Congress Close to Deal to Pay for Tax Cuts
May 14, 2010Congress is finally getting around to extending more than 50 popular tax breaks that expired at the end of last year, including money savers for homeowners, businesses and shoppers in states with no income tax. Lawmakers want to raise taxes on investment fund managers to help cover the cost.
Legislation combining the tax breaks with more aid for people who have been unemployed for long stretches is expected to come up for a vote in the House next week. The bill would extend unemployment benefits for up to 99 weeks in many states and subsidize health insurance premiums for laid-off workers through the end of the year.
Details are still being worked out, but lawmakers also plan to expand a federal bond program that subsidizes local infrastructure projects, and to protect doctors from a scheduled 21 percent cut in Medicare payments.
The tax breaks would be retroactive to Jan. 1 but would again expire at the end of December. They include a property tax deduction for people who don't itemize, lucrative credits that help businesses finance research and develop new products, and a sales tax deduction that mainly helps people in states without income taxes.
Delays in extending the tax breaks have left thousands of businesses unable to plan for their tax liabilities. Delays in passing a long-term extension of emergency unemployment benefits has forced thousands of laid off workers to live month to month with no certainty of income. Unemployment benefits for many will start to run out June 2, unless Congress acts.
Congress routinely extends the tax breaks each year - the House and Senate have already passed competing versions for 2010. But lawmakers have been unable to agree on how to pay for them.
House and Senate negotiators said this week they are close to a deal that would increase taxes on investment fund managers and some multinational companies. Also on the table: Requiring lawyers, doctors and other service providers to pay Medicare taxes on income they receive through their businesses.
The overall cost of the bill will likely top $100 billion, with the unemployment benefits and health insurance subsidies adding to the budget deficit.
The tax increases could raise more than $50 billion over the next decade, though lawmakers cautioned they are still working on the details.
The tax breaks benefit a wide variety of individuals and businesses and total about $30 billion a year. They include a deduction for college tuition for couples making less than $160,000 a year, and a deduction for teachers who use their own money to buy school supplies.
There is a tax credit for community development agencies that invest in low-income neighborhoods, as well as a tax break for restaurant owners and retailers who remodel their stores or build new ones.
"The retailers are working on very thin margins," said Van Martin, chairman and CEO of Tribble & Stephens, a Houston-based construction company that does work in 23 states. "We're looking for people that want to build, and it's still pretty slow."
Senate leaders hope to hold a vote on final passage before Memorial Day, said Sen. Max Baucus, D-Mont., chairman of the tax-writing Senate Finance Committee.
The Senate has rejected the tax increase on investment fund managers in the past, but Baucus said his colleagues are closer than ever to agreeing to it.
Investment managers typically get a fee to manage funds or assets. They also get a share of the profits earned for investors above a certain level.
Under current law, the profit-sharing fees, called carried interest, are taxed as capital gains, with a top rate of 15 percent. The bill would tax the fees as regular income, with a top tax rate of 35 percent, scheduled to rise to 39.6 percent in 2011.
"People who invest their own money should be paying a capital gains (tax), those who manage other people's money should be paying ordinary income (taxes), like everybody else does," said Rep. Sander Levin, D-Mich., chairman of the tax-writing House Ways and Means Committee.
The National Venture Capital Association says the tax increase would reduce investment in startup companies. The group sent a letter opposing the tax to lawmakers this week, signed by more than 1,700 venture capitalists and entrepreneurs.
The change in how investment managers are taxed would raise about $20 billion over the next decade, with a short-phase in period. It would affect hedge fund and private equity managers, as well as many real estate investment partnerships
The tax increase on multinational companies would raise an estimated $9.5 billion over the next decade by limiting the ability of some U.S.-based companies to use foreign tax credits to reduce their U.S. taxes. Generally, the United States taxes income earned by U.S.-based multinational corporations, even if the money is earned abroad.
The income, however, is not taxed by the U.S. until it is brought to the U.S. To avoid double taxation, companies get tax credits for the amount of foreign taxes paid on the income.
Some companies are able to use subsidiaries to claim foreign tax credits on income that is never brought to the U.S., and is never subjected to U.S. taxes. The provision would require companies to return the income to the U.S., subjecting it to U.S. taxes, before awarding the foreign tax credits.
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