Nutter's Washington

Congress: Three Weeks in and Tax Reform

 

The new Congress has been in session for about 3 weeks. Much has been made by the press and pundits about the divisions in the new Majority Republican Party. Friction between House and Senate, unhappy conservative House members with their Leadership are portrayed as impairing Republicans from functioning. While there are differences, some public squabbling, it is mostly about nothing.

Republicans share a common philosophy and goals--less government, less regulation, fiscal restraint, tax reform, perceived government over reach, and job creation. There is also almost universal opposition to anything the Administration proposes. This commonality, while there can be differences in scope and detail, means Republicans are well positioned to pursue their agenda. How much success there will be is to be determined.

Indeed, the first three weeks under Republican control have proceeded smoothly and as intended. The House has rapidly moved legislation on Keystone XL pipeline, defunding executive orders on illegal immigrants, curtailing the Affordable Health care Act, and opposing various regulations. In the Senate, Mitch McConnell (R-KY) has moved to change the tone in the Senate by allowing an open amendment process on consideration of the Keystone XL pipeline.

Tax Reform

Tax reform is a major topic in Washington and subject to a wide array of speculation. While there is general agreement the tax code needs a major overall, is a drag on the economy and is extraordinary complicated there is no consensus on either the scope of such “reform” or an approach.

Up until last week, the Administration had not provided any real impetus or push for tax reform other than recycling old principals and proposals. The President, however, meekly proposed during his State of the Union address raising the capital gains rate on top income earners and changing the income tax the treatment of assets held at death among other things. 

The centerpiece of the President's tax raising proposal is an increase in the capital gains rate on couples making more than $500,000 per year to 28 percent. The top capital gains rate has already been raised from 15 percent to 23.8 percent during Obama's presidency. Obama also wants to close what the administration is calling the "trust fund loophole," a change that has nothing to do with trusts but would require some estates to pay capital gains taxes upon death. It is notable the Administration did not mention corporate tax rates or corporate tax reform, an area of possible cooperation with Hill Republicans.

The President’s approach has been widely scoffed and deemed a political act. Some believe it deals a blow to cooperation on tax reform and the real movement will have to come from Congress. The Administration proposes to use the increased tax revenue for additional spending programs, a nonstarter in this Congress. 

In the Senate, Finance Chairman Orrin Hatch (R-Utah) denounced the Obama proposals and has formed separate working groups on individuals, businesses, savings and investment, international issues, and community development and infrastructure to help his committee outline a plan. Each group is to create a report to be delivered by the end of May. This is similar to the approach taken last year by then House Ways and Means Chairman Dave Camp. (R-MI)

The working groups are headed by:

• Individual: Sens. Chuck Grassley (R-Iowa), Mike Enzi (R-Wyo.) and Debbie Stabenow (D-Mich.),
• Business: Sens. John Thune (R-SD) and Ben Cardin (D-MD)
• Saving: Sens. Mike Crapo (R-ID) and Sherrod Brown (D-OH)
• International: Sens. Rob Portman (R-OH) and Chuck Schumer (D-NY)
• Infrastructure: Sens. Dean Heller (R-NV) and Michael Bennet (D-CO.)

Over on the House side, the Ways and Means Committee put out a press release prior to the State of the Union also dismissing the Obama approach. It is not clear which direction Mr. Ryan will take his Committee. He is open to wide revisions but is skeptical on its success. The rhetoric and proposals in the State of the Union are unlikely to add to his confidence.

Given the fact Republicans in Congress intend to push ahead, the unknown factor is the attitude and actions of the Administration. On the surface, there is little comity between the President and Republicans on the Hill and it is not likely to change. The window to jointly accomplish anything meaningful is short, perhaps into the fall. After that, Presidential and Congressional election politics will dominate. In addition, Mr. Obama loses more and more clout as the end his term get closer.

The overriding objective of the Administration appears to be political in almost all cases in spite of the mid-term losses. In recent weeks, Mr. Obama seems to announce another program of the day. The suggestions are not backed up with funding, and even if they were, Republicans are in no mood to accommodate the proposals. The State of the Union Address was a good example of the political divide and attitudes. Looks like more of the same.

 

 

 

Obama attacks Stepped-Up Basis: Wants to Tax Income at Death

The Obama Administration is renewing its assault on the taxpayer. The President will propose during Tuesday's State of the Union address raising the capital gains rate on top income earners and changing the tax treatment of assets held at death.

The centerpiece of the President's tax proposal is an increase in the capital gains rate on couples making more than $500,000 per year to 28 percent. The top capital gains rate has already been raised from 15 percent to 23.8 percent during Obama's presidency.

Obama also wants to close what the administration is calling the "trust fund loophole," a change that would require estates to pay capital gains taxes upon death.

It is the last one that is grossly misrepresented as it has nothing to do with “trusts” and it has nothing to do with inheritance received. It is an income tax issue. It is purely an attempt to raise taxes to enlarge government. It has nothing to do with the middle class (except to raised money at death). 

In order to understand this proposal it is important to separate the income tax from the estate tax. The federal estate tax does not impact all that many estates even though the estate of every U.S. citizen is subject to tax upon death. Impact in the sense the decedents estate has to cough up addition dough to the government for dying and having property. However, there is a lurking income tax issue out there that goes along with it and it is a sneaky one.

Let us try to put this in context by example.

Every asset has a basis, usually its cost. If I buy a tractor for $100, it has a basis of $100 and I use this amount for depreciation in my business. Under the gift rules, if my aunt gives me a share of stock, which she paid $100 for 10 years ago but now worth $1000, my basis is $100, and if I sell it for $1000, I have a $900 gain which would be included in my income taxes.  This is called ‘carryover basis’.

Under the estate tax, an asset acquired from the same aunt from her estates is “stepped-up.” That is to say, the assets in an estate and the subsequent beneficiaries receive a new income tax basis equal to the fair market value of the assets on the date of the decedent’s death, (or on an alternate valuation date an estate may elect on the six-month anniversary date of a decedent’s death.) Accordingly, a beneficiary will pay income taxes on any received assets when sold based on the difference in value of the assets between the date of death value and the sales price. There is no tax until the asset is disposed. In the above example instead of gifting the stock the aunt conveys it at her death, the beneficiary gets a basis of $1000 and upon it sale of $1000, pays no income tax because there is no gain. What a great system. One of the few ways to avoid tax on appreciated property but, of course, someone has to die. 

The Federal Treasury forfeits a substantial amount of revenue by not taxing the gain on assets held until death. In fact, according to the Office of Management and Budget, it is the fifth-largest existing “tax expenditure.” The entire concept drives liberal crazy. Most revenue estimates put the loss to the Treasury of around $60 billion a year, although it really not possible to know with more certainty as data from all people who receive property from a decedent is not verifiable particularly where an estate tax return is not required to be filed.

Tax reformers, do-gooders and assorted liberals have been trying to ace out stepped-up basis for years. They succeeded in Tax Reform Act of 1976 but installing a type of carryover basis regime and eliminating stepped-up basis. However, led by Senator Harry F. Byrd Jr. (I-VA), the provision was suspended and eventually repealed. There is a litany of reasons carryover basis advocates want to repeal of stepped-up basis. Equally there are arguments on the other side. However, it all gets down to the money. Government desire for more and more money is insatiable.

The Obama proposal goes beyond elimination “stepped-up basis”. It calls for a realization event at death, which means the asset will be deems sold, and any untaxed appreciation will be recognized as gain. So in my example, even though the aunt dies and passed on the asset, which is unsold by the beneficiary, there will be a substantial income tax. The Obama proposal will be littered with income levels, carve outs and exceptions but the fact remains a person who dies will have all his property that has appreciated subject to income tax. A pretty horrible and drastic concept and a deviation from long established tax principles. 

Preserving stepped-up basis is much more important to the average taxpayer than what ever the tax rates are on mega-estates. This is an income tax issue after all. Normal taxpayers who inherit property do not always know what the basis is to the property received and why subject the property to the estate tax and then to the income tax? This is particularly true when there is no actual disposition of the property except caused by the transfer at death.

These are uncertain times but any big tax expenditure is in jeopardy in a climate of tax reform, however it is defined.  Repeal of stepped-up basis is not necessarily an immediate tax hike that can be felt by everyone but it is a tax increase. Instigating an income tax at death goes far beyond this concept.  

This is a serious proposal. It is designed for political purposes but it is doubtful it will see the light of day in the Republican Congress. However, it was never intended to be. 

Jeb versus Mitt: Oh no, say it is not so!

The failure of Mr. Obama to post at the gigantic Paris march yesterday is in the news. Leaders from around the world gathered to show their concern and distain for Islamic terrorist acts. The United States, the former leader of the civilized world, the beacon of freedom and democracy did not send its President, its Vice President or even its Secretary of State. (ask yourself what could Biden be doing on a Sunday).  I think the United States sent Steven Colbert or someone like that.

I am not surprised, Mr. Obama has no real interest in this subject, I am not sure if he if he even cares. Linking arms with other dignitaries marching along to denounce destructive forces is not his style or belief. He gave up leading or pretending to lead some time ago.

In any event, my interest today is the speculation of Mitt Romney wanting to run for President again. This is interesting on several levels. However, it is the clash that could come between him and former Florida governor, Presidential son and brother Jeb Bush that adds extra drama. 

Mitt Romney is a good and decent man. He was certainly qualified to be President when he ran the two previous occasions. To take this on for a third time is Harold Stassenesque. I say, do not do it. Save your dignity. Save the embarrassment. You had a real chance and there are many who now are suffering Obama regret. However, it is too late. There are no do-overs.

Jeb Bush also appears to be a serious and decent man. A person who has since leaving office attempted to re-configure himself, running from his former conservative positions.  However, he also cannot win or at least I do not think he can win. The Bush name is still unjustly toxic and Mr. Bush no longer represents current Republican dogma.

The Romney-Bush battle would be entertaining. The two of them are establishment political heavyweights. The other expected candidates to enter the race would enhance this. However, pass on it guys. Make room for new faces.

 

 

Keystone XL Pipeline: Veto a Coming

 

The new Republican Congress will consider in the next few days legislation to remove Presidential authority and impediments preventing the construction of the Keystone XL pipeline. This construction project to bring Canadian tar sand oil into the United States for refining and use has been studied and examined for many years. I mean many years. If the pipeline is not built, the oil will be transported by other means and a good deal of it will be exported to Asia.

This is not a government project. It is a private endeavor needing government approvals. It is not like Solyndra, needing hundreds of millions of dollars in subsidies to be feasible and then still fail. The companies are big boys and they can make their decision based on the “market”. The fact is: this country will be using petroleum as a primary fuel for the next 50 years. Having a secure and reliable supply from friendly and neighborly Canada is in the national interst. 

The Obama government has done all it can to stop the project. Delays, studies, more permits, confusion with their climate policy agenda, right of ways, aquifer problems, litigation and more. The Administration has been less than candid (no surprise there) and has made one excuse after another.

Time is up and a majority in this Congress has had enough.

The White House has issued a veto threat and I have no doubt the measure, if passed, will be vetoed. Mr. Obama beholden to his anti-oil, anti-fossil fuels, anti-business, no growth environmental friends never, ever intended to allow the construction of the pipeline. Oh, there will be reasons given for the veto but hardly digestible. The fact remains, Mr. Obama could have given support to Keystone, could have push the approval process along, could sign the legislation. He simply for does not want it and he refuses to fess up about it.

This is what we have done to ourselves; this is the continuing consequences of 2012. 

New Congress is in Session: Feel Better?

The new Congress was sworn in today. Thirteen new members of the U.S. Senate and fifty eight new Members of the House of Representatives. The Republicans control both sides of the Capitol building now. As Mr. Obama said after his election, "elections have consequences". He can now harvest the chaff of what he sowed. 

Difficult to say how this will all unveil and unfold in the next few months. It can be said, however, Republicans, are prepared. They have an agenda and a plan. The also have legislative weapons to use, like appropriations, budgets, and oversight. Not all is going to be successful but there will be some action and due considerations. I am looking forward to it.

I also expect little cooperation from Senate Democrats. Now Minority Leader Reid is likely to be an opposition pill and try to keep his troops in line to oppose most things. He should be used to that style. House Democrats-whose numbers at at their lowest level since the last Roosevelt was in office- are largely irrelevant now, if not totally. 

There will be many who will try to create a chasm and a discord among Republicans, particularly focusing on conservative ideas and elements. It will not work. Republicans share a common belief and it is the over reach and liberal policies of the government have been for the most part ill-advised and, well, just plain wrong. The fabric, well being and standing of the country is much worse off that it was. 

The President will continue to be belligerent and dogmatic. However, as the calendar months move, his importance wanes, particularly as the next election comes closer.