Stating that the nation is mired in “an economic crisis as deep and dire as any since the days of the Great Depression,” President Obama introduced $838 billion legislation that provides more than $350 billion in tax cuts, and spending in areas such as health care, education, energy and highway projects. The Senate vote of 61-36 included three northeast Republicans. The House and Senate will now reconcile the bill.
The bill also funds unemployment compensation, health care, and food stamps. House Ways and Means had earlier approved $500 in rebates for many workers, and $1,000 for millions of couples, many of whose earnings are so low they pay no federal income tax. The first of these credits would be distributed in 2009 based on filed 2007 tax returns. The measure, which Republicans criticized, survived Senate negotiations, albeit with a lower income phaseout threshold.
Republicans had criticized the bill as providing too many long-term spending programs unlikely to provide jobs or increase consumer spending. Three northeast Republicans, Susan Collins (Maine), Arlen Specter (Pa), and Olympia Snowe (NH), joined 58 Senate Democrats — enough to withstand a Republican filibuster — in agreeing to trim $100 billion from the original bill. $40 billion of that would have reached state governments.
The “Make Work Pay” payroll tax holiday proposed by Mr. Obama was also trimmed in the final Senate version, as was an expansion of the child tax credit for the working poor. Senate Republicans were successful in adding measures (i) providing all homebuyers with tax credits of up to $15,000; (ii) providing small tax credits for new car purchases; and (iii) allowing corporations to carry back current losses against earlier years’ profits.
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Given the state of the economy, few now believe that the President will seek to accelerate into 2009 the 36 percent and 39.6 percent income tax rates that are scheduled to return after 2010. Mr. Obama is also said to favor retaining the 15 percent capital gains rate — at least for now. However, higher income individuals may pay more employment taxes in 2009, as Mr. Obama has called for a “payroll surtax” of up to four percent on compensation in excess of $250,000.
President Obama has expressed support for other tax legislation that would provide relief to lower and middle income taxpayers, including (i) a 10 percent mortgage interest credit for nonitemizers; (ii) an expansion of the earned income credit; (iii) an increase in education credits; (iv) an increase in the child credit; and (v) a tax break that would effectively eliminate federal income tax for retirees who income is less than $50,000 per year. One unanswered question under Mr. Obama’s planned tax relief for retirees is whether capital gains and required minimum distributions from retirement accounts would affect the $50,000 threshold. Another question is whether partial relief would be available for those whose income is above $50,000.
Given the record federal budget deficit, elimination of the AMT appears remote. Mr. Obama appears to support a permanent annual inflation-adjusted “patch”. The current legislation contains a $64 billion AMT “patch” for 2009. If the 36 percent and 39.6 percent income tax rates return in 2011, fewer higher-income taxpayers will be subject to the AMT because of their higher regular tax liability.
Under EGTRRA, the estate tax applicable exclusion amount reached $3.5 million on January 1, 2009, with a maximum tax rate of 45 percent. President Obama favors retaining this exclusion amount, as well as the 45 percent rate, permanently. According to Mr. Obama, this proposal would result in only 0.3 percent of estates being subject to the estate tax, and would reduce by 84 percent the number of taxable estates compared to 2000. Despite the reduced incidence of estate tax, Mr. Obama has expressed no support for eliminating the step up in basis for property acquired from an estate, which was an unpopular component of the earlier legislation which eliminated the estate tax for the year 2010.
President Obama favors providing assistance to homeowners faced with foreclosure. He has proposed lenders temporarily delaying foreclosures for 90 days. Mr. Obama also supports granting bankruptcy judges the power to modify the terms of mortgages. Until legislation is passed, lenders with securitized investors are contractually bound to commence foreclosure proceedings.
Mr. Obama appears to favor lowering the corporate tax rate, which is the second highest in the industrialized world. However, Mr. Obama has long been an advocate of closing tax loopholes which favor large corporations. Although the President had discussed a $3,000 refundable credit for 2009 and 2010 for each full time employee added to the workforce by an existing business, this proposal seems to have been abandoned as unworkable in practice. However, the President does favor extending the IRC § 179 expensing limitation of $250,000 through 2009. Legislation has been introduced in Congress which would cap deductible executive compensation at 25 times the salary of the lowest-paid employee of the business.
Permanent extension of the research and development (R&D) tax credit, which both Democrats and Republicans have in the past advocated, but had never accomplished due to its cost, may actually occur in 2009 under the Obama administration. President Obama has stated that the country’s future prosperity depends upon innovation. So too, the development of alternative energy is a top priority of Mr. Obama. Expect to see tax incentives for producers of wind, solar, biomass and other alternative energy sources — especially those which create “green” jobs. Although in the past Mr. Obama has been lukewarm toward nuclear energy, given its recent rehabilitation as a “green” energy source, administration might decide to streamline the regulatory process for new reactors.
Although President Obama spoke frequently — and eloquently — about health care reform and the importance of providing adequate health care to all Americans, economic realities may result in that ideal being held in abeyance. Senator Baucus (D. Mont.), chairman of Senate Finance, has proposed a “health insurance exchange,” which would serve as a marketplace for consumers to compare and purchase plans.
To increase tax revenues, President Obama has expressed support for the codification of the economic substance doctrine, which states that the tax benefits of a transaction will not be permitted if the transaction does not have economic substance. Although courts have invoked the doctrine, codification could result in penalties being imposed for transactions lacking economic substance. Mr. Obama also favors taxing “carried interest” — which is the share of profits investment fund managers receive as compensation for investment services — at ordinary income rates. Currently, compensation for these services is taxed as long-term capital gains at 15 percent.