Capitol Hill

Tax troubles

The GOP's reputation as the champion of lower taxation is being questioned this year. When filibustering a recent effort to permanently repeal the federal estate tax, or "death tax," Democrats remained true to their label as the party of "progressive taxation." But some recent, not-so-well-publicized efforts have given the business community good reason to take a hard look at Republicans' credibility as the standard bearers of lower taxes.

Death and taxes

On June 8, a permanent repeal of the death tax succumbed to a procedural vote. A motion to invoke cloture, which would have allowed the Senate to proceed to an up-or-down vote on legislation, failed by a margin of 57-41 because of a filibuster by Senate Democrats.

In the wake of the Senate's failure, House Ways and Means Chairman Bill Thomas (R-Calif.) introduced compromise language (HR 5638) to reduce the tax permanently. Because of the so-called "sunset provision" in current law, the death tax will be fully repealed for only one year—2010. In 2011, the estate tax exemption will revert to $1 million per person, and the maximum rate will return to 55 percent if no action is taken. HR 5638, which the House easily passed 269-156 on June 22, permanently would exempt estates up to $5 million for an individual and $10 million for a couple. Assets between the exemption levels and $25 million would be taxed at the capital gains rate—currently 15 percent. Estates valued at more than $25 million would be taxed at twice the capital gains rate. The capital gains rate is scheduled to increase from 15 percent to 20 percent at the beginning of 2011, so the maximum rate relief under the Thomas plan may only drop from 55 percent to 40 percent.

The Senate is expected to vote on HR 5638 before Congress adjourns this year.

A withholding provision

On May 17, President Bush signed into law the Tax Increase Prevention and Reconciliation Act of 2005 (HR 4297). The package extends expiring provisions enacted as part of Bush's economic stimulus package during his first term. Among other things, the law amends the Internal Revenue Code (IRC) to extend through 2009 the increased expensing allowance under Section 179 of IRC (from $25,000 to $100,000) for depreciable business property—a top priority for small businesses.

Not a priority is a new withholding tax on contractors. Thrown in as a "revenue raiser" at the last hour, a sweeping new requirement (Section 511) was inserted mandating a 3 percent tax withholding on all payments to contractors for goods and services provided to federal, state and local governments. This withholding provision hits honest taxpayers in an attempt to get at tax cheats, forces contractors to provide the government an interest-free loan and restricts the number of firms able to bid on government contracts.

Upon learning of the provision, Sen. Larry Craig (R-Idaho) introduced S 2821, the Withholding Tax Relief Act of 2006, May 17. This legislation would repeal Section 511. NRCA is working to repeal the provision.

Last to know

The Senate Finance Committee held a hearing in June about corporate income taxation without informing the business community in advance or allowing it to have a representative testify before the Republican-controlled panel.

Front and center during the hearing was testimony by a witness advocating repeal of the last-in, first-out (LIFO) inventory method of accounting. Despite business's specific request to be involved in the process, no pro-LIFO witnesses were allowed to testify. LIFO is an accounting method used to determine income and tax liability and can be a more accurate way to measure financial performance and calculate tax liability. Absent LIFO, phantom profits would be taxed.

Why the confusion?

The Republicans' newfound interest in targeting the business community is in part because of the annual budget deficit and ongoing concern with the "tax gap"—the difference between what taxpayers should pay and what they actually pay on a timely basis. The so-called "tax gap" is roughly $345 billion annually (15 percent of all taxes collected). In an effort to reduce the gap, business finds itself in the crosshairs of the federal government. One would hope that if noncompliance is the reason for our shortchanged coffers, the government will go after those underreporting income.

R. Craig Silvertooth is NRCA's director of federal affairs.


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