Tax Turmoil: Will Any Of It Actually Pass?

By September 21, 2011 Individuals

A lot of tax changes have been proposed over the last two weeks as the President unveiled a jobs plan and deficit plan in September. The changes would drastically change the tax layout for 2011 and forward, creating tax turmoil. With the recent political climate one has to wonder will any of these proposed changes actually become law? In fact, while the President continues to call for quick passage, no one on either side of the aisle is moving to bring the bills to the floor for a vote. Right now Congress is at an impasse and facing another shutdown over whether FEMA funds should be increased by $3 billion or $7 billion. So what do you need to know in this gridlock? Let us break it down for you.
The Jobs Bill

The President’s jobs bill, as we predicted, will most likely be dead on arrival. The bill would increase taxes by cutting deductions for taxpayers making over $200,000, $250,000 for married filing jointly. It would also cut Social Security taxes and introduce a host of credits for hiring the long term unemployed and veterans. However, aside form the tax increases, the bill also has other strings attached. It would make the long-term unemployed a protected class and prohibit discrimination in hiring. This could create a host of sticky issues for companies seeking to hire, especially since previous work experience is such a relevant topic. The bill would also use taxpayer funds to rehab government owned foreclosures at a time when the demand for housing is far below the current supply.

We don’t see any of the provisions of this bill passing right now, but we anticipate the 4.2% Social Security rate for employees will be extended at the end of this year. Democrats have indicated that they may be open to the further cuts in Social Security taxes for employers and employees, but only if the cap of $106,800 is raised or the tax resumes on income over $200,000 or $250,000 for married filing jointly. We don’t believe the votes are available for this to happen this year.

The “Buffett Rule”

Does Warren Buffett actually pay taxes at a lower rate than his receptionist? Possibly, if you ignore the fact that Buffett’s corporation Berkshire Hathaway pays about 30% in corporate taxes before Buffett sees a single penny in dividends, salary or capital gains from his company. But Buffett’s claim on taxes is the basis for the deficit reduction plan the President has dubbed the “Buffett Rule”. This bill seeks to cut government spending by $1.5 trillion over ten years and increase taxes by $1.5 trillion. However, once we peal back the details of this bill we see many items we think will prevent this one from passing any time soon.

The actual Buffett Rule portion of the bill, eliminating the Bush tax rates on the top two brackets, is only 55% of the tax hikes in this proposal. The rest is a small mix of taxes on gas, diesel, airline tickets, increases in co-pays for military, cuts to medicare provider reimbursements, elimination of subsidies for oil, gas, and coal, reductions in postal services and a large mix of other minor provisions that are sure to affect Buffett and his receptionist. In addition, the majority of the $1.5 trillion in spending cuts are simply double counting assumptions, such as the assumption that the wars in the middle east are wrapping up. Which are not actual, tangible reductions in government spending.

What will come out of this? Probably the elimination of oil, gas and coal subsidies and changes to how R&D and exploration for oil and gas is expensed. Republicans are starting to open up to the idea of eliminating corporate subsidies. This will affect some of our clients who are invested in these energy sources but as a whole mostly effect future investment in these areas.

One last note on the Buffett rule…Warren Buffett claims that he pays taxes at a rate of 17.4%. This is partially true based upon proper structuring of his income through the use of qualified Dividends and tax planning. However, if you count the payroll taxes, corporate taxes or any of the other state and local taxes he pays we feel this number is closer to 50%. His counter claim is that his receptionist pays income taxes at a 33% rate on a salary of $60,000. If that’s the case, sounds like she needs a new CPA!