Taxable Talk

Last night the Senate passed an increase in the Federal minimum wage. Attached to the bill are tax breaks for small businesses and tax hikes for big businesses. There are several issues here, so let’s take a look at what this bill might mean.

First, the House passed an increase without any tax changes. Leaders in the House have said that they want a “clean” bill—one without any attachments. Unfortunately for the Democratic leadership, in the Senate it takes 60 votes (out of 100) to cut-off debate. Republicans made it quite clear that without the tax changes, this bill was d.o.a. in the Senate.

As to the minimum wage increase itself, it will have no impact at all in California; the state’s minimum wage is higher than the new federal minimum wage.

However, the tax provisions will have an impact if they become law. The two versions of the bill must go to a conference committee which will have to iron out differences, and then it must pass both the House and Senate again. Also, under the Constitution tax changes must be first started in the House, not the Senate (there are ways of getting around this, though). So if the House leadership is adamant about a “clean” bill, the tax changes won’t happen.

The biggest impact of the new legislation would be a cap on the amount of deferred compensation. Today’s Wall Street Journal has an editorial arguing against this provision. The Journal argues that if deferred compensation isn’t allowed, companies will switch to other forms of compensation. And they’re correct, too. As the cliche goes, where there’s a will, there’s a way. If someone wants to pay $x, he’ll find a way.

So it should be interesting to see what happens with the bill. Since an increase in the minimum wage leads to fewer jobs (this is basic economics), I personally hope that the bill dies. But given that House leadership desperately wants to pass this legislation, I expect to see it emerge in some form later this year.

I really believe that I have lifetime employment. I just can’t see Congress implementing meaningful tax reform in my lifetime (as much as I’d like to see it).

But every so often a ray of sunshine is seen. The Captain’s Quarters blog reported today that Senators Ron Wyden (D-OR) and Larry Craig (R-ID) are involved in “Cleanse the Code,” an effort to simplify the Tax Code and the regulations that have been promulgated to implement the Code.

Senator Wyden would like to see a one-page Form 1040, and noted that the last meaningful reform took place during the second term of a Republican President with a Democratic controlled Congress. Senator Craig noted that while his plan is different from Senator Wyden’s, it’s not that different. Additionally, Senator Craig would like to see a flat tax.

Joe Kristan noted today about the creep towards AMT hell for everyone. If Congress does nothing on that score, the voting public will demand meaningful tax reform. Until that day, I suspect we’ll see bandages being applied.

I’m not worried about my job security, unfortunately.

A bill to make “technical corrections” to recently enacted tax legislation was introduced in both the House and the Senate, according to this story from CCH. The bills, S. 4026 and H.R. 6264, should find their way to passage in the “rump session” that will begin after the November election.

The bill in the Senate is cosponsored by both the Chair of the Senate Finance Committee (Charles Grassley, R-IA) and the ranking Democrat, Max Baucus (D-MT). Don’t be surprised if some non-technical corrections, like extension of the sales tax deduction, get thrown onto this bill.

We’ll keep you informed.

Stock options have been in the news over the past few weeks, for all the wrong reasons. Many corporations have been accused of backdating the options.

Senator Charles Grassley (R-IA), head of the Senate Finance Committee, isn’t happy about this. He told Reuters, “If the tax laws are inadequate on stock options backdating, I want to beef them up.” Grassley has scheduled a hearing on September 9th to discuss the options mess.

>From our vantage point expect tightening of the rules and regulations dealing with stock options, and a likelihood that fewer options will be issued in the future.

News Story: Reuters

One day, sometime in the future, Congress will complete all their work on appropriation and tax measures before the August recess. But it won’t be this year (and it probably won’t be for many years).

On Thursday the Senate failed to consider a repeal of the estate tax. Republicans in the House tied a minimum wage increase and various extenders to this bill (including the Research and Development credit). Now the extenders may not happen, which is making the high tech lobby unhappy.

Personally, I expect Congress to pass a version of this legislation…in November, after the election. Neither side wants to give the other any political capital before the election. Yet many of the proposals are too important politically not to get passed.

In other words, business as usual in Washington.

News Story: Wall Street Journal (Pay Link)

With an estimated $40 to $70 billion in taxes lost each year because of tax havens, the Senate Homeland Security and Governmental Affairs Committee was naturally quite interested in plugging this hole. Yesterday the panel heard testimony from IRS Commissioner Mark Everson, among others.

The 401-page report issued by the committee The report recommends eight items:

1. U.S. law should presume that offshore trusts and shell corporations are under the control of the Americans directing the use of the assets, when the trusts and shell corporations are located in a jurisdiction designated as a tax haven.

2. U.S. publicly held companies and their insiders should disclose in SEC filings holdings in an offshore trust or corporation.

3. Offshore trust or shell corporations related to a director, officer, or large shareholder of a U.S. publicly traded corporation should treated as an affiliate of that corporation.

4. Require 1099 reporting if a US financial institution opens an account for a foreign trust or shell corporation and determines that the beneficial owner of the account is a
U.S. taxpayer.

5. Loans that are treated as trust distributions under U.S. tax law should be expanded to include loans of real estate and personal property of any kind including artwork, furnishings and jewelry. Receipt of cash or other property from a foreign trust, other than in an exchange for fair market value, should also result in treatment of the U.S. person as a U.S. beneficiary.

6. Require hedge funds to establish anti-money laundering programs and report suspicious transactions to US law enforcement.

7. Enact laws and/or regulations such that taxes on stock option compensation cannot be avoided or deferred by exchanging stock options for other assets of equivalent value such as private annuities.

8. Enact sanctions on tax havens that do not cooperate with US tax enforcement and eliminate US tax benefits for income attributed to those jurisdictions.

Given that both Democrats and Republicans want to reverse this outflow, expect something to pass Congress in the not to distant future.

Hat Tip: TaxProfBlog

New York Times Article
AP Report
Wall Street Journal Article (Paid Subscription Link)

The Orange County Transportation Authority unanimously voted yesterday to ask the Board of Supervisors to put a 30-year extension of Measure M, Orange County’s 0.5% sales tax that funds transportation improvements, on the November ballot. Given that all fives supervisors are on the OCTA board, approval seems certain today.

The current Measure M expires in 2010. About $4.2 billion will have been raised over the life of the measure. Improvements made under Measure M include the widening of the Santa Ana Freeway (Interstate 5) from three lanes in each direction to six from the El Toro Y to the Los Angeles County line, widening of the Garden Grove Freeway, and major improvements at the El Toro Y (the junction of the Santa Ana Freeway and the San Diego Freeway (Interstate 405)).

The extension targets specific transportation improvements. One target is widening of the Riverside Freeway (Route 91) through the Santa Ana Canyon. Local commuters know that this freeway is usually bumper to bumper every weekday despite previous widening of the road and the toll lanes that run down the middle of the freeway.

In order for the measure to pass, it must receive two-thirds of the vote in November. Supporters, besides the Board of Supervisors, include the Orange County Business Council and the Automobile Club of Southern California. The measure still faces a tough fight, given most voters anti-tax stance. We’ll keep you updated as November approaches.

News Story: Orange County Register