Tax Quote of the Week

[A] democratic government is the only one in which those who vote for a tax can escape the obligation to pay it.




Senate Increases Debt Limit to $14.3 Trillion

On January 28, 2010, the Senate voted 60-39 to increase the Federal debt limit from $12.4 trillion to $14.3 trillion. The Senate resolution will now be sent to the House. It's expected that the House will also pass the same resolution and send it to President Obama for his signature.

As part of the resolution, a "pay-go" provision was included. The pay-go concept has been enacted in prior legislation. However, this pay-go provision in H.J. Res. 45 includes a number of exemptions. Congress would be able to index the alternative minimum tax exemption in 2010 and 2011, and they could set the estate exemption at $3.5 million with a 45% estate tax rate for those years. The tax brackets below 33% would be extended at their current reduced levels. However, the pay-go rules would permit the 33% tax bracket to increase to 36%, and the 35% bracket would be raised to 39.6% for two years.

Majority Leader Harry Reid (D-NV) supported the pay-go provision. He stated, "Pay-as-you-go in the 1990s led to record surpluses. Its absence in the next decade led to record deficits. The road back to economic recovery is a long one. If we are to travel it successfully and prudently -- if we are to create jobs and govern responsibility -- pay-as-you-go must be one of the rules of that road."

Sen. Judd Gregg (R-NH) is the Ranking Member on the Senate Budget Committee. He was opposed to the pay-go provision because of the various exemptions. Sen. Gregg responded, "Pay-go isn't pay-go. Pay-go is Swiss cheese-go." Sen. Gregg has been a strong voice during the past year for moving forward with spending reductions to reduce the deficit.

Finally, Sen. Kent Conrad (D-ND) acknowledged that Sen. Gregg is correct in stating that the pay-go provision is not very rigid. Sen. Conrad continued, "To be clear, I would have much preferred a stricter statutory pay-go. But the bottom line is the statutory pay-go provision being adopted today will serve as a useful additional barrier against the adoption of legislation that does not have broad bipartisan support."


Senate Rejects Budget Commission

On January 26, 2010, the Senate rejected a proposed Budget Commission by a vote of 53 to 46. The Budget Commission bill would have required 60 votes. The proposed Budget Commission was developed by Senate Budget Chair Kent Conrad (D-ND) and Ranking Member Judd Gregg (R-NH). Both Senators maintained that only a bipartisan commission with the authority to propose legislation that could not be amended on the Senate floor would make meaningful progress in reducing the deficit.

At a hearing on the Budget Commission, CBO Director Douglas Elmendorf projected the fiscal 2010 deficit to be $1.35 trillion. This is 9.2% of the gross domestic product, down slightly from the $1.41 trillion deficit in 2009.

Director Elmendorf noted, "The country faces a fundamental disconnect between the services that people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues they are prepared to send to the government to finance those services."

The Budget Commission was opposed by Sen. Max Baucus. As Chair of the Senate Finance Committee, he has great influence in all of the budget and tax legislation. Sen. Baucus noted that there have previously been deficit-cutting budgets that were passed using the "normal order" of the Senate. He suggests, "That's the process that Congress should employ to implement any bipartisan agreement today."

President Obama supported the Budget Commission. He indicated that the Budget Commission is necessary to address the "serious fiscal situation that our country faces." The Budget Commission will make "tough choices" but could be helpful in creating future jobs and economic growth.

Following the failure of the Budget Commission bill, President Obama issued an executive order to implement a Budget Commission. Sen. Conrad approved of the concept and concluded, "We now face a perfect storm of exploding debt, brought on by rising healthcare costs, a retiring baby boom generation, and an outdated and inefficient revenue system. Now is the time to act."


State of the Union and Taxes

President Obama spoke to a joint session of the House and Senate on January 28, 2010. In the State of the Union Address, he included two short sentences on taxes.

President Obama stated, "To help working families, we will extend our middle-class tax cuts. But at a time of record deficits, we will not continue tax cuts for oil companies, investment fund managers and those making over $250,000 a year."

Following the State of the Union Address, Senate Finance Chair Max Baucus (D-MT) indicated he would pursue the middle-class tax cuts. He stated, "In the coming weeks, I will work with my colleges to pursue targeted tax cuts that fulfill the President's goals of strengthening the middle-class, bolstering our economy and creating American jobs."

However, Republican Senators were dismayed that President Obama suggested he would increase taxes on upper-income persons. Sen. Charles Grassley (R-IA) has been a strong advocate for small businesses. He observes that over "70% of new jobs" are typically created by small businesses. With the unemployment rate in most states over 10%, Sen. Grassley believes that raising the top two brackets and the capital gain rate will have a harmful impact on small businesses and job creation.

Sen. Grassley responded, "For job creation, I've urged the President to get behind a comprehensive tax relief plan to encourage small business activity, and I introduced a bill last summer (S. 1381) that would leave more money in the hands of small business owners to hire workers, pay employee salaries and make investments that lead to new jobs."

Editor's Note: After the State of the Union Address and passage of the Senate debt increase resolution this week, it is now becoming clear that the Senate and White House leadership plan to increase the two top income tax brackets. Unless there is a change in law, on January 1, 2011, the 33% and 35% brackets increase to 36% and 39.6%. The 15% capital gains rate will increase to 20%. While the estate tax is scheduled to return with a $1 million (with indexed increase) exemption and a 55% rate, it is very possible that there will be a compromise on that tax.


Applicable Federal Rate of 3.4% for February -- Rev. Rul. 2010-6; 2010-6 IRB 1 (20 Jan. 2010)

The IRS has announced the Applicable Federal Rate (AFR) for February of 2010. The AFR under Sec. 7520 for the month of February will be 3.4%. The rates for January of 3.0% or December of 3.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2010, pooled income funds in existence less than three tax years must use a 4.6% deemed rate of return. Federal rates are available by clicking here.