The Value of Restoration
As Congress returns at the beginning of September after being on summer recess for over a month, much of the attention is focused on the upcoming November elections. With attention to lagging jobs and economy numbers, many pundits predict that the party in power will suffer losses at the voting booth.
While Democrats plan to press a jobs agenda, and Republicans attacking them for their performance thus far, September and early October certainly will be filled with partisan, political fireworks. Much legislative business remains in limbo, and the timetable for legislating continues to slip.
It is anticipated that Congress will adjourn for the election season in early October, which leaves short time to complete work on annual appropriations bills, as well as address key policy items that are set to expire at or before the end of the year. It is widely expected that Congress will return after the elections in November for a ‘lame duck’ session to complete at least the spending bills and possibly other critical items.
Outside of appropriations bills, perhaps the most important issue facing the public is the fate of the temporary tax cuts enacted in 2001 and 2003. These are set to expire at the end of the year, and unless Congress acts to extend these tax cuts, then taxes will increase to pre-2001 levels for 2011. The child tax credit will decrease, and more Americans will be forced to pay the alternative minimum tax, or AMT.
Much of the debate in Congress is whether to extend the personal income tax levels for individuals making $200,000 or less ($250,000 for married couples), and let the tax cuts expire for those above the cutoff, resulting in higher taxes. The top two income tax brackets would increase to 36 percent and 39.6 percent. Tax cut extension proponents argue that letting the top two income tax brackets increase would further hurt the economy and small businesses.
Congress is expected to debate between an extension of tax rates for those under the $200,000 individual / $250,000 married couple limit and at least a temporary extension for all tax rates. Regardless of which tax rates are extended, Congress will be forced to find a way to ‘pay for’, or offset, the cost of these tax cuts.
Congress still has to address critical issues surrounding the estate tax, capital gains and dividends taxes, and business tax extenders. Any or all of these could be written into a broad tax bill after the election, and the policy debate, as well as finding ‘pay-fors’, could prove challenging.
The current proposal for the dividends tax is to cap the tax rate at 20 percent for the two highest income tax brackets. Again, the cost of this change would have to be offset. If a dividend tax cap is not enacted, the dividend tax rate would rise to 39.6 percent for the top two income tax brackets.
For 2010, there is no estate tax. However, in 2011, the estate tax levels will rise to 55 percent for the top rate with a $1 million per person exemption. President Obama offered a proposal to make the top rate 45 percent, with an exemption of $3.5 million per person. This proposal is similar to the 2009 levels, and the House passed this estate tax legislation in December 2009.
In the Senate, Senators Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) have offered legislation to cap the top rate at 35 percent and provide an exemption of $5 million per person. This legislation could be debated in the Senate.
Given the political dynamics before the November elections, it is very unlikely Congress will address such controversial issues and take votes.
Congress will pass a short-term appropriations bill to keep government agencies funded past the end of the fiscal year of September 30 to mid-November, and then adjourn for the campaign season. After the elections, they could return to finish appropriations work and tackle pressing tax issues.
While the legislative calendar may be light, we must continue to monitor regulatory developments even when Congress recesses for the elections. After the elections, we can expect controversial debates and need to be prepared to mobilize for any opportunity.