When Congress managed to agree on a budget resolution this year with $70 billion set aside for tax breaks, it seemed to assure smooth passage for extending President Bush's expiring tax breaks by avoiding risk of a Senate filibuster. In reality, however, the legislation is proving to be very difficult.First, there are more expiring provisions than the $70 billion will protect, so the tax writing committees have been struggling with what to leave in and what to leave out. Then, as deficits started swelling again following Hurricane Katrina, Congress decided that they should not use the full $70 billion, but no more than $60 billion, leaving space for even fewer provisions.

As of this writing, both the House Ways and Means Committee and the Senate Finance Committee have now approved widely different versions of the legislation. Hope of adjourning for the year at Thanksgiving has faded, with a mid-December adjournment now being planned.

There is still some chance that the whole effort will fall apart, but Congress is unlikely to let $60 billion of budget-protected tax breaks go unutilized this year, so they are likely to find some way to get legislation passed.

Common extenders

The Senate bill is a much larger bill than the House bill, even though both bills tried to achieve the $60 billion number. The Senate bill has more tax cuts, but also includes a package of revenue raisers to pay for the additional cuts. The Senate bill gets into areas of relief for Hurricanes Katrina, Rita and Wilma, a package of provisions with respect to charities and charitable giving, and miscellaneous other provisions not related to expiring provisions. The House bill pretty much sticks to extending expiring provisions and addresses some of the other matters in separate legislation.

Common to both pieces of legislation are provisions providing for a one-year extension of the deduction for state and local sales taxes, the research credit, allowing nonrefundable credits against the AMT, the above-the-line deduction for teacher expenses, the deduction for corporate donation of computer equipment, District of Columbia tax incentives, Qualified Zone Academy Bonds, 15-year amortization of leasehold improvements, and a pair of tax incentives for Indian reservations.

Also extended in both bills but for differing periods or with other modifications are the above-the-line deduction for higher education expenses, the saver's credit, increased expensing for small business, the work opportunity tax credit and the welfare-to-work tax credit, and expensing and expansion of environmental remediation costs.

Removed from the Senate version of the legislation was an extension of the reduced rates for capital gains and dividends. The House version includes a two-year extension of this provision through 2010. Senate Republican leadership indicated that this action was taken only to secure enough votes to clear committee, and that there are enough votes on the Senate floor to restore this provision before final passage.

Unique extenders

Included in the House version of the legislation are extensions with respect to Archer Medical Savings Accounts, the taxable income limit of percentage depletion for oil and natural gas from marginal properties, the possession tax credit with respect to American Samoa, and authority for undercover operations. Parity in the application of mental health benefits was in both bills, but was removed from the Senate bill when it emerged from committee.

Included in the Senate version of the legislation is a one-year extension of the increased AMT exemption amount. This is one of the more expensive provisions, and the House could not squeeze it in. House Ways and Means Chairman Bill Thomas, R-Calif., has suggested that it can be addressed as part of fundamental tax reform next year. It is also popular enough that it could pass in a piece of legislation without budget protection.

Additional Senate breaks

The Senate legislation would create a Gulf Recovery Zone for areas affected by Hurricanes Katrina, Rita and Wilma, and provide various incentives for recovery, including bonus depreciation; increased expensing elections; tax-exempt bond financing; more generous loss carrybacks; special treatment of certain losses; expensing for demolition, clean-up and reforestation; and expansion of the new markets credit and low-income housing credit.

The Senate bill also includes a package of tax breaks focused on Rita and Wilma, similar to the previously enacted tax relief provisions related to Katrina. These provisions would focus on mortgage revenue bonds, use of retirement funds, the employee retention credit, and suspension of limitations on charitable contributions and casualty losses.

Senate revenue offsets

The Senate legislation contains a package of provisions focused on tax shelters, including a continuing effort by the Senate Finance Committee to enact a provision clarifying the economic substance doctrine. Provisions also focus on improving Internal Revenue Service collection efforts, increased penalties and fines, discouraging expatriation, and a variety of other provisions often focused on addressing particular types of transactions deemed abusive.

Also added in committee was a package of provisions related to charities and charitable giving. These include not only revenue raisers designed to address perceived abuses by and in the use of charitable organizations, but also include tax breaks, such as a charitable deduction for non-itemizers and tax-free IRA distributions for charitable purposes.

Summary

If all goes well in Congress, as you read this, the final version of compromise legislation may already have emerged. More likely, Congress will still be struggling in its last days to get a compromise version of the legislation out of conference committee and passed to avoid wasting $60 billion in budget-protected tax breaks.

Although the Senate is usually the most difficult body to get legislation through, and, therefore, the version of its bill often tends to be closer to the final version, in this case, with budget protection and with the Senate version being much larger and including a number of controversial provisions opposed by the House, we may find that the conference committee may produce a package much closer to the extenders-focused House bill than the more multi-faceted Senate bill.

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