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Congress Fights over Tax Cut Extension

July 20, 2012

Expect to see a lot more wrangling over taxes in Washington in the months ahead with the elections approaching, along with the expiration of the current tax rates.

Dean Zerbe has been a veteran observer of the Capitol Hill tax landscape, having served as senior counsel and tax counsel at the Senate Finance Committee when it was chaired by Sen. Charles Grassley, R-Iowa, and now as national managing director of alliantgroup, a tax advisory firm that is still highly influential in Washington. “It’s certainly an interesting time in tax,” he said in an interview Wednesday. “You’re seeing more posturing than things moving at the moment.”

He noted that the Democrats in their tax proposal had the dividend rate tied to the capital gains rate. “That was something in the Obama budget last year,” said Zerbe.  “He hadn’t had it in previous budgets, but he put that out there and that caused a lot of consternation, and the fact that the Democrats right out of the gate signaled a white flag on that issue, it says a lot. I had been thinking for a while there would be an agreement that they would stay in harness with each other, cap gains and dividends. I’ve never thought there was a lot of giddy-up from the Democrats on raising dividends [tax rates]. Certainly the Republicans have been in general against it, as they’ve been against anything [on raising taxes], but I think that’s a very interesting sign on dividends. That’s a good sign that the IC-DISC export incentive will remain in place as a good benefit, along with the dividends issue in general.”

Dean Zerbe

He also senses a shift in the ground on the issue of sales taxes, with more Republican governors ready to pass laws imposing taxes on online sales. “I never thought that would happen,” he said.

“I don’t think it will happen this year, but I do think it’s a shift.”

Zerbe also thinks it is likely that the medical device excise tax in the health care reform law will be repealed. “Clearly there are a lot of Democrats who are not happy with the position,” he said. “If Romney comes in, it will go away as part of the general bonfire, but even if Obama gets re-elected, I think they will take a whack at it.”

Asked about the R&D tax credit extension bill recently introduced by Democrats in the House Ways and Means Committee, Zerbe replied, “I do think obviously members on both sides of the aisle love the R&D credit. No question about that.” However, he doubts there will be action on the bill until after the elections.

Zerbe favors a bill introduced by a Republican member of the Ways and Means Committee, Rep. Jim Gerlach of Pennsylvania, the America’s Small Business Tax Relief Act of 2012. That bill would permanently extend the 100 percent exclusion of gain on certain small business stock, the five-year carryback of general business credit for small business, and increased Section 179 expensing limitations. It also contains provisions making permanent the alternative minimum tax rules for general business credits of eligible small businesses.

“This Gerlach bill shows something important: the need to make the AMT turnoff part of the effort,” said Zerbe. “This is what we did in 2010, and it was a big help. It’s important that folks be aware of it. I don’t think folks are against that change on the AMT.”

Meanwhile there are efforts underway in Congress on the traditional tax extenders, including in the Senate Finance Committee chaired by Sen. Max Baucus, D-Mont. He is trying to get a bill in place for after the election so it doesn’t have to wait until the frenetic lame-duck session.

“I know that Baucus has been having discussions so he can have an extenders bill ready to go so that after the elections he will be ready to move it,” said Zerbe. “I think that’s a good idea.”

Several of the provisions may need to be pared back or improved, however. Meanwhile, some Democrats, such as Sen. Patty Murray, D-Wash., have expressed a willingness to let the tax cuts temporarily expire at the end of the year and then introduce legislation at the beginning of next year to bring back the tax cuts for income over $250,000. But Zerbe doubts that scenario will happen.

“I think that’s actually been bandied about over a few years,” he said. “I’ve heard my Democratic counterparts talk about that under whispered breath.” He believes that eventually the two sides will need to work out a deal. Zerbe points to the billions of dollars in EITC tax benefits that working class voters depend upon every year.

“It would be crushing for the economy and for those individuals and families to not have those,” he noted. “The Democrats are playing a game of chicken they already know they will lose. It sounds good in July and not good in practice in January.”

What may end up happening is that there will be a cap on deductions to 2 or 3 percent of adjusted gross income. Zerbe pointed out that could raise hundreds of billions of dollars in revenue to offset the tax cut extension or even lower the marginal tax rates further. It was an idea that was seriously discussed during the bipartisan discussions in the “supercommittee” that tried last year unsuccessfully to come up with a deficit reduction agreement.

“This is something that Republicans have already talked about in the supercommittee,” Zerbe noted. “They would view it as a way to lower the rates overall.”

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