October 21, included provisions increasing the earned income credit (EIC) preparer due diligence penalty, providing for information exchanges between prisons and the IRS, and shifting the percentages due for certain quarterly payments of corporate estimated taxes.
The Korea trade agreement increases the penalty from $100 to $500 for each failure to satisfy EIC due diligence requirements. The Korea trade agreement also requires federal and state prisons to give the IRS the names, dates of birth and other personal information about inmates to help curb tax fraud by prisoners. Finally, all three trade agreements shift estimated taxes for large corporations in 2012 and beyond. The provision is a budget maneuver, shifting revenue already accounted for, from one period to another.
President Obama also signed on October 21 the Trade Adjustment Assistance (TAA) Extension Act. The new law enhances the refundable HCTC, which is available to individuals who receive Trade Adjustment Allowances and also certain recipients of benefits from the Pension Benefit Guaranty Corporation (PBGC). The TAA Extension Act increases the HCTC percentage from 65 percent to 72.5 percent for months beginning after February 12, 2011 through the end of 2013.
White House proposals
President Obama, meanwhile, continues to urge Congress to pass his proposed American Jobs Act. President Obama’s bill would extend the 2011 payroll tax cut for employees and self-employed individuals by reducing the employee-share of payroll taxes to 3.1 percent for 2012 along with rewarding employers that hire veterans and long-term unemployed individuals with tax breaks. Businesses would also benefit from a one-year extension of 100 percent bonus depreciation.
Paying for these and other tax breaks has the White House and the GOP at loggerheads. President Obama has proposed several offsets, including limiting itemized deductions and certain other tax expenditures for higher income taxpayers, taxing so-called carried interest as ordinary income, and eliminating some oil and natural gas tax preferences. Nearly all of these proposals have been rejected by the GOP and some Democrats.
The White House and its allies in the Senate tried unsuccessfully to pass the entire American Jobs Act. In coming weeks, Senate Democrats are expected to take up pieces of the proposal. Again, finding the revenue to pay for the tax breaks is the greatest stumbling block to passage. Senate Democrats have proposed a temporary 0.5 percent surtax on taxpayers with incomes over $1 million. Senate Republicans have moved to defeat the surtax.
Shortly after President Obama announced his American Jobs Act, the GOP unveiled some tax proposals. The GOP has proposed to reduce the individual income tax rates, lower the corporate tax rate, move the U.S. to a territorial tax regime, and repeal three percent government withholding.
The White House and Democrats, as expected, reacted lukewarmly – at best- to the GOP proposal. While Republicans are a majority in the House, they need support from Democrats in the Senate to pass any of their proposals. One area where they may find common ground is repeal of three percent government withholding.
Some Washington observers are predicting the Joint Select Committee on Deficit Reduction will proposal expansive tax reform measures. Others are not so sure. The Joint Committee’s 50-50 split between Democrats and Republicans is, some experts say, a recipe for deadlock.
The Joint Committee was created by the Budget Control Act of 2011 and is charged with reducing the federal deficit by at least $1.5 trillion over 10 years. The Joint Committee must present its proposals to Congress by November 23, 2011; that is, if it can agree on any.
So far, the Joint Committee has been tight-lipped about its deliberations. The Joint Committee held several public hearings in September but they discussed broad topics and not specific tax reform proposals. Most of the Joint Committee’s meetings are closed to the public, with only members and a handful of aides present. According to reports, members of the Joint Committee are far apart on which tax incentives to repeal or curb. Among the tax provisions reportedly discussed by the Joint Committee, and again details are sketchy, are a repatriation tax holiday, repeal or downsizing of some oil and natural gas tax breaks, an extension of the 2011 payroll tax holiday, and tax breaks for employers that hire military veterans.
If you have any questions about enacted or pending tax legislation, please contact our office. We will keep you posted of developments as 2011 draws to a close.