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New Tax Bill Raising Eyebrows

May 21, 2010 · 14 comments

Apparently, Congress is on a roll. Just a couple of months after they pushed through the massive health care bill (referred to as the Patient Protection and Affordable Care Act, signed into law in March 2010) and debated the similarly hefty Tax Extenders Bill (referred to as the American Workers, State, and Business Relief Act of 2010, passed by the Senate in March 2010), they’re trying again. Pitched as “amendments to the Senate Amendment to H.R. 4213″ (H.R. 4213 is the Tax Extenders Bill), the Senate and the House have apparently reached a consensus on a new bill and it’s causing quite a commotion.

First, the title: American Jobs and Closing Tax Loopholes Act of 2010. Let your mind wander for a minute.

Next, the length. When I plowed through it earlier today, the version was a remarkable 433 pages (the officially summary alone is 27 pages). Yeah, for an amendment.

And finally, the content. Brace yourself. There are nine chapters:

  1. Promoting American Jobs
  2. Relief for Working Families
  3. Disaster Response
  4. Domestic Energy
  5. Extension of Other Expiring Tax Provisions
  6. Closing Foreign Tax Loopholes
  7. Closing Other Tax Loopholes
  8. Maintaining Access to Affordable Health Care
  9. Other Provisions

There’s a lot to take in. I’m going to hit some of the most talked about highlights now and blog a longer summary later. Here are the bits raising eyebrows across the internet today:

  • Included in the bill are proposals to increase the Oil Spill Liability Trust Fund liability cap and to increase the Oil Spill Liability Trust Fund solvency. The latter would increase the per-barrel-tax on the oil industry by 24 cents. This is because “a major spill, particularly one in a sensitive environment, could threaten the viability of the fund.” Hmm, reactionary, much?
  • Also included in the bill is election to expense advanced mine safety equipment. While tax-neutral, the plan is to encourage mine operations to invest in more mine safety equipment. This makes sense because what’s really needed to push safety in mines is advanced expensing. Losing a miner or two (or 29) apparently isn’t enough.
  • The bill includes about $15 billion in foreign tax-related provisions. The plan is to try to curb “abuses of the U.S. foreign tax credit system and other targeted abuses.” Specifically targeted are multi-national companies. While the idea is a good one, there is a lot of chatter about whether continuing to hammer at multi-national companies will actually serve as a deterrent to doing business in the US which is really the opposite intention (it’s really supposed to discourage potentially tax-evasive offshore operations of US companies).
  • The bill slowly poisons many s corporations. Okay, that’s a bit dramatic. But the bill purports to raise nearly $10 billion by tacking on payroll taxes to certain service professionals who currently split income as wages and draws. And by certain service professionals, Congress specifically means those in “health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics,, investment advice or management, or brokerage services.” So, um, everyone who uses an s corporation. And likely those who are high wage earners. Make no mistake: this is Congress’ way of hiking taxes on the upper middle class and letting Obama keep his promise of not raising taxes on the middle class. If you aren’t familiar with the way s corporations work, let me just advise that most small business are s corporations specifically because of this payroll tax issue – and if the bill passes, they just got socked with an additional 15% tax. If Congress was looking for a way to encourage under-reporting, mark my words, this is it.
  • The bill also contains nearly $5 billion to pay for settlement of what are known as the Cobell and Pigford class action lawsuits. These are, respectively, lawsuits brought over management of trust accounts for Native Americans and discrimination lawsuits brought by black farmers against the USDA (opens as a pdf). Notwithstanding any other issues, there has been grumbling about whether this bill is the appropriate place to tack on these settlement funds.
  • Finally, the bill orders the Commerce Department to study job losses over the past 20 years. My guess (and I won’t charge them for it): they’re going to find some.

I’m not alone in my concern over the scope of this bill and what it means for our economy. We keep pushing a little bit at the edges of some pretty sweeping changes at an alarming speed – so fast, in fact, that many taxpayers haven’t had time to digest them, much less, react to them. Bits and pieces (like this one) are just now coming out about laws passed months ago. Maybe it’s time for Congress take a breath and slow down – or, I don’t know, actually read what they’re making into law. Just saying.

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{ 8 comments… read them below or add one }

1 scarpy May 22, 2010 at 11:05 am

Not to get too technical, but you’re comparing apples and oranges when you say Congress passed healthcare, extenders, and now this. This IS extenders, in its latest stage. It’s not “just an amendment,” it’s a substitute amendment that contains the entire bill.

You object to the tax increases but I don’t see you taking a position on the extenders portion. I know they’re not the only expenditures in the bill, but they ARE the main tax expenditures. What’s your position on those? Do you think they should be extended? (Aside from the mine equipment one — and come on, when did worker safety by itself ever prompt a company into changing business practices?) And if they should be extended, how should we pay for them? Or should we?

2 Kelly May 22, 2010 at 11:47 am

Scarpy, thanks for your comment. I realize that this is the alternative version of the extenders bill – that’s noted in the piece. But it is very clearly an amendment – the original version was passed, not simply discussed, by the Senate two months ago. My point is that they’re pushing and adding, pushing and adding, all within a relatively short span of time. And the additions are not technical corrections or traditional amendments – they are substantial changes. The s corp bit, for example, wasn’t even included in the original version yet it made its way into this one. I’m willing to bet that many in the Senate haven’t read either version completely.

For the record, I’m opposed to a number of provisions in the bill, including extensions. As I mentioned, I intend to blog the extended summary later – these bits are merely what’s making news this week in the blogosphere.

3 Eric Killian May 23, 2010 at 1:17 pm

Write your representative, even if you don’t agree with my opinions:

I won’t waste time with formalities.

While many provisions are concerning over Amendments to the Senate Amendment to H.R. 4213 (H.R. 4213 is the Tax Extenders Bill), in particular I have many concerns over how the bill purports to raise nearly $10 billion by tacking on payroll taxes to certain service professionals who currently split income as wages and draws. And by certain service professionals, Congress specifically means those in “health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics,, investment advice or management, or brokerage services.

As a CPA I can say this will cause a fervor among our middle class. As a small business focused CPA most my clients who live a middle class lifestyle (at best) are taking salaries and draws out of their businesses. This split and saving on income tax is the margin that allows most of these businesses to function (or pay health care costs, or pay decent wages to employees, or provide quality services….)

To look deeper one must understand the tax code and how earnings/wages are earned/taxed. All of my clients take a reasonable salary from their corporations. While there are many other individuals that do not – THESE ARE THE PEOPLE YOU SHOULD BE CLOSING THE GAP ON. These ‘people’ are those that claim less than <35k in salaries and take a disproportionate 50k, 60k, 150+k in dividends/rents/draws. One must look at the involvement in the business and if a reasonable salary is being taken out of the corporation before one can determine whether draws are investment or earned income.

You must see that a significant potion of my clients (and the middle class business owners of our United States) earnings are NOT due to full time work at the place of business but rather due to their investment of money, start up risk and innovation (although many continue to work 60-70+ hour work weeks just to stay afloat). These items, just like stocks and other investments, should NOT be taxed at the higher income tax rate. Earning a wage from a business has no inherent risk, while a starting/running a business effectively puts at risk your lifestyle, family, home and all that our clients strive for. Its the foundation of American entrepreneurial spirit.

Perhaps my next letter will be to my clients, encouraging them to work for our government where you can retire on full pension (with health care) after 30 years of service, have extravagant expense accounts, spend many weeks on vacation, spend many months campaigning and have their own system of social security and health care.

I encourage you and all of our representatives to look at the SUBSTANCE of earnings and focus on the MANY other gaps in our system.

-Eric Killian, CPA

-I applaud efforts to reel in extravagant oil company gains and encourage any and all efforts for environmental cleanup. I pick up after my dog… surely oil companies should be expected to do the same.

4 Bill Miranda May 23, 2010 at 9:57 pm

I don’t disagree with your concerns about the S corporation provision. About the extenders. It is true that both houses of Congress have already passed different extender bills, but the problem with both pieces of legislation is that they relied upon revenue raisers that were subsequently passed into law in other pieces of legislation. So, Congress not only needs to reconcile the two versions of the extender bill, but they also needed to come up with different revenue raisers than were in the original bills. I think the S corporation tax provision might have actually come from Treasury as a recommended “loophole closer” but I’m not sure about that.

5 Bryan B June 22, 2010 at 4:24 pm

Both my wife and I run separate, small, successful health care businesses and operate them as S corps. After years of schooling and enormous student loans and start-up costs we were hoping to have something to show for it. Well forget about expanding or hiring new staff, unless we are cutting older people to bring in younger cheaper labor.
We’ve always paid ourselves reasonable salaries, the same we would have to pay another doctor to come in and do our job. In the past it has always been under 20%, last year was so bad we didn’t make enough to really pay the salary portion so the dividend percent was set very low. When this passes we will likely never get out of the just getting by category.

We were both born intelligent and had committed parents who made sure we excelled at every level of schooling all the way through specialty residency. Why should we have worked this hard? We spent at least a 1/3 of our lives being trained and now when we are on the brink of doing well financially we are absolutely hammered by every tax imaginable. We haven’t reached being “rich” yet, the 250k limit, but with 700k of student loan averaging at around 6% which is not tax deductible we may never have to worry about that.

My parents were teachers when I grew up and told me to never follow in their footsteps. Well they both retired at 55 with 75% of their salary and benefits as Illinois school superintendents, their salaries also ballooned in the last 5 years because that’s what they base the 75% on. They thought about going to another state to work and make even more but they don’t need to. There is no way we can retire anywhere close to 55 and be in the same shape at 70 or 75 that my parents will be. No wonder our state is broke. Bottom line is government needs to shrink or the actual producers of this nations wealth will eventually be overcome and/or move their business elsewhere.

6 Kelly June 22, 2010 at 9:38 pm

Bryan, I *completely* understand where you’re coming from…

7 scottee June 30, 2010 at 6:51 pm

Thank you!! This fighting of big-Washington is exhausting, but certainly worth the effort. After all, it’s only our livelihoods.

But these tax-policies makes sense from a competition point of view: the Feds (and their Big Business cronies) would love for all independent professionals to go work for them and stop mucking up their oligopoly.

8 Jeff B. October 26, 2011 at 1:51 pm

Did this get passed??? I can’t seem to find if this bill passed or not as there are so many revisions and amendments to it.

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