Members of Congress have left the Capitol for the August recess and some important tax bills await them when they return in the fall.
House Passes Tax Extenders Bill, Republicans Block Senate Action
In May, the House passed a bill (H.R. 6049) that includes extensions of several temporary tax cuts targeting various interests (commonly referred to as "extenders") as well as renewable energy tax incentives and a few new tax cuts. Unlike similar bills passed during the Bush years, this bill includes revenue-raising provisions to replace the $54 billion that would otherwise be lost.
The one-year "extenders" cost a total of $27 billion and include extensions of several tax breaks targeting businesses and generally well-off individuals. The renewable energy tax incentives in this bill cost a total of $17 billion and the largest is the 3-year extension of the "section 45 tax credit" for the production of energy from renewable resources.
The new tax cuts in the bill, which cost an additional $10 billion, include a change in the AMT related to the treatment of stock options and an expansion in eligibility for the Child Tax Credit (CTC) for low-income families.
The Bush administration opposes this bill because it opposes any and all tax increases, even if they are included in a bill with tax cuts to make the legislation deficit-neutral. CTJ released a report in May that was critical of the administration's position and that explained the provisions in the bill. Democratic leaders in the Senate tried three times to invoke cloture on this House-passed bill, but the Republican minority blocked the effort each time.
House Passes Bill to Patch AMT and Close the Carried Interest Loophole, Republicans Defend Private Equity Fat Cats
In June, the House passed a bill (H.R. 6275) that would provide relief from the Alternative Minimum Tax (AMT) for one year.
The AMT was first created in 1969 to ensure that wealthy taxpayers would pay some minimum level of income tax no matter how proficient they are at using loopholes. It has been adjusted several times since then but the Bush tax cuts caused more people to be affected by the AMT and did not include any permanent adjustment for it. Congress, in recent years, has frequently enacted a "patch" which adjusts the exemptions that keep most of us from paying the AMT, but has not provided a permanent fix.
The one-year AMT "patch" would cost over $60 billion, and the House bill would replace the revenue, partly by closing the loophole for "carried interest" paid to private equity fund managers. A report from CTJ explains that since AMT relief will mostly help families that are relatively well-off, it should not be deficit-financed because that could eventually lead to higher taxes or cuts in services for middle-income people.
The Senate has not acted on the House-passed AMT bill. One sticking point is the provision to close the "carried interest" loophole. Carried interest is a form of compensation paid to fund managers in return for investing other people's money. Most of us who earn an income from work are subject to federal income taxes at progressive rates, starting at 10 percent and going up to 35 percent for the very wealthiest. Private equity fund managers are at the top of this wealthy group, but nevertheless pay only 15 percent -- the special low capital gains tax rate -- on their carried interest.
Presidential candidate Barack Obama favors closing the carried interest loophole, while John McCain does not. In fact, McCain's opposition to closing loopholes enjoyed by the private equity industry inspired an SEIU protest involving the performance of an ABBA song with new lyrics, retitled "Loophole King."
Senate Democrats Ready to Cave on Paying for AMT Relief But Insist on Paying for Extenders
Senator Max Baucus introduced a bill (S. 3335) that includes both the extenders, energy provisions and a one-year AMT "patch." The legislation includes enough revenue-raising provisions to pay for the extenders but not for the AMT patch. The biggest revenue-raising provisions are the same ones that are in the House-passed extenders bill. One would clamp down on the use of schemes by private equity fund managers to move deferred compensation offshore to avoid taxes. Another would delay a 2004-enacted law that has not even gone into effect yet. The soon-to-take-effect law is designed to make it easier for multinational corporations to take U.S. tax deductions for interest payments that are really expenses of earning foreign profits and therefore should not be deductible.
The Republican minority in the Senate blocked efforts to invoke cloture on this bill before the recess because they object to the revenue-raising provisions.
Needed Improvement in the Child Tax Credit
Both the House-passed extenders bill and Senator Baucus's extenders/AMT bill have a provision that would make the Child Tax Credit (CTC) more widely available for low-income families.
First enacted during the Clinton administration, the CTC was significantly expanded as part of the Bush tax cuts. It is now worth up to $1,000 for each child under age 17. But many low-income families do not benefit at all from the child credit, and many others get only partial credits. That's because the credit is unavailable to families with earnings below $12,050 (indexed for inflation), and the credit is limited to 15 percent of earnings above that amount. In other words, a working family making less than $12,050 this year is too poor to get any child credit.
The House extenders bill would lower the child credit's earnings threshold from the current $12,050 to $8,500. The Center on Budget and Policy Priorities points out that 13 million children would be helped by this provision.