The Senate Finance Committee conducted a hearing on July 14, 2010 to discuss the potential extension of tax cuts. In the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), there were tax reductions for nearly all Americans. The tax reductions continue through 2010, but are set to be repealed on January 1, 2011.
The White House has proposed to extend these tax cuts for single persons with incomes under $200,000 ($250,000 for couples), but to increase the capital gain rate and top income tax brackets. Under the White House plan, the capital gain rate will increase from 15% to 20%, the 33% bracket increases to 36% and the 35% tax bracket is raised to 39.6%.
Senate Finance Chair Max Baucus (D-MT) opened the hearing by stating, "Americans are struggling to make ends meet, and we need to do all we can to put more money back in the hands of workers, middle-class families and small businesses so our economy can grow. I support extending the middle-class tax cuts permanently, as soon as possible, so working families can keep more of their hard-earned money."
Sen. Baucus and the White House are both advocating a permanent extension of the tax cuts for low and middle-income taxpayers, with an increase in taxes for those in the upper brackets.
Ranking Member on the Senate Finance Committee Charles Grassley (R-IA) has repeatedly expressed concern about the increase of taxes on small business owners. He noted, "To those who are pushing the higher marginal rates, I say the burden is on you to show that you are not harming our primary job creators." Sen. Grassley has noted that two-thirds of new jobs in the past decade have been created by the small business owners who will be subject to the higher taxes.
Douglas Holtz-Eakin is President of the American Action Forum and was formerly the Congressional Budget Office Director. He testified that approximately one-half of the $1 trillion in business income that will be reported in 2011 will be subject to the higher 36% and 39.6% tax brackets. In his opinion these higher rates will reduce the willingness of small businesses to hire new employees.
Editor's Note: The hearings on taxes are the first step in creation of a tax bill. Because the failure to act this year would result in repeal of all of the tax cuts, it is probable that there will be a tax bill prior to the end of 2010. However, with the shortened legislative calendar due to the fall elections, the tax bill is quite likely to be deferred until after the election.
Kyl-Lincoln Introduce Estate Tax Motion
On July 14, 2010, Sen. Blanche Lincoln (D-AR) and John Kyl (R-AZ) introduced an amendment to H.R. 5297, the Small Business Lending Bill.
Their amendment would modify the estate tax rules. Sen. Kyl and Sen. Lincoln claim that they now are close to the required 60 votes in the Senate for passage of their compromise on estate taxes. The bill includes five guidelines:
- Phase In – The increase exemptions and reduced rates would be gradually phased in over a period of 10 years.
- Estate Exemption – The exemption would start at the 2009 level of $3.5 million and increase to $5 million by 2020.
- Estate Tax Rates – The 2009 estate tax rate of 45% would be reduced by 1% per year to 35% by 2020.
- Optional 2010 Rules – For estates of 2010 decedents (such as Houston oilman Dan Duncan who passed away in March with an estate of $9 billion) there is an option to use the 2009 exemption of $3.5 million or accept the 2010 rules with no estate tax and a loss of the stepup in basis.
- Tax Offsets – The Senate Finance Committee is tasked with finding additional new taxes that offset the cost of increasing the exemption from $3.5 million to $5 million and reducing the top estate tax rate from 45% to 35%.
Editor's Note: Majority Leader Reid (D-NV) has not yet indicated whether he will permit a vote on this motion. If the 60 votes in favor of this compromise are available in the Senate and he permits a vote, then the House will need to consider the compromise. Previously, the House majority has maintained a strong preference for extending the $3.5 million exemption without further increases.
