The House Committee on Ways & Means announced today that it will hold the first of a series of hearings on fundamental tax reform on Thursday, Jan. 20th.
According to the announcement, marginal income tax rates have increased and the tax based has narrowed since 1986 when Congress last enacted fundamental tax reform. The Committee will consider how the current Federal income tax with its myriad tax preferences ”discourages job creation and economic growth.”
Quoted in the hearing announcement, Chairman Dave Camp says “we have one of the highest corporate tax rates in the world, and our small businesses are struggling with continued uncertainty about individual tax rates and new regulations. It is this Committee’s responsibility to examine ways to reform the code so that it won’t be a continued barrier to economic growth and job creation.”
According to University of Maryland economics professor Peter Morici, the latest U.S. census figures show that sun-belt states with a favorable tax and business environment, such as Texas and Florida, are attracting more immigrants. High tax northeastern and midwestern states are losing population.
Every so often, the real world makes a mockery of the neat figures modeled by Congressional budgeteers. In 2008, U.S. individual taxpayers reported $438 billion less in capital gains than they did in 2007. This change, reported today by the IRS, resulted in about $65b less revenue than in 2007.
The other significant components of individual taxpayers’ gross income either dropped slightly, or picked up slightly, but the capital gains figure dropped a whopping 48%. To put this in perspective, the total drop in adjusted gross income from 2007 to 2008 was $425b, less than the drop in capital gains. The biggest component of AGI - – wages and salaries – - rose by a meager 1.9%.
In 2007, capital gains accounted for 10% of AGI. In 2008, it had dropped to 5%.
What this illustrates is that federal revenue has become sensitive to the performance of capital markets. When the stock market crashes, as it did in 2000 and in 2008, it causes a major impact on federal revenue in the following year.
Households with more than one wage earner could save substantially more, because the holiday applies to each wage earner. For example, a household with two wage earners, each earning $80,000 would save $3,200 or $266 per month in payroll tax. Under a new IRS policy announced today (IRS Notice 1036), these amounts will start appearing in employees’ paychecks no later than January 31st.
The tax bill also retroactively extends and increases the AMT exemption levels for 2010 and extends them through 2011 at a cost of $136 billion, and extends nearly all other expiring tax provisions until the end of 2011.
By a vote of 81-19, the Senate passed a bill to extend the EGTRRA and JGTRRA sunsets until 2012, increase the estate tax exemption level to $5 million, reduce the maximum rate to 35%, enact a 2% payroll tax holiday for 2011, and extend expiring tax provisions. The House Rules Committee is expected to meet later today to pass a rule for consideration of the bill in the House. Reportedly, the House is considering allowing an amendment on the estate tax provisions of the bill. Any changes that the House makes would set up a new vote in the Senate before final passage.
The Senate today voted to end debate on the bipartisan tax compromise negotiated at the White House, setting the stage for a final Senate vote within 30 hours. The final vote was 83-15, with Sens. Bingaman, Brown, Coburn, DeMint, Ensign, Gillibrand, Hagan, Lautenberg, Leahy, Sanders, Sessions, Udall, and Voinovich voting “no.” Sens. Merkley and Wyden missed the vote.
House and Senate tax writers last night introduced bipartisan legislation to carry out the terms of the tax compromise negotiated earlier this week between top Republican and Democratic negotiators at the White House. The legislation was introduced late on December 9th as S.A. 4753 to H.R. 4853. The Senate Majority Leader filled the amendment tree and filed cloture, setting up a vote on whether to end debate at 3pm on Monday. At this point, it is unclear precisely what amendments would be allowed, but the legislation is expected to win 60 votes. After that, there would be a maximum of 30 hours of debate, a vote on final passage, and the bill would go back to the House.
Without support from the Senate Democratic leadership, the compromise announced by the White House on December 6th, the comprehensive tax deal faces an uncertain future. The Senate Democrats are meeting today for their regular caucus meeting, and the outcome of that meeting could be decisive. If Senate Democrats agree to go along with the White House, the Senate could wrap up business early and members could return home for the holidays. If not, the compromise may be doomed. The most likely outcome is that the compromise will be changed as Senate Republican and Democratic leaders negotiate a structure for floor consideration of the bill.
According to congressional staffers involved in bicameral negotiations with the White House aimed at avoiding expiration of current individual income tax rates, the White House is offering the option of a 2% reduction in payroll taxes for 2011 as an alternative to extension of the Making Work Pay Credit. It is unclear whether the reduction would apply to both sides of the payroll tax or would be limited to the employee’s liability. Another proposal on the table is 100% expensing for small businesses in 2011. The White House has announced a press conference at 6:10pm EST.