Tax News

Three law professors at the University of Kansas have completed a study suggesting that large U.S. corporations won billions of dollars in tax savings by lobbying Congress to change the tax code four years ago.

Stephen Mazza and two associates spent six months analyzing a provision in the American Jobs Creation Act, passed in October 2004, that allowed corporations to bring overseas earnings back to the U.S. at a 5.25 percent tax rate, instead of the usual 35 percent.

They then looked at how much companies like IBM, Pfizer and Eli Lilly and Co. spent to lobby for the change and how much they saved.

Their figures determined that 93 of the country’s biggest firms got $62 billion in tax savings after spending only $283 million for lobbyists. In total, they said almost 500 companies saved close to $100 billion — or an average 22,000 percent return on their lobbying investment.

“Is this how you want policy enacted?” asked Bill Allison of the Sunlight Foundation, which monitors political spending and lobbying. “Whoever has the biggest access to lobbyists and to Washington insiders gets the tax relief?”

Sheila Krumholz of the Center for Responsive Politics, which also watches lobbying, said the big companies could outspend and obscure other viewpoints.

“Is policy being decided on the merits, or is it being unduly influenced by the money spent?” Krumholz said. “And then do the non-moneyed interests … lose a valuable seat at the table?”

Industry officials say they were doing what was right for their employees, customers and taxpayers.

“The government is doing something to you or for you every day here in Washington,” said Dave Wenhold, president of the American League of Lobbyists, which represents lobbyists themselves. “If you don’t have somebody watching out for your interests, it could prove dangerous to your organization.”

Supporters say most lobbying deals with issues that have little financial impact, such as gun control, abortion and education. Focusing on a single tax break affecting billions of dollars in corporate revenue, like the study does, could overstate what lobbyists do, they say.

Mazza acknowledged that tax lobbying may be quite different from other kinds of lobbying, noting that “the payouts are going to be significantly higher in the tax area.”

Others said the tax policy needed to be changed, regardless of whether lobbyists got involved or not. If it hadn’t been changed, the U.S. Treasury would have missed out on billions in revenue as those companies’ overseas profits stayed overseas.

“It doesn’t take a rocket scientist to figure why businesses have an incentive to look for tax savings,” said Pete Sepp of the National Taxpayers Union. “Over $300 billion in profits held overseas were brought back here. … It sure beats doing a favor for some other country’s economy by letting the money sit abroad.”

President Barack Obama has pledged, like presidents before him, to impose tougher regulations on lobbyists trying to influence the executive branch. But the industry continues to flourish, receiving $3 billion last year — a 14 percent increase from 2007 — to lobby Congress and the federal government, according to the Center for Responsive Politics.

Lobbyists claim they’re in demand because they get results. They said the need for professional help is even more profound in tax matters because the tax code is so complex.

“If anyone’s to blame for this situation, it’s Congress,” Sepp said. “If lawmakers would give up their habit of using the tax system as a political weapon and making the whole thing simpler, we wouldn’t even be having this debate.”

Allison said it’s not just a question of complicated tax laws, however. It’s that big taxpayers are more likely to get help because they can afford the most powerful lobbyists, he said.

“Any citizen can hire a lobbyist,” he said. “But even if we all banded together, we’re not going to get a huge tax break.”

Mazza said the study doesn’t suggest that the 2004 tax changes were illegal or wrong, although he did refer to studies indicating the companies receiving the break gave passed along the savings to shareholders instead of hiring more workers.

“The tax break created jobs,” he said, “but it created them in the lobbying industry.”

President Barack Obama wants Congress to consider taxing the wealthy instead of workers to pay for a health-care overhaul, as House Democrats discuss a plan to require health insurance for most Americans.

The Obama administration stepped up efforts to influence health-care legislation today as advisers David Axelrod and Austan Goolsbee appeared on television talk shows to discuss the issue.

The president is trying to avoid broad-based levies such as a Senate proposal to tax some employer-provided health benefits Axelrod said. Instead he is urging lawmakers to reconsider limiting all tax deductions for Americans in the highest tax brackets.

“He made a very strong case for the proposal that he put on the table, which was to cap deductions for high-income Americans, and he urged them to go back and look at that,” Axelrod said on the CNN’s “State of the Union.” Goolsbee, appearing on “Fox News Sunday,” said Obama is “mindful” about how “ordinary Americans are able to foot the bills” and never proposed taxing employee benefits.

House Democrats are weighing a new proposal in response to Obama’s call for legislation to be enacted by August. An outline of the plan obtained by Bloomberg News would require Americans to have insurance with some exceptions.

It would probably exempt those who can prove they can’t find an affordable policy. There could be a tax penalty for those with adequate financial resources who don’t elect to get insurance, according to the outline.

Group Rates

The outline suggests consumers who have individual health insurance policies that they like could keep them. Still, it says that “by and large” the nation’s market for individually purchased health insurance policies would move to a new federally operated exchange. It would permit both individuals and employees of small firms to buy policies at less expensive group rates.

“States will have the option to run a state exchange but the default will be a national exchange,” according to the outline.

Karen Lightfoot, a spokeswoman for House Energy and Commerce Committee Chairman Henry Waxman, a California Democrat whose panel is working on a proposal, said the document that is circulating is not the official work of the committee.

All House Democrats will be briefed June 9 on the details of a single piece of legislation that three House committees will work on, with the House slated to act by the end of July. The proposal is part of a broader push by Democrats in Congress to complete a revamp of the U.S. health-care system by an early fall timetable set by Obama.

Kennedy’s Approach

In the Senate, health committee chairman Edward Kennedy has an early draft of legislation that also includes a so-called “individual mandate,” and would require all employers to supply health insurance for workers or contribute to the cost of a plan.

Kennedy, a Massachusetts Democrat, would also create a public health plan to compete with private insurers, a priority of Obama’s that is opposed by Republicans, and would bar insurers from limiting coverage.

The effort to overhaul health-care would affect a sector that makes up 17 percent of the U.S. economy. The goal of Democratic supporters is to provide insurance to most of the nation’s 46 million uninsured, and lower the soaring cost of care. A key challenge is the potential impact of legislation on an already rising U.S. budget deficit that may reach $1.8 trillion this year.

Axelrod, speaking on CNN today, said the ultimate goal of legislation is to reduce costs.

“We have to bring down the cost of health care,” he said. “If we do that and make it affordable, people are going to buy it, mandate or no mandate.”

Burdens on Business

Google Inc. Chief Executive Eric Schmidt, speaking on Fox, said reducing costs would also ease burdens on business.

“The only way to really address this is to address the combination of coverage and cost,” Schmidt said. “So anything that the Congress and the president does has to do that. And from my perspective, the sooner the better.”

“You won’t fundamentally solve the problems in business until you solve the problem of spiraling health-care costs, which is driving everybody crazy,” he added.

Lawmakers have a plethora of proposals to raise the hundreds of billions estimated to be needed for an overhaul, including new taxes on soda, beer, and wine, and a partial tax on employer-provided health insurance for the first time. The tax-free nature of employer-provided insurance is the biggest tax expenditure in the federal budget.

Taxing Cap Deductions

Obama’s own proposal would set a 28 percent cap on tax deductions for items such as mortgage interest, investment expenses and charitable gifts for Americans in the two highest tax brackets, which would be 36 percent and 39.6 percent under his proposals. Without the cap, they would be able to deduct 36 cents and 39.6 cents on the dollar for those expenses, respectively.

Obama also proposes new taxes on securities dealers and life insurers, and to raise revenue by prohibiting certain estate-planning techniques.

House Democrats intend, like Kennedy, to include a new government program to provide health-care to a portion of the uninsured who don’t already qualify for Medicare or Medicaid, according to the outline.

While the lawmakers continue working out the details, they intend the new program to operate through the exchange and for both the public program and private insurance policies to have the same basic benefits.

Helping the Poor

House Democrats want to improve the Medicaid health-care system for the poor, including a uniform benefits package and “improved” provider payments. They are weighing whether to add people who are near the poverty level to Medicaid or to provide subsidies to allow them to purchase their own policies.

The plan would place new restrictions on private insurers, including a bar on excluding coverage for those with “pre- existing conditions.”

The legislation would seek to get some cost savings from Medicare and Medicaid, including incentives for doctors to coordinate their care and get bonuses for improving quality, according to the outline.

Is that work issued BlackBerry really a taxable “fringe benefit?” The IRS seems to think so and is looking for ways to improve compliance of a tax that has been on the books for two decades.

Get ready for a potential bookkeeping nightmare.

The Wall Street Journal on Friday highlighted an IRS notice (Notice 2009–46, pages 13-15) June 8 detailing plans to tax company issued mobile phones. The Journal calculates:

The Internal Revenue Service proposed employers assign 25% of an employee’s annual phone expenses as a taxable benefit. Under that scenario, a worker in the 28% tax bracket, whose wireless device costs the company $1,500 a year, could see $105 in additional federal income tax.

The Journal picked up the story after following a few blogs such as The Finance Buff and various CPA blogs.

At this point, the IRS is seeking comment on how to better enforce a 1989 tax law. In a nutshell, workers that use company phones for personal calls are supposed to count those calls as income and pay taxes. That approach may have made sense in 1989 when mobile phones were the size of netbooks, but work life has changed a good bit. In fact, work and life are completely blurred.

The IRS writes:

If an employer provides a cell phone to an employee, and the employer acquires and pays the costs of using the cell phone, the employee receives a fringe benefit. To the extent that the employee uses the employer’s cell phone for business purposes, the fair market value of such usage qualifies as a working condition fringe benefit excludable from the employee’s gross income and the cell phone expense is a deductible business expense for the employer, provided that the substantiation requirements of § 274(d) are met. However, to the extent the employee uses the employer’s cell phone for personal purposes, the fair market value of such usage is includable in the employee’s gross income.

To better tax your work mobile phone the IRS proposed three approaches:

* A claim of minimum personal use: An employer could claim the entire use of an employer-issued phone is used for work. The rub: The employee has to provide the employer with “sufficient records.” In other words, call your wife and you’re toast. The other option here is some minimum personal use quota so you could call the family—a little.
* A safe harbor: The IRS is proposing that a mobile phone has to be used 75 percent of the time for business to elude the tax man.
* Statistical sampling: Employers could use statistical sampling to gauge personal use of mobile phones.

Needless to say that this little IRS proposal is likely to get a lot of comments from companies and the wireless industry. It seems like a waste of time. Don’t we have more important things to do than count how many personal calls are made on a business phone? And if you really want to get complicated just imagine how the IRS will count Tweets and text messages from a work phone.

If there is one tax loophole that looks dead in the water, it’s the law that lets hedge fund and private equity managers pay a 15-percent capital-gains rate on the multimillion-dollar fees they collect — substantially less than the top income tax rates paid by their secretaries, chauffeurs, and the pilots of their private jets.

On the surface, the stars are aligned. There is a newly elected Democrat in the White House who is desperate to raise revenues. His budget calls for killing this tax break to raise $14.75 billion over five years and $23.89 billion over ten years. In addition, there are Democratic House and Senate majorities – representing the party of working people – and what could more unfair than letting billionaires pay taxes at a fraction of the rate of the guy with the lunch pail ?

But reformers seeking to raise the taxes of the super-rich should not assume this is a slam dunk. The Democratic majority in the Senate has looked at this provision before — most recently two years ago. Many Senate Democrats saw the legislation as biting the hand that fed them and breathed a sigh of relief when, on December 6, 2007, Republicans mustered enough votes to filibuster the proposal to death.

Not only have hedge and private-equity fund managers earned massive amounts – in 2007, according to Institutional Investor’s Alpha Magazine, John Paulson made $3.7 billion while George Soros and James Simons came in at just under $3 billion (to make the top 25 required $360 million) – even as their compensation does not require them to put their own money at risk.

The most common arrangement provides that fund managers get a) a fee of 2 percent of the value of the fund, whether it goes up or down – a fee on which they pay ordinary income tax rates of up to 35 percent; and b) 20 percent of the annual profits, on which they pay only a 15-percent capital-gains tax rate.

Combined, the top 50 hedge and private equity fund managers last year earned $29 billion (hedge and private equity funds can make money by ‘going short’ or ‘going long’.)

You might expect these rich folks to be Republicans, but, it turns out, hedge and venture capital people like Democrats – so much that they have lavished millions of dollars to help them win re-election. As an expression of their love – and of their desire to influence tax policy – hedge and private equity fund managers and their PACs gave more cash to Democrats than Republicans in 2002 and 2004, even before the Democrats rose to power.

All the recent hubbub about the tax rebates has me completely flummoxed and recent reports by the Tax Foundation make me wonder how all this hand waving by Congress & the Executive is actually going help the economy. It’s clear people who are making policy don’t have to do any of the hard work to implement it.

What they’ve managed to cobble together in a matter of weeks will be a logistical nightmare and wont get into the economy for months.

It may be too late now, but if we’re going to have a stimulus package I would be interested in hearing comments on alternatives to an income tax rebate. There are plenty of other taxes we pay besides income taxes.

Wouldn’t a payroll tax holiday would be an easier solution?

No checks would have to go out from the treasury and the effect could be felt immediately by both businesses & employees. Employers would have lower payroll tax deposits and employees would get a larger paycheck. For instance, Congress could declare that from February 1st, no FICA/Medicare tax rates would be due on the first $8000 of wages. That would be equivalent to $612 savings per employee, for the employers and employee with each sharing in the stimulus.

Congress could increase unemployment benefits for the unemployed and bump up Social Security payments to help seniors. These checks are going out to recipients anyway and wouldn’t require special handling by the treasury.

The only group I haven’t been able to quite work out how to “stimulate” is the self-employed. Maybe an increase in the deduction for Self Employment Tax, or a slight decrease the net earnings from self-employment multiplier would reduce the SE tax for the year which would reduce their required estimated tax payments.

Accelerated depreciation could still be included as part of the package to stimulate investment.

It seems easier to help business and employees keep the money they already have than to have them send it to the gov’t which then turns around and sends it right back. Very inefficient.

Millions of taxpayers, thousands of businesses and groups as diverse as solar power developers and natural disaster victims will see tax relief with the House vote Friday to approve and send to the president a $700 billion financial rescue plan.

The tax relief package attached to the rescue bill promotes renewable energy development and extends dozens of tax breaks from the critical research and development tax credit to breaks for such narrowly focused groups as motor sports racetrack owners, film producers and bicycle commuters.

The renewable energy part of the package alone, House Speaker Nancy Pelosi said, will “create and save half-a-million good-paying jobs in America immediately.”

Virtually all of the tax breaks already exist. But many of them expired Jan. 1 for use in the current tax year, and the others will expire three months from now unless Congress renews them.

The largest group of beneficiaries in the tax portion of the financial rescue bill is about 20 million mainly upper-middle income taxpayers. Without congressional action, the AMT, with originally was supposed to affect only the very rich, would add some $2,000 this year to the tax bill of these people, most earning under $200,000 a year.

Thousands of businesses are waiting for renewal of the research and development tax credit, which expired at the end of last year. Without that credit, industry advocates say, high tech, biotech and aerospace companies would have trouble hiring the highly skilled workers needed to compete with foreign competitors.

The Information Technology Association of America reports an $18.5 billion drop in R&D activity since the beginning of the year, when the credit lapsed. The R&D credit extension would cost $19 billion over 10 years. The cost of the entire tax portion of the bill is close to $110 billion.

The renewable energy incentives include an eight-year extension of investment credits for solar energy, as well as breaks for wind, geothermal and other alternative sources. The solar industry says extension of the credits through 2016 would produce an extra 440,000 jobs and more than $230 billion in investments.

The measure also has $8 billion in tax breaks for disaster victims, $5 billion for higher education tuition deductions and $400 million in deductions for teachers who buy school supplies with their own money.

There are $3 billion in deductions for residents of states without income taxes that have state and local sales taxes. Extending the deduction would save Texans a projected $1.2 billion a year or an average of $520 per filer claiming the deduction, said Matt Mackowiak, spokesman for Sen. Kay Bailey Hutchison, R-Texas.

There are also some four dozen small provisions. Among them, with projected costs over 10 years:

_Extending an expired provision that gives Puerto Rico and the Virgin Islands a rebate against excise taxes charged on imported rum. The rebate, at $13.50 per proof gallon, helps finance local infrastructure projects. The cost is $192 million.

_Establishing a new tax credit ranging from $2,500 to $7,500 for purchasers of plug-in electric-drive vehicles. Cost: $758 million.

_Extending tax credits that expired at the end of 2007 for certain domestic corporations involved in American Samoa economic development. Cost: $33 million.

_Extending a credit of up to $10,000 for the training of mine rescue team members. The credit expires at the end of this year and the one-year extension costs $4 million.

_Enacting President Bush’s proposal to erase the debt of the black lung disability trust fund at a cost of $1.3 billion.

_Extending for one year a seven-year depreciation timetable that NASCAR and other motorsport racing facilities have had for some years, the same tax break that amusement parks enjoy. Without the extension, the tracks would have to depreciate the cost of their improvements over 15 years, raising their taxes by $100 million.

_Extending for five years a program that reduces import duties on some wool fabrics. The tariff relief benefits U.S. worsted wool fabric producers that use imported fibers and yarns. Cost: $148 million.

_Increasing the single-year deduction in production costs, from $15 million to $20 million, that film and TV productions may take if the costs are incurred in economically depressed areas. In an effort to keep film and TV productions in the U.S., it also allows more companies to use a domestic production deduction. Cost: $478 million.

_Allowing commercial fishermen and others hurt by the 1989 Exxon Valdez oil spill in Alaska to average out damage awards over three years rather than taking a one-year hit from the IRS. Cost: $49 million.

_Extending two programs that fund rural schools and rural communities that have been relying on declining income from logging on federal land or have low property tax bases because they are located on or next to federal lands. This is a major issue in the West. Cost: $3.3 billion.

_Exempting wooden practice arrows used by children from an excise tax of 39 cents per arrow. Oregon’s two senators and two Wisconsin representatives previously introduced legislation calling for the action, saying the tax was meant for more expensive archery arrows and is untenable for makers of toy arrows that may cost only about 30 cents apiece. The bill would affect about a half-dozen manufacturers nationwide, including one in Oregon; the Oregon senators said they didn’t seek its addition to the bailout, however. Cost: $2 million.

_Allowing employers to exempt from taxation what they spend on some fringe benefits for workers who commute to work by bicycle, for example reimbursing the cost of parking the bikes. Cost: $2 million.

Some House members and radio-TV commentators have called for eliminating several of the measures, including those affecting wooden arrows, Puerto Rican rum, racetracks and film producers.

“All these things are called sweeteners in order to get votes from Democrats and Republicans in the House,” conservative commentator Rush Limbaugh said at the opening of his show Thursday. “To get this bailout through the Senate and House, they’ve added pork. Surprise, surprise.”