Wednesday, December 8, 2010

Obama Reveals Tax Deal ‘Framework' With GOP

President Obama announced Dec. 6 that he has agreed to the “framework” of a deal to extend the 2001 and 2003 tax rates for two years, temporarily cut the estate tax rate to 35 percent, and trim two percentage points off of the Social Security payroll tax.

The president said his goal is to ensure that taxes do not rise on middle-class households on Jan. 1 and that the plan he has sketched out with Senate Republicans would do that, while also providing additional stimulus to the economy through extensions of key tax breaks from the American Recovery and Reinvestment Act (Pub. L. No. 111-5).

Obama said he understands that congressional Democrats will be displeased with the agreement, but said he needed to break the stalemate with Republicans in order to keep taxes from rising sharply in the coming weeks.

“I know there are some people in my own party and in the other party who would rather prolong this battle even if we can't reach a compromise but I am not willing to let working families across this country become collateral damage for political warfare here in Washington,” Obama said in an evening press conference.

Obama said the agreement would extend unemployment insurance benefits for the long-term unemployed for an additional 13 months, cut workers' share of the Social Security payroll tax from 6.2 percent of earnings to 4.2 percent for one year, and extend the improvements to the earned income tax credit and the child tax credit.

The cut in the Social Security payroll tax rate would give workers who earn $70,000 per year an additional $1,400 per year in tax savings, White House officials said. The officials said the provision would replace the Making Work Pay tax credit used in 2009 and 2010 and would offer a more generous and easier system for calculating tax breaks.

As was done with the Hiring Incentives to Restore Employment Act (Pub. L. No. 111-147, the money would be shifted to the Social Security trust fund to make sure there is no negative impact on trust fund and solvency. The idea of a payroll tax cut is “one of the higher impact tax cuts for encouraging job growth and economic growth” and would provide $120 billion into the economy next year, a White House aide said.

On the business side, the plan would also provide businesses with the ability to expense the full cost of all capital investments made during 2011, an improvement from the 50 percent expensing provision included in ARRA.

None of the proposed extensions would be offset through spending cuts or other revenue raisers, White House aides said.

Senate Minority Leader Mitch McConnell (R-Ky.) said he appreciates the “determined efforts” of the White House to craft a plan with Republicans and expressed encouragement that the agreement would create incentives for economic growth.

“Members of the Senate and House will review this bipartisan agreement, but I am optimistic that Democrats in Congress will show the same openness to preventing tax hikes the administration has already shown,” McConnell said.

Estate Tax Cut for Two Years
On top of the extension of the upper-income tax cuts for two additional years, Republicans also won a significant victory in getting the White House to agree to a reduction in the estate tax.

Obama agreed to a 35 percent tax rate for the estate tax for 2011 and 2012 and the exemption level for the estate tax would be raised to $5 million per person. Without congressional action, the estate tax rate will return to its pre-2001 level of 55 percent and the exemption level will fall to $1 million per person.

White House aides said the plan would also include a two-year extension of the alternative minimum tax exemption “patch” to keep taxes from rising on an additional 20 million taxpayers, as well as all of the short-term tax provisions known collectively as the “extenders.”

Those extenders provisions include popular tax breaks such as the research and development tax credit, the subpart F active financing exception, and federal deductions for state and local taxes.

Investors will also benefit from the plan through an extension of the 15 percent top tax rate for both capital gains and dividends tax rates.

Although Democrats' initial tax extension bill failed, it did provide a road map for many of the provisions that will be in the final package.

Tab to Exceed $2.2 Trillion
The White House said it could not yet provide an estimate for the total cost of the bill. The Joint Committee on Taxation estimated that the tax portion of Baucus's legislation would cost $2.2 trillion over 10 years, with $1.5 trillion of that coming from the extension of the middle-class tax cuts. The American Opportunity tax credit would cost $80 billion under the Baucus bill.

Lawmakers said they are eager to complete the legislation and adjourn for the year.

The complete text of this article can be found in the BNA Daily Tax Report, December 7, 2010. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today.

© 2010, The Bureau of National Affairs, Inc.

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