Tax writers have full agenda in run-up to summer break

The arrival of late summer will be anything but lazy for congressional tax writers who next week will return to Capitol Hill and tackle a mountain of pending legislation.

The healthcare debate and partisan squabbling in the Senate held up a number of tax-related bills that were supposed to pass Congress earlier this year. The delays prevented action on legislation that many Democratic leaders said would be completed by August.

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But with the midterm elections rapidly approaching and Democrats expecting losses in both chambers, it is unclear how much political appetite there will be for tax work — especially since much of it involves increasing taxes on one segment of the economy to extend tax relief to another.

Legislation extending several popular business and individual tax breaks is arguably Democrats’ top priority, since the taxes expired in 2009. Senate Majority Leader Harry Reid (D-Nev.) has vowed to complete work on the tax extenders bill, which has failed to pass three times largely because of opposition to other tax hikes used to pay for the cost of extending the tax breaks.

The package slaps a 15.3 percent payroll tax on certain S corporations, which are companies that elect to pay personal tax rates. The legislation would also tax some investment returns as ordinary income.

Lawmakers on both sides of the aisle have criticized the measure, saying it would create a drag on the economic rebound and hinder businesses from hiring workers.

“This is a job-killing tax hike that will force entrepreneurs across the nation to retrench and reconsider any plans for hiring employees or expanding their business,” said Sen. Olympia Snowe (R-Maine).

Congress has renewed the tax breaks that are included in the extender bill dozens of times. But unless Democratic leaders find another way to pay for the bill, Republicans are unlikely to support it.

In the House, Ways and Means Chairman Sandy Levin (D-Mich.) is planning to complete work on a green jobs energy bill before the August recess. It’s an ambitious goal, considering Majority Leader Steny Hoyer (D-Md.) has shortened July’s work period by one week to give Democrats more time to campaign. The House will wrap up its work July 30.

Details on the proposal have not been released, but it is expected to include the extension of a 30 percent tax credit for investments in manufacturing clean energy products, known as the Section 48C program.

The proposal is hitting headwinds in the Senate because the cost would be offset by repealing tax breaks for the oil and gas industry.

“I think [passage] would be very doubtful,” said Sen. Lisa Murkowski (R-Alaska), ranking member on the Senate Energy and Natural Resources Committee.

An amendment to the tax extenders bill to repeal $35 billion in oil and gas tax breaks offered by Sen. Bernie Sanders (I-Vt.) failed by a 35 to 61 vote. Several Democrats joined Republicans in opposing the measure.

Murkowski said a similar outcome would occur in the Senate if the House advances a green energy bill that eliminates the energy tax breaks.

“We had a vote not too long ago just on that same issue in term of those taxes, and support clearly wasn't there,” Murkowski said.

Levin would also like to extend the Bush tax cuts for the middle-class before August. Work was supposed to begin on the matter after Congress returned from its spring recess, but sources close to the Ways and Means Committee told The Hill there has been little talk on the issue recently.

Democrats want to extend the marginal tax breaks for families earning less than $250,000 annually ($200,000 for individuals) before their expiration at the end of the year. A two-year expansion does not have to be offset, but top marginal tax cuts for wealthier taxpayers would revert back to pre-2001 levels, from 33 and 35 percent to 36 and 39.6 percent, respectively.

Reduced tax rates for capital gains and dividends are also slated to expire this year. Democrats would like to resuscitate them for the middle-class while allowing wealthier taxpayers to pay higher rates.

Sources close to the tax-writing committee say little progress has been made on how they can be extended for just the middle-class without creating unintended consequences in the stock market.

In the Senate, meanwhile, Finance Chairman Max Baucus (D-Mont.) wants to move a small business tax package before the August recess.

The Senate began debating the bill in late June, but it was pulled from the floor to let Reid handle other issues. Debate is expected to resume on the bill when lawmakers return from the recess.

The legislation exempts capital gains taxes on certain C corporation stock, extends “bonus depreciation” allowing companies to expense 50 percent of the cost of equipment, and allows self-employed workers to deduct health insurance costs from their self-employment tax.

The bill also enables small businesses to get a refund on past tax payments and count general business credits against the alternative minimum tax. The proposal includes measures that passed the House as well, such as penalty relief for businesses that invested in certain tax shelters.

The bill has been combined with legislation by Senate Small Business Chairwoman Mary Landrieu (D-La) that expands loan opportunities to small businesses.

Once debate begins again on the bill, Senate Minority Whip Jon Kyl (R-Ariz.) has indicated that he would like to amend the measure with a fix for the estate tax.

However, Reid has used a legislative maneuver known as “filling the tree” that makes it hard, if not impossible, for Kyl to add his provision.

The tax on estates is repealed, but barring congressional action it returns next year to pre-2001 levels by socking estates worth more than $1 million with a tax that tops out at 55 percent. Republicans and more than a few Democrats oppose this level and prefer rates set in 2009, when estates worth over $3.5 million were taxed at a top rate of 45 percent.

In December, the House passed legislation (H.R. 4154) making permanent 2009 estate tax rules, which costs a whopping $233.6 billion over 10 years. The Senate has yet to take up the measure.

Tax lobbyists expect a lot of tax activity in the coming weeks, but aren’t sure how much of it will produce legislation aimed for the White House. They expect the lame duck session will be when most bills pass Congress, but aren’t sure if the Bush middle-class tax cuts will be a part of the group.