President Obama’s announcement on Monday of a compromise agreement with the Republican leadership should bring some end-of-year certainty to the tax landscape, but questions remain.
And it’s not even certain that the agreement reached will in fact pass muster with the House as currently constituted. In fact, House Democrats voted Thursday in a closed caucus to reject the proposal despite the apparent readiness of the Senate to pass a bill.
“It’s just a conceptual agreement,” noted George Pieler, former counsel to the Senate Finance Committee. “Obviously the negotiators think it is a done deal, but the people not in on the negotiations might have other opinions.”
Pieler discounts the notion that the House will block the agreement altogether. “Aside from the politics of it, there is too much campaign cash attached to this package for members down the road that they won’t want to walk away from,” he said.
“There are two theories on why to make political contributions – you contribute to your friends because they’re your friends, or you contribute to your enemies because you want to win them over,” Pieler added. “Well, there’s a new set of friends coming on board in January.”
The agreement itself is not complex. It continues the rates now in effect, by extending the Bush tax cuts, for two years, while providing a temporary, one-year payroll tax cut. In addition, it extends jobless benefits for 13 months, generating the late-night quip that the Republicans in Congress are thrilled with the tax cuts, while the Democrats leaving Congress are pleased with the jobless benefits.
Nevertheless, it is a true compromise. Although it’s being trumpeted as a Republican victory, the extension is good only until 2012 and includes elements of pleasure and pain for both sides.
“The President’s proposals cover both sides in order to meet in the middle,” said Barry Fischman, a tax partner at the New Haven office of Marcum LLP. “He did his best to reach a middle ground in terms of trying to get a compromise out of the gate.”
The idea behind the proposal is creating cash flow for individuals and businesses, Fischman observed. “He’s reducing the full FICA by 2 percent, which will create an immediate increase in someone’s net pay,” he said. “His direction is to generate more cash flow with the hope it gets spent to help spur the economy.”
On the business side, the 50 percent bonus depreciation would be increased to 100 percent for investments made in 2011. “If a company needs equipment and gets a 100 percent write-off, it provides a tremendous incentive to make the purchase during the next year,” Fischman said. “So it provides cash flow incentives for both businesses and individuals.”
The agreement will help the economy by helping small business, agreed National Federation of Independent Business senior vice president Susan Eckerly.
“While we would have preferred a more permanent solution, NFIB believes this compromise gives all small business owners some much needed certainty over their tax liability for the next two years and includes a workable estate tax compromise,” she said.
However, she noted there is some concern that the extension of unemployment benefits would result in increased unemployment taxes for business owners. “While all Americans are deeply troubled by the high unemployment rate, extending unemployment benefits will add additional tax burdens on small business owners,” she observed.
The agreement provides an AMT patch and an estate tax fix that sets the rate at 35 percent with a $5 million exclusion. But one of the things the agreement doesn’t cover is Form 1099 reporting, scheduled to go into effect in January 2011 for landlords and in 2012 generally. “Repealing the 1099 provision would eliminate a mountain of expensive paperwork on small business,” Eckerly said. “There is bipartisan support for repealing the 1099 reporting requirement, and we hope Congress will do so before the end of this year.”
While it isn’t clear that the agreement covers the ethanol credit, Pieler believes it will be included in the final bill. “It makes a lot of people unhappy, but in terms of numbers there are more people that want it extended than those who think it’s a waste,” he said.
While House Democrats are voicing strong opposition to passing the proposal without major changes, most observers believe it will be done by year’s end.
“If nothing gets done, new payroll withholding tables take effect January 1,” said Fischman. “The President wants this, and they risk the wage earner getting less take-home pay in a couple of weeks if they do nothing.”
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