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Tax News & Views
President Obama’s renewed call this week to extend the Bush-era tax cuts only for low- and moderate-income taxpayers sparked a messaging war between Democratic and Republican congressional leaders that added to a growing sense of inevitability that a final agreement is unlikely before the post-election lame duck session.
Under current law and without congressional intervention, the top ordinary income tax rate for individuals is scheduled to increase to 39.6 percent (from 35 percent), the rate on long-term capital gains will increase to 20 percent (from 15 percent), and the top rate on qualified dividend income will jump to 39.6 percent (from 15 percent) on January 1, 2013. (For certain upper-income taxpayers, new taxes on earned and unearned income enacted in the Patient Protection and Affordable Care Act of 2010 that take effect in 2013 would result in even higher tax rates on ordinary income and long-term capital gain and dividend income.)
Expiration of the Bush tax cuts also would mean that the top estate tax rate will climb to 55 percent (from 35 percent), the estate tax exemption will fall to $1 million (from $5 million), and limitations on personal exemptions and itemized deductions (the so-called PEP and Pease limitations) will be reinstated. Other notable changes that would take effect next January include the expiration of “marriage penalty” relief and the 10 percent income tax bracket, and a 50 percent reduction in the amount of the child tax credit.
In a July 9 speech at the White House, President Obama called on Congress to immediately extend the 2001 and 2003 Bush tax cuts for taxpayers with adjusted gross income of less than $250,000 per year ($200,000 for individuals).
“Pass a bill extending the tax cuts for the middle class; I will sign it tomorrow. Pass it next week; I’ll sign it next week,” the president said. He added that once legislation is passed to protect the middle class, “we can continue to have a debate about whether it’s a good idea to also extend the tax cuts for the wealthiest Americans.”
White House Press Secretary Jay Carney underscored the administration’s insistence on the $250,000 income threshold when he told reporters after the speech that the president would veto any bill extending the tax cuts for all taxpayers.
The speech prompted congressional Republican leaders to reiterate their own position that the Bush tax cuts should be extended for taxpayers at all income levels, noting that the president’s proposal would be detrimental to small businesses.
“According to the Joint Committee on Taxation, nearly a million small businesses would feel this tax hike right away, and up to a quarter of the entire American workforce depends on these employers for a paycheck,” Senate Minority Leader Mitch McConnell, R-Ky., said in a July 9 press release. “No one should see an income tax hike next year…. We should extend all the income tax rates while we make progress on fundamental tax reform.”
Democrats unite around $250,000 threshold
Throughout the first half of the week, President Obama and administration officials met with congressional Democratic leaders to shore up support for his position within that caucus. Although they generally favor allowing the Bush tax cuts to expire for wealthier individuals, some Democrats in Congress – most notably House Minority Leader Nancy Pelosi of California and Senate Finance Committee member Charles Schumer of New York, whose constituencies include high concentrations of upper-income individuals – have in the past called for bumping up the income threshold and allowing current-law rates to expire only for taxpayers earning over $1 million. Other Democrats who are up for re-election in highly contested races – such as Sen. Claire McCaskill, D-Mo. – have also expressed an openness to raising the income threshold to $1 million as part of a broader budget deal.
But those differences appear to have been resolved for the time being. Pelosi told reporters after a July 11 White House meeting that congressional Democrats “are in complete unity with the president on the $250,000.”
Dueling Senate proposals
The partisan debate also played out in the Senate on July 11, as lawmakers in that chamber attempted to move a small business tax incentives package (S. 2237) sponsored by Majority Leader Harry Reid, D-Nev. (For details on the small business legislation see related story in this issue.)
Minority Leader McConnell tried to force a vote on President Obama’s proposal by offering it as an amendment to Reid’s small business bill. He also attempted to force a vote on an amendment offered by Finance Committee ranking Republican Orrin Hatch of Utah that would extend the Bush tax cuts – including providing estate tax and alternative minimum tax (AMT) relief – for one year for all taxpayers. The Hatch amendment also directed the Finance Committee to report legislation within one year of enactment that simplifies the tax code, reduces the individual income tax rate to “significantly below 35 percent,” caps the top corporate tax rate at 25 percent, repeals the AMT, and adopts a territorial tax system.
Reid rejected McConnell’s offer to vote on the two amendments, but later offered a unanimous consent agreement that would have provided for one vote on a proposal to extend the Bush tax cuts under the president’s parameters and a separate vote on a proposal to extend the tax cuts for all taxpayers, with a simple majority vote required for passage in each case. But that proposal went nowhere after McConnell raised an objection.
A spokesperson for House Majority Leader Eric Cantor, R-Va., has indicated that the House is expected to vote the week of July 30 on legislation to extend the Bush tax cuts for all taxpayers for one year. In the Senate, Majority Leader Reid has indicated that he will hold a vote sometime before the August recess on a proposal to extend the tax cuts for taxpayers making less than $250,000 per year ($200,000 for individuals), but the length of the proposed extension currently is unclear. According to Reid, this legislation also will include an AMT patch and “no big changes” regarding the estate tax. Tax “extenders” provisions, such as the research and experimentation tax credit, will not be a part of this legislation, Reid indicated.
Although the GOP bill is expected to pass in the House and Reid’s legislation could pass in the Senate (the threat of a 60-vote procedural hurdle to move legislation in that chamber makes the prospect of passage somewhat less certain) the partisan standoff is expected to continue and neither proposal is likely to reach the president’s desk before the November elections.
— Victoria Glover
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