Tax Drought: When will it Rain?

A good portion of the United States has in recent months experienced a water drought. Crops have withered, grain prices have increased, animal herds have been thinned, and food prices have increased as a result of the lack of moisture falling from the sky. It is horrible, a regrettable circumstances in spite of the crop insurance in place. 

There is another kind of drought for those of us who follow federal tax policy and earn our living at such endeavors. We are experiencing a drought also. Not, of course, of the same magnitude but nevertheless. Nothing is happening, now goint go happen anytime soon. 

According to the Congressional Joint Committee of Taxation, there are 60 tax provisions that expired in December 31, 2011 and another 41 that will expire at the end of this year. The size and magnitude of these provisions range from several billons of dollars a year to those that for budgetary purposes get an asterisk. Let’s take a peak at some of them.

• The Bush tax cuts will expire at the end of the year. Unless Congress acts not only does the top rate increase but also so do the bottom tax rates. The marriage penalty will also be re-instated.
• The current rates on capital gains now at fifteen percent will expire at the end of the year.  
• The lower rates on dividends installed in 2003 will expire at the end year.
• The Alternative Minimum Tax (AMT) will scoop up millions of taxpayers unless a correction is enacted before the end of this year.
• The temporary 2% employee payroll tax cut will also expire at the end of the year.

This is old stuff, the so called the "tax cliff". It is a legislative certainly none of the major tax issues will be solved, much less seriously considered until after the election.

In other words, unless Congress and whatever Administration is in office after the election can come together, the tax code will go upside down. Taxes will significantly jump for almost all taxpayers. Correction, it is not a jump but a giant leap at the macro level of more than $500 billion a year. According to the Congressional Budget Office, the result most certainly would mean a server economic dip would be forthcoming.

There are many reasons this is a mess. The President has essentially abrogated his leadership and wastes time politicizing the situation. The Republicans are no better than the Democrats. Conservatives are universally opposed to increased taxes. They tout tax reform wanting lower rates but never identify specific tax expenditures that would have to be eliminated to prevent the deficit becoming even more inflamed. Cannot blame them for this as why walk the plank alone when the Administration sits on its hands?

How does this resolve itself? The prospect of a lame duck Congress trying to address all of these very important issues with a possible lame duck President is unsettling. Who knows how the election results will influence the decisions? Which side will hold the power? Which will blink first? What is the basis for resolution when there is so much difference between the parties? Speaker Boehner said this week, he is not sure these matters can be successfully addressed in a post election session. Majority Leader Reid, unfortunately and as always, has no real plan unless it is to embarrass Republicans. 

Regardless of the draught, the real question who can solve this problem?  How does this get done? If Mr. Obama wins re-election, he would face until the end of the year the same political set of circumstances as he does today. Will Republicans work with him or dig in? What about if Republicans get control of the U.S. Senate? What does that do as they can control the agenda after the new Congress in sworn in except the minority Democrats will assume the role of obstructionist extraordinaire.

If Romney is elected, what will Mr. Obama do? Last gasp effort to address these issues, agree to kick everything to the new incoming Administration? If the Senate rolls over to the Republicans, they would then find themselves in the same position as the Democrats did in 2009. Not much incentive to do anything in a lame duck session of Congress.

One thing is for certain, no matter who controls the Senate, Republicans will be more conservative with their new members coming in. No incentive to compromise with Mr. Obama. The House assuming it stays Republican-a good bet- will also be more conservative as a lot of the freshmen will have survived their first election cycle.

Mr. Obama has stated things will be different and better after his re-election. I almost choked when I read this. He thinks after his scorched earth political campaign the Republicans will be receptive, more malleable to his ways. I am not so sure about that. My guess is now everything, and I mean everything, gets put off until the next Congress convenes. This means the extension of all the tax cuts with the promise that tax reform will be front and center for the next Congress. Maybe then it will rain.