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Bill won't pass on proposed "Bailout"

[Taken from Steptoe & Johnson LLP Daily Tax Update]

Today, the House failed to pass the Emergency Economic Stabilization Act of 2008” (H.R. 3997) by a vote of 228 nays to 205 yeas. The measure needed 218 votes for passage. House Republicans rejected it by a 2-1 margin, and more than 90 Democrats voted no.  Opponents said that part of the reason for the opposition from Republicans was what they called a partisan floor speech before the vote by House Speaker Nancy Pelosi.  After the vote, House Minority Leader John Boehner said, “I think we need to renew our efforts. . . . I think we need to calm down, relax and go back to work.” 

  • The voting time was held open for an extended period in order to try to persuade opponents to change their vote in support of the bill.  It is unclear when Congressional leaders will try to bring up the bill again. Supporters vowed to try to bring the rescue bill up for consideration again as soon as possible.  However, Congress is not in session tomorrow. 
  • According to the Senate Finance Committee, the tax provisions in the financial rescue plan are as follows:

    “Help for Homeowners Sinking Under Mortgage Debt: Usually, when homeowners have parts of their mortgages forgiven, they immediately owe income taxes on the amount of indebtedness forgiven.   To keep struggling homeowners from facing higher tax bills, the housing relief bill passed by Congress this year allowed homeowners caught up in the mortgage crisis to avoid paying tax on forgiven mortgage debts through 2009.  To help more homeowners stay on their financial feet in the ongoing economic crisis, the rescue plan will extend through 2012 the housing bill provision that forgives income from the cancellation of indebtedness.  It does not extend the relief to home equity loans.   

    “Fairness for Banks Hit by the Failures of Fannie Mae and Freddie Mac: Federal law limits the allowable investments for banks, and so many community banks invested in Fannie Mae and Freddie Mac preferred stock – which became worthless when the government bailed those companies out.  This proposal ensures fairness for the approximately 800 banks that held Fannie and Freddie preferred stock, by allowing financial institutions or financial institution holding companies to treat their Fannie and Freddie losses as ordinary losses.  Applying to any preferred stock that was owned on September 6, 2008 or sold between January 1 and September 6, 2008, this provision will allow banks to claim the book benefit of the loss on their tax returns, therefore reducing the need to obtain additional capital from the FDIC or investors.  This should also prevent some community banks from becoming insolvent. 

    “Stronger Taxation of Compensation and Severance Pay for Financial Executives: The financial rescue plan contains non-tax measures aimed at limiting executive compensation and ‘golden parachute’ severance packages overall for companies and executives participating in the buyout – a key element in gaining approval of the package among negotiators.  When the Treasury directly buys assets from a company, not through an auction or bidding process, the financial institution will be required to meet certain standards for executive compensation, including a total prohibition on ‘golden parachute’ severance payments to senior executive officers. 

    “When more than $300 million of a company’s assets are purchased by the Treasury through an auction, ‘golden parachute’ payments will be banned for top executives hired while the Treasury rescue is in effect.  Additionally, tax provisions will kick in to strengthen the tax treatment of remaining executive compensation and severance packages.  The deductibility of executive compensation for companies will be cut in half from the level in current law, and companies will also lose deductions currently available for excessively large severance packages.  Executives receiving severance packages will continue to face a 20 percent excise tax on payments once they reach an excessive threshold, and that tax will now be due if the executive leaves for reasons other than a standard retirement for which they are eligible – not just if the company changes hands, as in current law.”

US Presidential Candidates Tax Positions

Presidential Candidates' Tax Policies in a Nutshell

Whichever candidate is elected in November, there are likely to be big changes proposed to the tax code. The presidential candidates' proposed tax policies include changes to individual and business income taxes, the estate tax and Social Security. For individuals, Sen. Obama would provide expanded credits for families, savers, homebuyers and clean vehicles; Sen. McCain would double the personal exemption to $7,000 and extend and index the increased alternative minimum tax (AMT) exemption amounts.

On the business side, both Obama and McCain seem to support reducing the corporate tax rate; McCain proposes a corporate tax rate of 25 percent. However, the candidates differ on the estate tax with Obama favoring the status quo, a top rate of 45 percent and a $3.5 million exemption, while McCain proposes a top rate of 15 percent with a $5 million exemption. The candidates also differ greatly on the issue of Social Security: Obama favors the current structure, with an increase in the payroll tax to pay for it, and McCain favors personal accounts for younger workers.

Individual Income Taxes

Obama proposes a $1,000 tax credit for families with incomes between $8,000 and $75,000 ($500 for individuals). He would extend the current marginal rates for the lower tax brackets and proposes to eliminate the federal income tax on seniors with incomes below $50,000. He suggests a universal mortgage credit of 10 percent, up to $800, a $4,000 refundable education credit, and expanding the existing Savers Credit to more taxpayers and making it refundable. He also proposes an expanded earned income tax credit (EITC), an expanded Child and Dependent Care Credit by making it refundable, and an expanded tax credit for clean vehicles. To pay for these tax breaks, he proposes restoring the 36- and 39.6-percent tax brackets, raising the capital gains and dividend tax rate to 20 percent for families with incomes over $250,000 ($200,000 for individuals) and restoring the phase-out for itemized deductions and exemptions. He also supports simplified tax returns for many filers and would also extend and index the increase in AMT exemption amounts.

McCain wants to make the Bush tax cuts permanent, including the lower marginal rates and capital gains and dividend rates. He also proposes gradually doubling the personal exemption amount to $7,000. He would pay for these proposals by eliminating congressional earmarks and with unidentified cuts in government spending. He has proposed simplified tax returns for many filers. He would also extend and index the increased AMT exemption amounts and has proposed an election for a separate and simplified alternative tax system.

Business Income Taxes

Obama generally supports corporate tax reform and hints of corporate tax rate reductions for domestic business activity tied to repealing other business tax breaks and closing loopholes to pay for the rate reductions. He also proposes to eliminate capital gains taxes on small businesses. Loopholes Obama has identified include clarifying the economic substance doctrine, increasing capital gains reporting, eliminating special tax breaks for oil and gas companies while expanding the renewable production tax credit, taxing carried interests as ordinary income, and what is described as the CEO pay loophole. He would also reform international tax loopholes and crack down on international tax havens. Further, he proposes making the research and development credit permanent.

McCain has proposed reducing the corporate tax rate from 35 percent to 25 percent, banning taxes on internet sales and cell phones, and permitting full first-year expensing for capital acquisitions. These tax breaks would be paid for with spending cuts or corporate loophole closers, identifying some of the tax breaks for oil and gas companies and repealing the domestic production activities deduction. McCain has also proposed expanding the research and development credit and making it permanent.

Estate Tax

Obama would preserve the estate tax as in effect in 2009: a 45-percent top tax rate and a $3.5 million exemption.

McCain wants to preserve the estate tax with a 15-percent top tax rate and a $5 million exemption.

Social Security

Obama would preserve the existing Social Security structure but help cover the growing deficit by imposing a payroll tax of four percent (two percent each from employer and employee) on incomes over $250,000.

McCain has proposed adopting personal accounts for younger employees, similar to proposals by the Bush administration.

Health Care

Obama proposes targeted health care tax credits including a health care credit for small business. He proposes a new health insurance exchange to provide health insurance, paid for by employers who do not provide employee health insurance.

McCain wants a refundable tax credit of up to $5,000 for families to be paid for by treating employer-provided health benefits as taxable compensation to the employee.

By Jeff Carlson and Stephen K. Cooper, CCH News Staff

Rangel in a Rancor

A New York Times article reports that Charles Rangel, a Harlem Democrat who is now the Chairman of the House Ways and Means Committee, which writes the federal tax code, is being accused of failing to report $75,000 of income he earned on a beachfront villa at the Punta Cana Resort.  Rangel has earned this rental income from a villa he has owned in the Dominican Republic since 1988, but never reported it on his federal or state tax returns, according to a lawyer for the congressman and documents from the resort.

His lawyer, Mr. Davis, said the congressman did not realize he had to declare the money as income, and was unaware of the semiannual payments from the resort because his wife, Alma, handled the family finances and conferred with their accountant, John Viardi, on tax matters. The money was never sent to the Rangels directly, according to Mr. Davis and resort records, but was used to defray the mortgage the company gave them when they bought the villa and $23,000 in subsequent construction costs in 2003. Rangel is known for his push for higher taxes on the wealthy.

For more informaiton, please visit the NY Times link below: