Experts Predict AMT Patch, Temporary Extension of Many Tax/Budget Provisions, No Payroll Tax Cut Extension

Congressional lawmakers are expected to address tax extenders including the alternative minimum tax (AMT) patch before year-end 2012, experts predicted during a November 7, Deloitte, LLP webcast entitled “Tax Legislation: Will The Election Prompt Significant Change?” Other major issues that the lame-duck Congress must address include the Bush-era tax cuts and budget sequestration, which kicks in on January 2, 2013, before the new 113th Congress convenes for the first time.

Experts remain unsure about whether Congress will resolve the more controversial issues of Bush tax-cut extensions and sequestration before the end of 2012. Jonathan Traub, managing principal, Tax Policy Group, Deloitte, LLP, stated that, if there was no consensus on the Bush-era tax cuts before the year-end, lawmakers would most likely feel pressure to move ahead on another piece of legislation. “There will be a kind of rush for lifeboats to pass something before the end of the year,” Traub stated. The AMT patch and other tax extenders will be high on Congress’s priority list for this purpose. For the business sector, Congress will also need to address tax extenders such as the research and development credit, Subpart F deferral of income and the controlled foreign corporation look-through.

Traub and Davis both predicted that Congress would try to avoid the “fiscal cliff” by temporarily extending many of the current laws—such as the tax extenders, budget spending, the debt ceiling and possibly the tax rates—for several months at the beginning of 2013. That way, lawmakers would have more time to negotiate over the major decisions that must be made for a permanent resolution. “Absent market tremors, it is a lot easier to kick the can down the road without making the big decisions now,” Traub said.

Because the election essentially restored the status quo of the pre-election 112th Congress, Tom Davis, director, federal government services group, Deloitte, LLP, Washington, D.C., stated lawmakers were likely to feel emboldened and remain even more entrenched in their positions. In other words, they would generally interpret the vote on November 6 as a confirmation of their policies by the voters. In addition, Davis stated that, when the House returns next week, one of the first actions that the Republican conference will undertake is election of its leadership. “Members generally want to hear that the leadership will stand tough,” Davis said. Meanwhile, the 113th Congress is more polarized than ever. “The most liberal Republican in Congress is more conservative than the most conservative Democrat,” Traub said.

Both Traub and Davis agreed that it was highly unlikely that there would be any attempt to extend the temporary payroll tax cut. Lawmakers viewed the one-year extension as necessary for 2012 because it was an election year. Now that the election is over, lawmakers will probably not be willing to vote for something that was supposed to be temporary and is such a large drain on federal revenue.

Davis also predicted that, after the election, President Obama would withdraw opposition to the Keystone XL pipeline. He no longer would need to worry about the environmental sector’s influence over the election, and approval of the pipeline could garner Republican support for other important pieces of legislation.

— Tax Reform

Davis and Traub both stated that Republicans would be much more likely to support revenue raising tax reform if it involved tax rate cuts, tax-base broadening and the elimination of many tax extenders. Cutting so-called “loopholes” would not allow the tax rate to be cut to a sufficient level. That would likely mean that individuals could lose the home interest deduction, the charitable contributions deduction, the exclusion of employer health contributions and more. On the business side, taxpayers might lose depreciation deductions under the Modified Accelerated Cost Recovery System (MACRS), research and experimentation expensing deductions, domestic production expense deductions, LIFO, low-income housing, deferral of gain and more.

Davis predicted that discussion of these tax expenditures being eliminated would be hotly contested. Proponents would likely be drowned in protest and so serious, far-reaching fundamental reform involving tax-rate cuts and eliminated expenditures would depend almost entirely on President Obama’s ability to lead.

— Territorial Tax System

Another major issue is whether the United States should move from a hybrid system to a territorial tax system. A territorial system would allow repatriation of foreign income back into the U.S. to fund the U.S. economy. Both President Obama and House Ways and Means Committee Chair Dave Camp, R-Mich, have articulated plans for international tax reform, meaning the process toward change has already begun, Traub said. Further discussion of a territorial system would need to address foreign tax credits, the definition of “foreign source income,” the Subpart F regime, the possibility and amount of a transition tax on accumulated un-repatriated earnings and much more.

“Is Congress prepared to take on this much?” Traub questioned. Both he and Davis predicted discussion of the territorial tax system would take place much further down the road.

By Jennifer J. Rodibaugh, CCH News Staff

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