Year-End Review: Fiscal Policy (Jan. 1)  

Mike & Co. — 

For the first time in five years, Congress and the administration came to an agreement last month on the federal budget and the debt limit. They managed to do this without serious risk of a government shutdown or default.  In fact, with the government now funded throughSeptember 30, 2016, there’s practically no chance of a shutdown until then.  

The budget deal also raised the defense and non-defense spending caps to avoid sequesters next month and in January 2017.  And it extends the debt limit through March 15, 2017, when Treasury starts running out of “extraordinary measures.”  

 Apparently, no one wants to miss time on the campaign trail wrangling over appropriations or threatening default. 

 What happened?  Does this mean fiscal peace in our time?  Or is it a short-term time out from the budget battles of recent years?  See below a look at the year-end fiscal policy agreement, with a detailed review of the extenders package. 

 For now, enjoy the ceasefire and happy New Year! 

 Cheers, 

Dana

 

——–

The omnibus spending bill enacted last month is tantamount to passage of all 12 appropriations for FY17 before that fiscal year starts next October 1.  That means the FY17 appropriation top lines will be set before the fiscal year starts for the first time since 1995 (FY96).  That’s twenty years ago.

There was no reason to expect this comity for most of 2015.  Budget making by regular order seemed out of the question as Senate Democrats vowed to filibuster every FY16 appropriations bill to hit the floor unless the GOP consented to restore domestic and military sequester cuts on a 50/50 basis — and did so.

The strategy worked, but for a reason few could have predicted.  The House Republican conference’s demands on leadership became so untenable — that is, so likely to produce the government shutdown that Speaker Boehner and Senate Majority Leader McConnell were desperate to avoid — that Boehner finally made the House hardliners an offer they couldn’t refuse: accept his resignation for the price of a continuing resolution (CR).

Boehner’s budget bargain became his successor’s.  The new Speaker, Paul Ryan, convinced the conference to live with this bargain for the time being and live to fight another day.  In part to avoid making the Ryan House immediately as ungovernable as Boehner’s had been, with the prospect of paralysis continuing into 2016, the conference adopted all of the Boehner CR’s top line numbers in the omnibus.

The two-year budget deal that increases discretionary spending by $80 billion over two years and extends the debt limit through 2017 met nearly every budget demand laid out this year by Democrats, who also remained united to prevent the GOP from attaching riders to the omnibus  to cut off funding for Planned Parenthood and several of President Obama’s top priorities, including Obamacare, as well as his new environmental rules and executive actions on immigration.

Other key riders that were rejected:

  •  Campaign Finance— Senate Majority Leader McConnell pushed for language loosening federal restrictions on fundraising by political parties, a move meant to give parties more equal standing with independent “super PACs” that have the ability to raise unlimited amounts of money from private donors following the Supreme Court’s Citizens Uniteddecision. But Democrats and conservative Republicans joined together to oppose any loosening of party fundraising, one of the key provisions of the 2002 McCain-Feingold campaign finance reform bill.

What was included was a Republican rider preventing the IRS from cracking down on the political activities of 501 (c)(4) nonprofit groups, who are allowed to spend on the “promotion of social welfare” with much less disclosure than a campaign or political action committee.

  •   Regulatory Reform— Democrats rejected all riders that would repeal or scale back the 2010 Dodd-Frank Wall Street reform bill.  Republicans wanted particularly to block a proposed DOL rule that requires retirement investment advisers not to consider how much commission or what fees could be collected when advising clients.  That rider was not included in the deal, nor was a widely discussed proposal to reduce the number of banks subject to stricter financial regulations as “systemically important” institutions.

Nearly all of the policy riders included in the 2014 cromnibus were carried over in the 2015 spending bill.  One of special interest to HRC and New Yorkers in general:

  •  9/11 Responders— Congress voted in 2010 to create a new federal health program for police officers, firefighters, construction workers and others who worked at Ground Zero in the immediate aftermath of 9/11; hundreds are suffering from cancer, respiratory illnesses and other maladies.  The omnibus extended this health program until 2090 and adds another five years to a separate victims compensation fund, costing a total of $8 billion.

In addition to the FY 2016 budget, Congress also passed a more sweeping set of extensions of existing short-term tax breaks than most observers had expected.

The large 10-year revenue loss estimate of this extenders bill — over $650 billion — reflects Congress’ decision to do at once what it would otherwise do in five to seven smaller chunks.  The costliest of the extenders:

  •   Research & Development—  A top GOP and corporate priority, the research-and-development tax credit is made permanent for the first time since it was created in 1981 and expanded it so that some small companies that aren’t making profits can take the credit against payroll taxes.  Small businesses would be able to write off as much as $500,000 in capital costs instead of the $25,000 they could deduct if Congress didn’t act, and those levels would be indexed for inflation. Banks such as Citigroup and Morgan Stanley will get to continue deferring U.S. taxes on their foreign income.

 

  •  Low-income Individual Breaks

Democrats, in turn, won permanent extensions of some of the president’s priorities—expanded tax credits for low-income and middle-class families that are scheduled to lapse at the end of 2017, after he has left office.  The child-tax credit, earned-income tax credit and a college-tuition credit will all get extended indefinitely at their current levels, although without the indexing to inflation some Democrats had sought.

  •  Permanent Extensions— Among the largest of the extenders made permanents are the state and local sales tax deduction, charitable contributions, and basis adjustment of S corporation stock.  Others include:
  •  Section 179 small business expensing up to $500,000 annually, phased out for property placed in service in excess of $2 million, indexed for inflation;
  •  small businesses with gross receipts of $50 million or less, which may use the credit to offset their Alternative Minimum Tax Liability;
  • 20 percent wage credit for active duty employees for employers of any size;
  • 15-year straight line depreciation for restaurant and retail property improvements;
  • 100 percent exclusion of small business stock held for five years, also eliminated from the AMT;
  •  the Subpart F active financing exception;
  •  the Child Tax Credit;
  •  the American Opportunity Credit;
  •  the Earned Income Tax Credit; and
  •  the eduction for certain expenses of elementary and secondary school teachers.
  •  Five-Year Extensions—  Each side also got five-year extensions of other key priorities.  Republicans won an extension of bonus depreciation, which lets all companies deduct more than usual in the year they buy a capital asset.  Other major five-year extensions:
  •  the bonus depreciation, 50% in 2015, 2016, and 2017, 40% in 2018, and 30% in 2019.  Unused AMT credits may be claimed in lieu of bonus depreciation. Qualifying property expanded to include certain improvements and certain trees, vines, and plants;
  •  the New Markets tax credit;
  •  breaks for hiring people from disadvantaged groups and investing in struggling communities; and
  •  credits for wind and solar energy, including a change that lets solar projects qualify once they begin construction, instead of when they begin producing energy (NB: both the wind and solar credits ultimately get phased out)
  •  Two-Year Extensions
  • timber capital gains taxed at 23.8 percent;
  • race horses as three -year property; and
  • the $1/gallon biodiesel credit

Other major year-end tax policy changes:

  •  Cadillac Tax —  The 40 percent ACA Cadillac tax has been postponed until 2020 and is likely to be repealed before then.  It would have applied to the most expensive health insurance plans. But with skyrocketing health insurance costs, by 2018, almost half of all plans would have been hit.  Strong bipartisan majorities in both houses of Congress favored repeal, but President Obama saved it by agreeing to a two-year postponement.
  •   Medical Device Tax— The 2.3 percent medical device tax will not apply to sales in 2016 and 2017 and it’s likely to be repealed after that.  This is the same story as the Cadillac tax.  If the votes were there to postpone it, then they will be there to repeal it.   The only question is whether the next president will let that go without vetoing it.
  •  International Tax Reform— Though almost no one expects broad based tax reform (individual and corporate) until 2017, preliminary comprehensive tax reform talks between the White House and Congress occurred during the highway bill negotiation this fall.  But domestic and pass-through businesses would not allow tax breaks for U.S. multinationals to pass without getting a piece of that pie.  Any international tax reform would create winners and losers and the losers have enough clout today to bring it down.

Nevertheless, an international tax proposal with a 20 percent top rate is being prepared for 2016 by House Ways and Means Chair Kevin Brady:

“How we run in 2016, how we lay this foundation is critical to how we finish this effort. … The answer isn’t in more Treasury rules, or in pointing fingers, or hand-wringing. … I am convinced that we have to be at 20 percent or below to keep us competitive for the longer run. … Doing that in a way that does encourage them to bring those profits back is a challenge.  It is definitely achievable. And right now, again — because of the [OECD’s base erosion and profit-shifting project’s influence] around the world — there is an urgency to determine if we allow ourselves to become isolated in our tax code where innovation companies simply can’t justify doing their [research and development] and manufacturing here in the U.S. If that continues, we are going to lose [a] tax base that is important to the country.”

Lastly, a couple of tax policy loose-ends:

  •  the Internet Tax Moratoriumexpires October 1, 2016.  There’s little doubt it will be extended.  The only question is whether it will go by itself or with a sales tax bill.
  • an Online Sales Taxis under consideration for next year.  Just before the Senate adjourned for the year, a permanent Internet Tax Moratorium was added to the Trade Facilitation and Trade Enforcement Act (aka Customs bill) conference report.  Assistant Senate Minority Leader Durbin is confident that his point of order will strike that from the conference report and hopefully force Senate passage of the Marketplace Fairness Act, S.698, which would establish uniform sales and use taxation of Internet sales.

 

 

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