Senators McCain and Obama offer starkly differing tax philosophies. Mr. Obama favors a middle-class tax cut but not “a permanent tax cut for Americans who don’t need them.” Citing the inequity of hedge fund managers who pay less tax than “their secretaries,” Senator Obama favors increasing the capital gains rate. In opposing estate tax repeal, Mr. Obama observes that “[w]e have to stop pretending that all tax cuts are equivalent.” The $1 billion cost would not be “responsive to the needs of ordinary Americans.” Although it “wouldn’t be fair” to blame the economic plight of middle class families entirely on the Bush Administration, Mr. Obama states that “in the past three years, corporate profits have increased more than 60 percent. Workers are being paid just 3% more.”
Senator McCain believes that the present tax system is “fair” since “the bulk of taxes are paid by wealthy people.” Mr. McCain appears to favor extending the Bush tax cuts even though he was one of only three Republicans to oppose them initially, calling them “fiscally reckless” at the time. Mr. McCain states that his record in opposition to tax increases is “very clear,” but unlike all of his former Republican rivals, he will not “pledge” not to increase taxes. The position of Mr. McCain with respect to the estate tax is not clear, although he appears to oppose its elimination, and appears to favor increasing the exemption amount to $5 million. Although Senator McCain does not appear to favor increasing the capital gains tax rate, neither does he appear to favor its reduction or elimination.
Senate Finance has proposed legislation that would (i) provide a one-year AMT patch (and allow the use of personal credits against the AMT); and (ii) extend a series of expiring tax incentives (i.e., research and development credit, deductions for state and local taxes, college tuition tax credits, and renewable energy tax credits). The cost of the measure is estimated to be $55 billion.
On April 15th, the House approved by a vote of 238 to 179 tax legislation which would (i) reduce Code complexity (whose volume increased by more than 10,000 pages from 2001 through 2006); (ii) require that distributions from health savings accounts (HSA) for qualified medical expenses be excluded from gross income only to the extent such expenses are substantiated; and (iii) prohibit the IRS from engaging private third-party debt collectors whose cost, Democrats argue, exceeds revenues collected.
On April 3rd, Senate Finance held a third hearing for reforming the estate tax. Prior to 2001, gift and estate taxes were unified. Under current law, the limit on lifetime gifts is $1 million, while the limit on testamentary gifts (reduced by lifetime gifts) will increase to $3.5 million in 2009. Experts at the hearing, including Dennis I. Belcher, partner of McGuire Woods LLP, expressed support for the reunification of the estate and gift tax. Shirley L. Kovar, Fellow, American College of Trust and Estate Counsel, advocated the concept of “portability” of the unused applicable exemption amount to the surviving spouse. She believes this would provide security to a surviving spouse and would accomplish by statute what a married couple could achieve through sophisticated estate planning.
New York Legislative Developments
New York’s budget enactment (S.B. 6807; 4/9/08) included the following provisions: (i) LLC and LLP filing fees will be based on New York source income, rather than the number of partners or members, and will range from $25 to $4500; (even federal disregarded LLCs will pay a filing fee of $25); (ii) a voluntary disclosure program will enable “eligible taxpayers” to avoid certain penalties and criminal prosecution provided disclosure is made before the Department has “determined, calculated, researched or identified” the tax liability; (iii) the corporate franchise tax under the capital base is reduced from 0.178% to 0.15%; (iv) for tax years after 2008, the first estimated tax installment payment for corporate franchise and other business taxes will be increased to 30% (from 25%) where the preceding year’s tax exceeded $100,000; (v) tax preparers who prepared 100 or more returns on or after January 1, 2007, will be required to file electronically. (However, the requirement will not apply to New York State and New York City personal income tax individual filers.); (vi) a rebuttable presumption has been established that certain sellers using New York residents to solicit sales are “vendors” required to collect sales and use tax; (vii) the MTA surcharge will be extended; (viii) New York City will be authorized to permanently impose an additional 1% sales and use tax; and (ix) the cigarette tax will be increased to $2.75 per pack (from $1.25).