Congress returns to work after recess with busy tax agenda
After a five-week break, Congress has returned to work with a full agenda. Proponents of comprehensive tax reform are hoping to build momentum for passage of a bill before year-end. However, before taking up tax reform, Congress has some immediate issues to address, including sequestration for fiscal year (FY) 2014, the debt ceiling, expiring tax extenders, the IRS's operations, including the confirmation of a new Commissioner of Internal Revenue, and more.
Unless changed by Congress, automatic spending reductions are scheduled to take affect for the government's FY 2014, effective October 1, 2013. The Budget Control Act of 2011 generally requires that $109 billion in spending, divided equally between defense and nondefense spending, must be reduced in FY 2014. The across-the-board spending cuts will be similar to the ones in effect for FY 2013, which resulted in furlough days for IRS and other federal employees, reductions in certain nonrefundable tax credits and more.
Some federal spending is exempt from sequestration. Most notably are Social Security and veterans' benefits. Payments to individuals in the form of refundable tax credits are also exempt. This means that taxpayers will not see any reduction in the refundable portion of the child tax credit, the earned income credit and other credits. The Code Sec. 36B health insurance premium assistance tax credit is also exempt from sequestration. However, nonrefundable credits available to businesses are subject to sequestration. So far, the IRS has announced reductions in the Code Sec. 45R small employer health insurance credit and the corporate AMT credit because of sequestration.
President Obama has proposed to replace the FY 2014 sequester with a new round of revenue raisers. The President has called on Congress to tax carried interest as ordinary income, repeal the last-in, first-out (LIFO) method of accounting, and reduce certain tax deductions and exclusions for higher income individuals. While the President's proposals have gained support in the Democratic-controlled Senate, they have a very slim chance of passage in the GOP-controlled House. To win some GOP support, the President has proposed to reduce the corporate tax rate in exchange for increased spending on job creation. Reduced revenue from a cut in the corporate tax would be offset by repeal of unspecified business tax incentives.
House Speaker John Boehner, R-Ohio, has repeatedly said that the GOP will not vote to increase the nation's debt ceiling without more spending cuts. President Obama, on the other hand, has said that he will not negotiate over the debt limit like he did in 2011, which ultimately lead to passage of the Budget Control Act. At this time, the two sides seem far apart but reportedly there have been behind-the-scenes discussions between administration officials and some Republican lawmakers. Unlike past years, the federal deficit is projected to shrink this year because of increasing revenues which could make some lawmakers more receptive to raising the debt ceiling. Some tax measures, such as the tax extenders, could be linked to an increase in the debt ceiling.
Many popular but temporary tax incentives - affecting individuals and businesses - are scheduled to expire after 2013. They include the state and local sales tax deduction, the higher education tuition deduction, transit benefits parity, the research tax credit, enhanced small business expensing, and more. Supporters of tax reform (discussed in more detail below) want to make the extenders part of a comprehensive tax reform bill. Some extenders, which have yet to be identified, would be allowed to expire; others would be made permanent. More likely, Congress will decide the fate of the extenders in a year-end bill, as it has done frequently in the past.
Two lawmakers have taken on leadership roles in tax reform: Rep. Dave Camp, R-Mich., chair of the House Ways and Means Committee, and Sen. Max Baucus, D-Montana, chair of the Senate Finance Committee. Both lawmakers spent the summer drumming up support for tax reform, but it is unclear how many of their colleagues share their enthusiasm. House Speaker Boehner and his Senate counterpart, Majority Leader Harry Reid, D-Nevada, have expressed, at best, lukewarm support for comprehensive tax reform in 2013.
Of the two lawmakers, Camp seems more prepared to bring tax reform bill before his committee this fall. Eleven working groups comprised of members of the Ways and Means Committee have been discussing tax reform for many months. The Ways and Means Committee has issued discussion drafts on business tax reform, international taxation, accounting methods, and more. The Senate Finance Committee has also released discussion drafts on tax reform but they are not as detailed as the drafts prepared Ways and Means Committee. In August, Baucus said that the Ways and Means Committee is further ahead in drafting tax reform legislation that the Senate Finance Committee.
Since May, Daniel Werfel has been temporarily leading the IRS. Werfel has been a frequent witness at Congressional hearings looking into the agency's treatment of conservative groups and others seeking tax-exempt status. Werfel has also been championing increased funding for the IRS.
President Obama has nominated John Koskinen to be the next Commissioner of Internal Revenue. Koskinen previously served as the nonexecutive chair of the Federal Home Loan Mortgage Corporation. The Senate Finance Committee is expected to take up Koskinen's nomination this fall. Lawmakers are certain to ask Koskinen how he intends to oversee the agency and what reforms he may make.
Affordable Care Act
One huge divide between the White House and the GOP is the Affordable Care Act, including its many tax provisions. Before leaving for the August recess, the House voted to repeal the Affordable Care Act. Knowing that the Senate will not take up the House bill, some GOP lawmakers have turned to another tactic: defunding the Affordable Care Act.
On October 1, health insurance marketplaces for individuals are scheduled to open. Small employers (generally employers with fewer than 50 workers) can purchase insurance through the Small Business Health Options Program (SHOP), which also opens October 1. Coverage will begin January 1, 2014.
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