NCSL Information Alert

December 10, 2010 

CURRENT OFFER. President Obama and House and Senate Republican Leaders reached preliminary accord on a framework for addressing expiring tax cuts, expired tax credits and unemployment insurance benefits on December 6. The framework was presented to House and Senate Democratic and Republican Caucuses for review and feedback on December 7 and 8.

On December 9, Senate Majority Leader Harry Reid introduced an amendment to H.R. 4853 that mirrors the framework and the summary below and adds sections on tax extenders and energy credits/incentives.

BACKGROUND: FEDERAL TAX POLICY AND UNEMPLOYMENT INSURANCE BENEFITS

In both 2001 and 2003, the Congress passed and the President signed legislation making substantial changes to individual federal tax rates, exemptions, deductions, capital gains and qualified dividends tax treatment, marriage tax treatment, estate taxes, the alternative minimum tax and a host of other provisions. Virtually all of these provisions were temporary, that is, they were written to expire on December 31, 2010 or earlier. The alternative minimum tax, small business expensing, education tax credits and teachers classroom expenses have been dealt with by Congress on an annual basis, either as part of what is called “tax extender” legislation (which addresses nearly four dozen federal tax credits that are typically extended on a year-to-year or two year basis) or as part of either stand-alone or other legislation. Authority for extended federal unemployment insurance benefits expired on November 30, 2010.

A summary of the framework follows. This summary does not necessarily track all of the provisions within the framework.

INDIVIDUAL FEDERAL TAX RATES

The 2001 and 2003 tax cuts would be extended as they are in current law for 2011 and 2012. Ordinary taxable income rates would remain at 10 percent; 15 percent; 25 percent; 28 percent; 33 percent; and 35 percent depending on income level.

LONG-TERM CAPITAL GAINS/DIVIDEND INCOME

For 2011 and 2012, rates remain at either 0 percent or 15 percent depending upon income.

SOCIAL SECURITY PAYROLL TAX. For employees, this tax would be reduced from 6.2 percent to 4.2 percent for 2011. Funds would be transferred from the General Revenue Fund to the Social Security Trust Fund to compensate for lost revenue.

EARNED INCOME TAX CREDIT. Would remain at levels approved in the American Recovery and Reinvestment Act for 2011 and 2012.

CHILD TAX CREDIT, MARRIAGE PENALTY, REFUNDABLE CHILD TAX CREDIT, CHILD AND DEPENDENT CARE TAX CREDIT, THE AMERICAN OPPORTUNITY TAX CREDIT (PARTIAL REFUNDABLE TAX CREDIT FOR COLLEGE TUITION)

Although there are minimal differences, all of these would stay as they are in current law for two years. There is less information on these credits at this time than there is on most of the other provisions in the framework.

ESTATE TAX. For 2011 and 2012, the federal estate tax would be 35 percent for estates valued at $5 million and higher (single filers) or $10 million (joint filers). Restoration of the state death tax credit has yet to emerge in any summary and it is uncertain as to whether it is a discussion item. Preliminary reaction to this provision has swirled around the estate tax rate and exemption level.

ALTERNATIVE MINIMUM TAX. The alternative minimum tax would be “patched” for both 2010 and 2011.

SMALL BUSINESS EXPENSING. In 2011, small businesses could expense (Section 179) 100 percent of all investments.

UNEMPLOYMENT INSURANCE. Provides extended federal unemployment insurance benefits from December 1, 2010 through December 31, 2011. Nothing has emerged yet on whether states will get an extension of the waiver of interest on loans secured from the federal government for their unemployment insurance programs.

TAX EXTENDERS. Senator Reid's amendment includes reauthorizations of dozens of expired tax credits, including optional state and local sales tax deductibility for those who itemize.

ENERGY.
Senator Reid's amendment includes extension of a variety of energy tax credits and incentives covering wind and solar power, ethanol subsidies, energy efficient applicances, renewable and alternative energy, biodiesel, energy efficient homes and others. 

COST. The preliminary estimate of revenue lost and funds needed to be borrowed to cover costs of the proposal is $900+ billion depending on the source at this writing.  The offer declares some of the above provisions as “emergency” meaning they do not have to be offset while others qualify for exemptions from PAYGO requirements.

FOR MORE INFORMATION

Please contact either Jeff Hurley or Michael Bird for further information. Jeff is reachable at 202-624-7753 or jeff.hurley@ncsl.org and Michael can be reached at 202-624-8686 or michael.bird@ncsl.org. This alert material will be updated as new information and negotiation results become public.  At this writing, there is no legislative language to reference.