What’s Next?

Taxpayers are rightly worried about the economic condition of the country. The Congress began the process of recovery through its enactment of the Emergency Economic Stabilization Act of 2008, but it has become clear that this is only a first step. That legislation included many tax-related provisions aimed at extension of popular individual tax breaks and at incentivizing alternative forms of energy production in various aspects of the American culture; but nothing targeted a general recovery of the economy or capital formation, only a few provisions aimed at helping the financial sector. While much attention is given to the various tax proposals that the President-elect campaigned on, the Congress is currently meeting in a lame duck session where tax legislation aimed at other sectors of the economy is currently being offered. Even if not enacted before the end of the year, these proposals will likely be revisited in the next Congress.

The Senate leadership, Senators Reid and Byrd, has suggested consumer-friendly provisions to jump-start the sputtering automobile market, an industry that has been the backbone of the manufacturing sector. The proposal creates above the line tax deductions for interest payments on car loans and state sales/excise taxes for new cars purchased between November 12, 2008 and December 31, 2009. Currently, interest on a car loan is not deductible and state sales taxes are deductible below the line and only in lieu of state income taxes; the proposal would make this sales tax deductible in addition to state income taxes. Such legislation may be iffy however, given the hostility with which the Congress has addressed the CEOs of the Big Three automakers, who have come to Washington hat in hand seeking a bailout loan of 25 billion dollars. But politics often produces results seemingly at odds with appearances.

Senator Baucus, the Chairman of the Senate Finance Committee, has indicated that the bonus depreciation and the $250,000 enhanced §179 deduction provisions that were enacted earlier this year purportedly for 2008 only might have to be extended through 2009. Those provisions could front-load deductions sufficiently to encourage businesses to purchase capital and manufacturers to produce it in response to increased demand, presumably creating new jobs.

In addition, Senator Baucus favors legislation that would waive the minimum withdrawal rules for certain retirement account owners. Such taxpayers are generally required to take a minimum level of distributions once they reach age 70-1/2, the amount of which is determined by the owner’s age and the account’s value as of the end of the prior year. As a result of the stock market meltdown, many taxpayers now have a much lower account value today than they had on December 31, 2007, and required minimum distribution rules operate to require a liquidation of a percentage of the account’s investment portfolio that is now often dramatically out of line with the intention of the current rules and may operate to put further stress on stock values in an already battered market. A suspension, for taxpayers who otherwise don’t need the distributions to make ends meet, of the required minimum distribution rules would encompass 2008 and 2009, allowing the stock market to stabilize. On the other hand, the Obama proposed shift in the maximum capital-gains tax rate for upper income taxpayers to 20 percent will spur some selling now to lock in current gains at the lower 15 percent maximum.

Steny Hoyer, majority leader of the House of Representatives and a member of the Blue Dog Democrats, has indicated a willingness to forego pay-go requirements in the short term with respect to legislation aimed at bolstering the flagging economy. The Blue Dogs, who are fiscal conservatives, have watch-dogged budget balance by general insistence on pay-go although they have bent on occasion to tax cuts that weren’t wholly offset by revenue enhancements. However, Representative Stoyer has not mentioned tax reform itself as a legislative goal that would allow leeway, but the political process is ongoing so it waits to be seen whether tax relief will emerge as a tonic to the ailing economy.

Legislative developments are discussed in various courses, including The Best Federal Tax Update Courseby Surgent McCoy (BFTU) and The Best Individual Tax Update Courseby Surgent McCoy (BITU).