Well before Congress hurtles toward the so-called fiscal cliff in late December, House Republicans will make clear that they favor extending the Bush-era tax cuts.
Last week, Speaker John Boehner, R-Ohio, said that the House will vote prior to the election to “stop the largest tax increase in American history.”
He means that the House intends to take up a measure to continue the Bush tax cuts, enacted in 2001 and 2003, that lowered each level of personal rates, and reduced capital gains and dividend rates to 15% each. The policies expire Dec. 31.
In addition to the Bush tax cuts, a raft of other tax breaks also expire at the end of the year.
Curtis Dubay, a senior policy analyst at The Heritage Foundation, estimates that the economy will be hit with a $494 billion tax increase if Congress doesn't act.
Most observers anticipate that lawmakers will address the expiring tax breaks, as well as the looming federal debt limit and $1.2 trillion in automatic spending cuts, in a lame-duck session of Congress following the election. The mounting challenges commonly are referred to as the “fiscal cliff” or “taxmageddon.”
House Republicans are portraying their upcoming vote on the Bush tax cuts as a way to illuminate the murky tax picture. The legislation also will include a provision to establish a fast track for broad tax reform next year.
“We need an extension that creates a level of certainty ... and then move into a framework where you can really begin to deal with large tax reform questions,” Rep. Peter Roskam, R-Ill., the House chief deputy whip, said at a Capitol Hill event last Thursday with four corporate chief financial officers who were promoting low capital gains and dividend rates.
“There's a sense of clarity about moving forward and passing [an extension of the Bush tax cuts] out of the House so that the public knows if their lawmakers are afoot or horseback,” Mr. Roskam said.
NO RESOLUTION IN SIGHT
Democrats are accusing Republicans of trying to make the rich richer.
“Democrats will again fight to extend the tax cut for the middle class and work to ensure that the wealthiest Americans pay their fair share as we reduce our deficit,” House Minority Leader Nancy Pelosi, D-Calif., said in a statement. “While the Republicans continue to protect millionaires and the special interests, Democrats are committed to acting quickly to ensure certainty for America's middle class and small businesses.”
Resistance from House Democrats signals that tax policy is far from being resolved.
“Speaker Boehner's speech is just the beginning of a long process that is going to run right up to the end of the year,” said Clint Stretch, managing principal of Deloitte Tax LLP. “If I had to bet, toward the end of the year, we do extend everything for one year because that's the path of least resistance.”
As with most politics in Washington, the key tension point will be between the Democratic-majority Senate and the Republican-majority House.
“The Senate is going to be the challenge,” said Brian Reardon, executive director of the S Corporation Association of America. “It's unclear what they're going to be able to pass over there.”
Although it looks as if both parties will resort to the brinkmanship that has characterized fiscal and tax policy negotiations over the past few years, the fact that the House will vote on a Bush tax cut bill before the election provides some needed momentum, according to observers.
“Anything they can do to get the process rolling gives them a better chance of getting things wrapped up before the end of December,” said Phillips Hinch, assistant director of government relations at the Financial Planning Association.
If Congress hasn't extended the Bush tax cuts by Jan. 1, the capital gains rate will rise to 20%. Dividends will be taxed at personal rates, the highest of which will be 39.6%.
Advisers back the lower rates.
“The tax incentive is an important element in encouraging people to invest in the equity markets,” said Scott Moser, chief executive of Moser Wealth Advisors PLLC. “Right now, everything is going into fixed income.”
In order to broaden the appeal of their effort to keep the capital gains and dividend rates low, Republicans are arguing that the primary beneficiaries of the policies are in the middle-income range.
According to Rep. Lynn Jenkins, R-Kan., a member of the House Ways and Means Committee, 50% of those who pay capital gains taxes earn less than $100,000 a year.
“These are hardworking Americans who will be impacted if these rates go up,” she said at the Capitol Hill meeting with the corporate chief financial officers, which was organized by The Alliance for Savings & Investment.
Whether Congress acts by Dec. 31 or not, the capital gains and dividends rates — wherever they stand — will increase by an additional 3.8%. On Jan. 1, a tax hike on passive income contained in the health care reform law will kick in.
“I know no clients realize it,” said Tom Moore, an investment adviser with Capital Investment Advisors LLC. “When you tell people, they're absolutely shocked about it.”
Perhaps the best way to keep investors calm will be for Congress to provide certainty about tax rates well before midnight on New Year's Eve.