Congress

I’ve been tossing around blog post after blog post in my head, trying to figure out what to write exactly about the tax provisions in the most recent bailout package. And I think I’ve finally figured out what’s been bothering me: the darn thing just doesn’t make sense.

I knew that the bill was going to be a hot mess. The bill which managed to pass the Senate wasn’t just about the bailout - it was everything but the kitchen sink. But the final bill is even worse.

So here’s just a taste of what the bill, known as H.R. 1424, the Emergency Economic Stabilization Act, says:

FDIC caps raised. As previously reported, the FDIC insurance limit was raised from $100,000 to $250,000. This cap is temporary and was supported by both Senators McCain and Obama. And yes, it’s supposed to make us feel better about our banks (is it working?).

AMT “relief”. Congress finally did something to fix the AMT before the end of the year… Really. But just like in prior years, this is a temporary patch. We’ll be yelling about it again next year.

Gain or Loss From Sale or Exchange of Fannie Mac and Freddie Mac Stock. The bill treats losses on sales of Fannie Mae and Freddie Mac preferred stock by financial institutions or banks as ordinary losses.

Golden Parachute Rules Modified. The bill applies limits on executive compensation and golden parachutes for executives of employers who participate in the bailout.

Extension of Mortgage Forgiveness Tax Treatment. The bill extends current law tax forgiveness on the cancellation of mortgage debt. A forgiveness of debt had been traditionally included in income, but was exempted in 2007 - the bill extends that deadline through 2012.

Taxes Paid and Other Deductions Extended. For taxpayers who itemize, there are extensions for deductions for state and local sales tax; qualified higher education expenses; school supplies expenses for educators; and the recent additional standard deduction for property taxes.

Donations To Charity From Retirement Accounts. The bill also extends the ability of people over age 70½ to make a donation to charity from an IRA of up to $100,000 and exclude that amount from income.
Child Tax Credit Modified. The bill enhances the child tax credit by lowering the “floor” for the refundability of the credit.

Extensions and Modifications of Production Tax and Energy Credits. The bill extends the date for the production credit and expands the types of facilities qualifying for the credit. The bill extends the 30% investment tax credit for solar energy property, qualified fuel cell property and microturbines.

Extension of Energy Credits for Homeowners. The bill extends the credit for residential solar property and removes the credit cap for solar electric investments. The bill adds residential small wind investment and geothermal heat pumps, as qualifying property.

New Clean Renewable Energy Bonds (“CREBs”). The bill authorizes $800 million of new clean renewable energy bonds to finance facilities that generate electricity from wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, qualified hydropower, landfill gas, marine renewable and trash combustion facilities.

Steel Industry Fuel. The bill adds a credit for coal used in the manufacture of coke, a feedstock used in steel production (taxgirl trivia: I’m a coke expert! As a kid, we named Coke, after this very product. Really.)

Plug-in Electric Drive Vehicle Credit. The bill establishes a new credit for plug-in electric drive vehicles. The credit for passenger vehicles and light trucks ranges from $2500 to $7500. The credit will operate like the existing credit for hybrid vehichles.

Bicycle Commuters. The bill allows employers to provide employees who commute to work by bicycle limited fringe benefits to offset costs like storing the bike. This puts bike commuters in the same category as drivers (imagine that!).

Extension of Credits for Energy-Efficiency Improvements For Homeowners. The bill extends the tax credit for energy-efficient existing homes and includes energy-efficient biomass fuel stoves as a new class of energy-efficient property. The credit that contractors receive for the construction of energy-efficient new homes is also extended.

Investments in Recycling. The bill allows taxpayers to claim accelerated depreciation for purchase of equipment used to collect, distribute or recycle.

Basis Reporting by Brokers on Sales of Stock. Brokers are going to be required to report basis information to the IRS for transactions involving publicly traded securities, such as stock, debt, commodities and derivatives. As a tax professional, I can’t tell you what a great thing this is - assuming that they get it right. The lack of information provided to investors is appalling.

FUTA Surtax. The Federal Unemployment Tax Act (”FUTA”) imposes a 6.2% gross tax rate on the first $7,000 paid each year by employers. The “temporary” surtax of .2% imposed by Congress in 1976 has been extended for another year. Interesting take on the word “temporary”, no?

Charitable Giving. The bill offers tax incentives for charitable giving to help victims of summer storms, tornadoes, and floods in the Midwest. The bill also extends special deductions for businesses for donations of food, as well as books and computers to schools.

And now some of my favorites:

Extending credits for mine rescue training team expenses and an election to expense advanced mine safety equipment;

Increasing deductions for film and TV production costs if the costs are incurred in economically depressed areas;

Accelerated depreciation for casinos business property on Indian reservations;
An economic development credit for American Samoa;

Tax rebates for rum imported from Puerto Rica and the American Virgin Islands;

Allowing commercial fishermen and those affected by the Exxon Valdez oil spill in Alaska to average out damage awards over three years;

Extending programs that fund rural schools and communities which depend on income from logging on federal land;

Imposition of a break on excise tax for the manufacture of wooden arrows used in toys for children;

Extending a write off for NASCAR and other motor tracks to offset racetrack costs; and

Tax breaks to support the “Wool Research Fund”

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So we covered everything, right? Nobody feels left out?

And yes, I know this post is tinged with my political views - but it’s not partisan. It’s about simplicity. At my office, if a client wants three things, we don’t throw them all together, we tackle them one at a time. We don’t do a combination will + noncompete + incorporation in one document because those are different issues that require different levels of discussion and attention. And that works for us.

Why doesn’t the “one thing at a time” bit work for Congress?

[author's note: My apologies if you read the original, sadly unformatted version of this in the feed. I hit "send" instead of "save" cause yes, it's been that kind of day.]

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Not a lot was done right after Hurricane Katrina but Congress did step in with some disaster relief that include tax breaks for victims and tax incentives for those to give to charities assisting victims. Congress passed similar legislation for victims of other disaster areas, including those who suffered through catastrophic hurricanes and tornados.

Why re-invent the wheel? Today, lawmakers from five Midwestern states introduced a similar measure in Congress to aid victims of the recent violent storms and flooding.

If the plan passes, it would allow disaster victims take money out of retirement plans without paying a tax penalty - the money would presumably be used for home repairs and other necessities not covered by FEMA. The bill would also give tax breaks to businesses that suffered losses and, most significantly in an era of “charity burnout” encourage more taxpayers to make donations to charities.

As written, the plan would apply to those areas declared federal disaster areas in the midwest and in the south. This includes areas in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin.

The IRS had already granted disaster relief for taxpayers in affected areas of Illinois, Indiana, Iowa, Nebraska, West Virginia and Wisconsin for the most recent storms. Earlier this spring, the IRS extended similar relief to storm victims in parts of Arkansas, Colorado, Georgia, Maine, Mississippi, Missouri and Oklahoma.

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The proposed gas tax holiday has officially been scrapped.

Of course, this shouldn’t be news - the tax holiday was planned to start on Memorial Day as the kick off to the summer holiday season. Considering that we’re about six weeks away from Labor Day (the proposed end), the idea that the holiday won’t happen this summer shouldn’t surprise anyone.

According to Forbes, the reason that the holiday was shelved has everything to do with the same reason that the tax was proposed in the first place: the economy. Apparently it took Congress quite awhile to figure out what my readers already knew, that a decrease in tax revenue without a corresponding cut in spending would result in lost jobs.

The chair of the House Transportation and Infrastructure Committee, Rep. James Oberstar (D-MN), and the chair of the highway subcommittee, Rep. Peter DeFazio (D-OR), presented a report to Congress illustrating how many jobs were at risk. It ranged from 1,000 jobs in Vermont to 23,000 jobs in California. In an election year, that is a particularly tough pill to swallow.

But it’s even worse than we thought. The highway trust fund, which pays for highway and bridge projects, is losing money. Three years ago, the trust fund had a surplus of $10 billion. The trust fund is now predicted to reach a $3 billion deficit next year.

The Transportation Construction Coalition expressed concern that if Congress does not do something soon, further job losses would occur. Predictions run as high as 485,000 additional jobs at risk. Cutting projects is not an option because recent reports suggest crises in roads and bridges infrastructure that need to be addressed.

Congress hasn’t done anything to resolve the matter yet, largely because there is no clear agreement on how to replenish the trust fund. One suggestion? Raising the gas tax. Yes, I said raising the gas tax. Congressional officials note that federal fuel taxes have not changed in 15 years, not even indexed for inflation. Suggestions for an increase in the tax have ranged from 10 cents per gallon to 40 cents a gallon.

Alternatives to a gas tax increase are just as unpopular. They include the addition of toll roads and public-private partnerships, congestion pricing and user fees.

No matter which road we head down, gas is going to become much more expensive. Ugh.

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The Senate voted overwhelmingly (76-10) to advance a mortgage rescue plan to save hundreds of thousands of homeowners from foreclosure. The plan focuses on a $300 billion FHA program to allow homeowners who are currently considered too risky to qualify for government-backed loans to refinance into safer, more affordable mortgages.

The number of “yes” votes means that the bill would escape a veto from the White House. With this in mind, the White House is trying to work out a compromise with the Senate - specifics of a compromise are still not clear.

It is also not clear whether the package will clear the House. One issue that has not been agreed on between the Senate and House focuses on the limits on the mortgages FHA can insure and Fannie Mae and Freddie Mac can buy. The Senate measure caps the limits at $625,000 while the House version would impose a cap of $725,000. Those kind of caps, to me, are crazy. According to a report in the NY Times, the the median home price is $220,000. What kind of lenders are handing out loans to homeowners in excess of $625,000 without verifying ability to pay? I just don’t get it. Apparently, 76 members of Congress do.

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Defying the White House, Representatives in the US House voted to prevent about 22 million taxpayers from being hit by the alternative minimum tax (AMT).

What?

Oh yeah, just like with any headline, there’s more.

The idea of AMT relief was originally endorsed by the GOP (such as Senator McCain). The problem with AMT relief? The $61 billion hole in the budget left behind.

To offset the hole, Deomocrats propose to raise revenue in three key areas:

1, The bill would tax the “carried interest” of private equity and hedge fund managers at ordinary income tax rates instead of the 15% capital gains rate;

2, The bill would close a loophole that Democrats say has allowed foreign-owned US firms to avoid taxes on payments to foreign parent companies as a result of tax treaty provisions; and

3, The bill would bar integrated oil companies from claiming a domestic manufacturing tax deduction and would freeze the benefit for smaller oil and gas companies. Integrated oil companies are those involved in the upstream (i.e., exploration and production) and downstream (i.e., refining, marketing, distribution and retailing) segments of the industry. Prior to 2004, oil companies were not entitled to this deduction which was estimated to cost $3.5 billion over 5 years.

House Ways and Means Committee Chair Charles Rangel (D-NY) claims that the offsets are necessary in order to prevent the deficit from getting bigger: “We’ll be able to say we didn’t borrow the money and we didn’t put this burden on our children and grandchildren.”

But the GOP and the White House see it differently, calling the offsets a “permanent tax increase.”

With the offsets in place, the bill likely won’t pass the Senate. If it does, the White House has threatened a veto.

I think we all agree that AMT relief needs to happen in some form - and not as a series of last minute patches. The question is whether there should be an accompanying revenue offset: what do you think?

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It cost me nearly $50 to fill my tank this week - $50! And I drive a pretty fuel efficient car. Gas in my home town has hit $4.25/gallon for plain old standard gas. Yuck. Gas prices are just climbing and climbing.

At least there’s a small break: the mileage rate for business miles has finally been upped for tax purposes. The mileage rate will increase by eight cents to 58.5 cents a mile for all business miles driven as of July 1, 2008.

The mileage rate for deductible medical or moving expenses will increase by eight cents to 27 cents a mile.

Sadly, the rate for volunteering at charitable organizations is set by statute and remains at a pathetic 14 cents a mile. Congress, are you reading?

(Image: Newscom)

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Senate Republicans blocked a proposal today that would tax the windfall profits of the country’s largest oil companies. The GOP put together 43 votes, which left the Democrats 9 votes short of what they needed to break a filibuster and bring the proposal to a vote.

Democrats had urged Congress to pass the bill, with Sen. Byron Dorgan (Dem - ND) claiming, “Americans are furious about what’s going on.” But the GOP wouldn’t budge, claiming that the bill was not the answer to the current energy problems which are leaving taxpayers shelling out more than $4/gallon.

The bill would have imposed a 25% tax on profits considered “unreasonable” compared to profits several years ago. An exemption would have been available to oil companies that invested profits in alternative energy projects or refinery expansion. The bill also would have rescinded oil company tax breaks granted under the Bush administration — worth about $17 billion over the next 10 years.

GOP Senators opposed the plan, saying that increasing domestic production is the answer, not taxation. Republicans leaders instead hope to revive a plan, which was voted down last month, to allow oil drilling in the Arctic National Wildlife Refuge in Alaska and in state coastal waters.

I’ll agree that increased taxes are not always the answer. But I do find it amazing that oil companies are among those getting tax breaks at a time when taxpayers are hurting at the pump. Of course, you and I both know that rather than take a hit in their own bulging pockets, Big Oil would simply pass along that tax to consumers.

Sigh. I have no answers. Do you?

(Image: Newscom)

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As his popularity continues to decline, President Bush has re-introduced legislation to extend his 2001 and 2003 or risk what he is calling “the largest tax increase in history.”

Realistically, some of the cuts will likely be extended or made permanent - but not all. Bush claims, for example, that allowing the tax cuts to expires will add almost $2,000 to the tax bill of a family of four reporting an annual income of $60,000. That kind of hit to the middle class would not survive - especially in an election year.

However, cuts which benefit the wealthy may not survive the cuts. Something has to go and popular opinion supports letting the tax cuts for the wealthy expire first. Why let them expire at all? The current economic situation is already putting a burden on tax revenues. Add in the war in Iraq and the growth in Social Security and Medicare, and the money simply isn’t there to support additional cuts in the form of tax extensions. The Tax Policy Center estimates that extending the cuts for all but the wealthy would still cost taxpayers $783 billion over 10 years.

Yowza. And again, that doesn’t include expiring tax provisions for the wealthy, including the federal estate tax which affects roughly the top 2% of American taxpayers.

You can read the transcript of Bush’s speech here.

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Oh politics. It’s all about being right, isn’t it? You know, rather than doing the right thing?

President Bush vetoed the farm bill (the 190th veto of his presidency) claiming, rightfully so, that it was too expensive and would send too much in the way of subsidy to rich farmers.

The House voted 316-108 to override the veto. It was only the second time that the House was able to override a veto during Bush’s presidency. The Senate was expected to vote similarly.

Only there was one teensy weensy problem: a 34-page section of the bill (!) had been accidentally omitted from the printed bill sent to the White House. In other words, Bush vetoed a different bill from the one that the House passed.

To fix things, the Democrats hope to pass the entire bill again under expedited rules. The Senate is expected to follow suit. The correct version would then be sent to Bush under a new bill number for another expected veto.

Oh, you didn’t think that Congress was going to fix what was actually wrong with the bill, did you?

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