The latest economic stimulus plan advanced by the incoming administration may approach $1 trillion, with $300 billion in tax cuts or refunds.
Although details haven’t been worked out, a plan of this magnitude will have ramifications across the political, social and cultural landscape as well as economic implications. Hence, the huge number of voices competing to be heard on the direction it takes.
Senators on both sides of the aisle were less than enthusiastic about certain portions of the plan.
“Tax relief can work well to boost the economy if it’s done right,” said Sen. Chuck Grassley, R-Iowa, ranking member of the Finance Committee. But, he added, “Everyone ought to be very concerned about materially expanding entitlement spending and digging a deep budget hole even deeper without stimulating the economy. If we don’t stick to a tight definition of ‘stimulative,’ we’ll have trouble getting an effective bill passed.”
Critics say that the proposed provisions are much like last year’s “tax rebates,” which didn’t work because they gave nothing in the way of increased incentive to work and invest, as a real reduction in rates would allow. One of the provisions most criticized by both Republicans and Democrats is a tax credit for companies that hire or retain workers.
But many business tax breaks are getting broad support, according to Bill Smith, director of the CBIZ National Tax Office. “Keeping the code Section 179 deduction at $250,000, increasing the NOL carryback from two to five years so that refunds are immediately available for businesses with losses in 2008, and extending bonus depreciation all have good support,” he said. “This is despite the fact that some economists say that similar provisions in 2002 didn’t generate any particular benefit.”
Another provision that Smith sees as a possibility is a modification of the Section 382 rules on utilization of net operating losses.
“The general rule is that if there is more than a 50 percent change in ownership, the utilization of NOL going forward is severely limited,” he noted. “At the end of last year, the IRS issued a Notice that removed that restriction for banks. They called it the ‘Wells Fargo’ provision, and it basically allowed profitable banks to acquire unprofitable banks and use NOLs to offset income.”
Congress was upset about the provision at the time it was issued, Smith observed, because in their mind it approached the level of tax legislation. “It’s beyond the authority of the IRS to say they won’t apply the Internal Revenue Code to a particular industry,” he said. “So far, however, there have been several gigantic acquisitions relying on the Notice.
“That’s one of the things they’re talking about in the stimulus package, making the restriction less onerous or removing it altogether,” Smith added. “That could be one of the most important provisions – some big acquisitions or mergers would take place as a result.
“An NOL can be the most saleable asset to an acquiring company, if it can use, say, 40 percent of the losses in the coming year,” he added.
Meanwhile, the just-released National Taxpayer Advocate Report to Congress makes the case that the biggest problem facing taxpayers these days is the complexity of the Tax Code. But the code changes that take place every year are making the code more rather than less complex, and the anticipated changes that will come about with enactment of the stimulus package will only add to its complexity.
With all of the competing interests at stake, here’s hoping that our elected representatives get it right.
