On December 4, 2007, Senator Reidpresented a motion to proceed to consideration of H.R.3996 andfileda cloture motion on that motion. We anticipate that Senators will offer a full-text substitute to the measure if the Senate is allowed to proceed to consideration of the bill. This Legislative Bulletin focuses only on the provisions of H.R.3996 that we believe have strong bipartisan support in the Senate and anticipate will be included in the final text approved by the Senate: 1) the AMT patch; and 2) tax “extenders.”
Summary and Background
H.R. 3996,the Temporary Tax Relief Act of 2007,will help millions of Americans – from middle-class families to teachers to service men and women – by protecting them from a tax increase that will otherwise occur absent Congressional action.
· Provide relief for 19 million Americans from the alternative minimum tax (AMT), a tax that was created to keep wealthy people from avoiding taxes altogether, but which is now being applied to more and more middle-class families.
· Put money back in the pockets of America’s hard-working middle-class taxpayers, by extending tax deductions for college tuition, state and local sales taxes, and teachers’ out-of-pocket classroom expenses; c excluding combat pay in calculating the earned income tax credit for members of military; and providing for penalty-free withdrawals from retirement plans for active duty members.
· Promote job creation, enhance competitiveness, and support the U.S. economy by extending tax relief for American businesses. H.R.3996 would extend the R&D tax credit, accelerated depreciation for leasehold and restaurant improvements, accelerated recovery of remediation costs at “Brownfields” locations, and tax credits for RR track maintenance costs
The Senate is expected to take floor action on H.R.3996 inDecember 2007. It is anticipated that Senator Baucus will offer a substitute amendment to H.R.3996 comprised of AMT relief, the package of “extenders” (the extension of tax provisions that are due to expire at the end of 2007 and 2008), and tax provisions that will fully offset the cost of the “extenders.”
This Legislative Bulletin focuses only on the provisions of H.R.3996 that we understand have strong bipartisan support and that we anticipate will be included in the final text approved by the Senate: 1) the AMT patch; and 2) tax “extenders.”
More and more middle-class families are being forced to pay a “stealth tax,” the Alternative Minimum Tax (AMT), which was originally intended for the super-wealthy to ensure they paid a minimum amount of tax. But because the AMT exemptions were not indexed for inflation like the regular income tax, the AMT has ensnared an increasing number of middle-class taxpayers and no longer affect the very highest income individuals. Now, more people making less than $100,000 per year are forced to pay the AMT than people making more than $1 million. To protect 19 million Americans from having to pay these higher taxes – millions of whom are middle-class taxpayers who were never intended to pay the AMT, H.R.3996 would “patch” the AMT for one year. This “patch” would extend allowances of certain credits and set the AMT exemption levels at $66,250 for joint filers and $44,350 for individuals.
More information on the impact of the 2007 AMT in your state is available here.
Extension of Provisions Primarily Affecting Individuals
· State and local taxes. Millions of taxpayers live in Alaska, Florida, Nevada, Washington, South Dakota, Tennessee, Texas and Wyoming – states that have deductible sales taxes but no state income tax. To continue to provide similar federal tax treatment to residents of states that rely on sales taxes rather than income taxes to fund state and local governmental functions, H.R.3996 would extend to taxpayers the option of deducting state and local sales taxes in lieu of deducting state and local income taxes.
· Tuition deduction. The average cost of a public, four-year college education has soared by 61 percent during the Bush Administration. [The College Board, Trends in College Pricing 2007, available here] To mitigate the impact of rising tuition costs on students and their families and to provide an incentive for individuals to pursue higher education, H.R.3996 would extend the above-the-line tax deduction for qualified education expenses.
· Regulated investment company dividends. H.R.3996 would extend the tax treatment of interest-related dividends, short-term capital gain dividends, and other special rules applicable to foreign shareholders that invest in regulated investment companies.
· Mental health parity requirements applicable to group health plans. Current law requires certain group health plans to provide the same coverage for mental health benefits that they provide for medical and surgical health benefits. H.R.3996 extends the imposition of a $100-per-day excise tax on group health plans that fail to comply with this requirement.
· Contributions of capital gain real property made for conservation purposes. To encourage conservation and preservation, H.R.3996 would extend the increased contribution limits and carry forward period for amounts in excess of these limits for contributions of appreciated real property (including partial interests in real property) for conservation purposes.
· Distributions from individual retirement plans for charitable purposes. To increase giving to charitable organizations, H.R.3996 would extend the provision that permits tax-free charitable contributions from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per taxable year.
· Elementary and secondary schoolteachers’ out-of-pocket expenses. Since 2002, teachers have been able to deduct up to $250 a year for money that they spend out of their own pockets to buy supplies for their classrooms. More than three million teachers nationwide have taken advantage of this deduction each year. To partially offset the costs educators personally incur for the benefit of their students, H.R.3996 would extend this tax deduction for one year for teachers and other school professionals for expenses paid or incurred for books, certain supplies and supplementary materials used by the educator in the classroom.
· Earned income tax credit for combat pay. The earned income tax credit (EITC) is a refundable tax credit for eligible low-income workers. Generally, “earned income” includes taxable wages, salaries, tips, and other employee compensation. Some low-income military families who receive the EITC based on taxable military pay could lose this tax credit if they begin receiving non-taxable combat pay (in light of sustained deployments in Iraq, some military households eligible for the EITC would be unable to claim it because of high combat pay earnings). H.R.3996 would extend the provision that allows America’s military men and women to count combat pay for the purposes of qualifying for the earned income tax credit.
· Special rules for qualified mortgage bonds for veterans. To give our nation’s brave veterans greater access to homeownership, H.R.3996 would extend the provision that allows veterans to qualify for state-operated, tax-exempt mortgage revenue bond programs to provide lower-income individuals without regard to the general first-time home buyer requirement.
· Distributions from retirement plans to individuals called to active duty. Generally, there is a ten percent withdrawal tax on early distributions from certain retirement plans. Because reservists called to active duty may need access to amounts that they have contributed to their retirement plans in order to meet their personal financial obligations while serving our country, H.R.3996 extends special rules that permit active duty reservists to make penalty-free withdrawals from their retirement plans.
· State legislators’ expenses away from home. For federal income tax purposes, a state legislator may deduct his or her living expenses while away from home as a miscellaneous itemized deduction. The calculation of living expenses is based on the number of “legislative days” the state legislature was in session, but there is no authoritative guidance on what constitutes a “legislative day.” H.R.3996 would clarify that the legislature shall be considered to be in session on pro forma days for purposes of the allowance for state legislators’ travel expenses away from home.
· District of Columbia homeownership. According to the Senate Committee on the Budget, the District of Columbia’s homeownership rate is significantly lower than neighboring Maryland and Virginia. H.R.3996 would encourage owner-occupied home ownership in the District of Columbia by extending a $5,000 first-time homebuyer credit for individuals.
Extension of Provisions Primarily Affecting Businesses
· Research and development tax credit. Research can be the basis of new products, industries, and jobs for the domestic economy. To encourage firms to increase their spending on research and experimentation, H.R.3996 extends the research tax credit.
· Indian employment credit. To encourage economic development in and employment on Indian reservations, H.R.3996 would extend the business tax credit for employers of qualified employees that work and live on or near an Indian reservation. The credit is for wages and health insurance costs paid to qualified employees (up to $20,000) in the current year over the amount paid in 1993.
· New markets tax credit. To encourage investment in economically underdeveloped areas throughout the country, H.R.3996 would extend the new markets tax credit, which permits taxpayers to receive a credit against federal income taxes for making qualified equity investments in designated Community Development Entities.
· Railroad track maintenance. To enable small and mid-sized railroads to update and upgrade their track capacities in order to promote railroads as an alternative to shipping freight on roadways, H.R.3996 would extend a 50 percent general business credit for qualified railroad track maintenance expenditures.
· Leasehold improvements. In recognition of the fact that leaseholds and restaurants have shorter lives than industrial and commercial structures in general, H.R.3996 would extend the special 15-year cost recovery period for qualified leasehold and restaurant improvements. Absent an extension of this provision, the cost recovery period for these facilities would be 39 years.
· Motorsports entertainment complexes. To encourage economic development, H.R.3996 would extend the special seven-year cost recovery period for property used for land improvement and support facilities at motorsports entertainment complexes. Absent an extension of this provision, the cost recovery period for these facilities would be 15 years.
· Indian reservation business property. To encourage economic development within Indian reservations and expand employment opportunities on such reservations, H.R.3996 would extend for one year the placed-in-service date for the special depreciation recovery period for qualified Indian reservation property.
· Brownfields clean-up. To promote the goal of environmental remediation and promote new investment and employment opportunities by lowering the net capital cost of a development project, H.R.3996 would extend the provision that allows for the immediate expensing (rather than over time as a depreciation) of costs associated with cleaning up hazardous sites.
· Domestic production activities in Puerto Rico. To encourage investment in Puerto Rico, H.R.3996 would extend the provision extending special domestic production activities rules afforded to manufacturing activities in the United States to activities in Puerto Rico.
· Qualified zone academy bonds (QZABs). School districts use Qualified Zone Academy bonds (QZAB) as an innovative way to fund school renovation in economically distressed areas at a much lower cost. Investors receive a federal tax credit in lieu of an interest payment, and, over the life of the bond, the district can save 50 percent. H.R.3996 would allow an additional $400 million of QZAB issuing authority to state and local governments, which can be used to finance renovations, equipment purchases, developing course material, and training teachers and personnel at a qualified zone academy.
· District of Columbia investment. In addition to the $5,000 first-time homebuyer credit for individuals described above, H.R.3996 would extend a package of tax incentives for the District of Colombia for businesses and individual residents within certain economically depressed census tracts within the District of Columbia that have been designated as the District of Columbia Enterprise Zone.
· American Samoa economic development. To encourage investment in American Samoa, H.R.3996 would extend the tax credit providing provides certain domestic corporations operating in American Samoa with a possessions tax credit to offset their U.S. tax liability on certain income related to business operations earned in American Samoa.
· Food inventory contributions to charitable organizations. To encourage contributions of food to charitable organizations, H.R.3996 would extend for one year the provision allowing unincorporated businesses to claim an enhanced deduction for the contribution of certain food inventory.
· Book contributions to public schools. To encourage contributions of books to public schools, H.R.3996 would extend the provision allowing C Corporations to claim an enhanced deduction for contributions of book inventory to public schools (kindergarten through grade 12).
· Computer donations for educational purposes. To encourage contributions of computer technology and equipment to public libraries and educational organizations, H.R.3996 would extend an enhanced deduction that encourages businesses to contribute computer equipment and software to elementary, secondary, and post-secondary schools.
· Charitable contributions of property. The bill would extend for one year the provision allowing S Corporation shareholders to take into account their pro rata share of charitable deductions even if such deductions would exceed such shareholder’s adjusted basis in the S Corporation. H.R.3996 would also make a technical correction clarifying the application of this provision.
· Hurricane Katrina employees. To encourage employers to hire individuals who were affected by Hurricane Katrina, H.R.3996 would extend the provision that expired in August 2007 that allowed employers to claim the work opportunity tax credit for hiring employees employed within the core disaster area of Hurricane Katrina.
· Tax return information. To simplify the filing obligations for taxpayers, H.R.3996 would extend for one year the authority for combined employment tax reporting and the current-law authority to disclose return information for purposes of the income-contingent loan repayment program and for purposes of coordination with the Department of Veterans Affairs. H.R.3996 would also extend the present-law terrorist activity disclosure provisions.
· Student loan disclosure. Generally, the IRS is prohibited from disclosing returns and return information. H.R.3996 would extend an exception that allows disclosure information to the Department of Education (but not its contractors) to establish an appropriate repayment amount for an applicable student loan.
· Undercover IRS operations. To provide the IRS with an important enforcement tool similar to that provided to other law enforcement agencies, H.R.3996 would extend the authorization for the IRS to engage in certain activities related to undercover operations, such as purchasing property, organizing business entities, and use the proceeds from an undercover operation to pay additional expenses incurred in the undercover operation.
· “Cover over” of tax on rum. Given the current fiscal needs of Puerto Rico and the U.S. Virgin Islands, H.R.3996 would extend the provision providing for an increased rebate of certain taxes on distilled spirits produced in or imported into the United States from Puerto Rico and the U.S. Virgin Islands.
As it becomes available, the DPC will distribute information on possible amendments.
On November 13, the Senate received H.R. 3996. On November 15, Senator Reid presented a Motion to Invoke Cloture on the Motion to Proceed to the House measure, along with a unanimous consent proposal that provided for a series of votes that would allow the Senate to consider the “extenders” and increase the exemptions taxpayers can claim to avoid paying the AMT in 2007, which would prevent the “stealth tax” from applying to anyone who didn’t pay it last year. The Senate Minority Leader, however, objected, and the motion was withdrawn.
On December 4, Senator Reid presented a motion to proceed to consideration of H.R.3996 and fileda cloture motion on that motion, moved to proceed to the bill and filed a cloture motion on the motion to proceed to the H.R. 3996. The cloture vote on the motion to proceed is scheduled to take place on December 6.
Statement of Administration Policy
On November 8, 2007, the Bush Administration issued a Statement of Administration Policy (SAP) for H.R. 3996. The SAP indicated that, in light of the offsets for the AMT exemption amounts, the nature of some of the business-related provisions that would offset the extenders, and the provision that would repeal the current statutory authorization for the IRS private debt collection program, “the President’s senior advisors would recommend he veto the bill.”
For more information, the SAP is available H.R.3996sap-r.pdf" target= "_blank">here.
House Report 110-431, Temporary Tax Relief Act of 2007 (November 6, 2007), available H.R.431.110.pdf" target="_blank">here.
CRS Report RS22563, The Alternative Minimum Tax for Individuals: Legislative Initiatives in the 110th Congress (November 20, 2007), available here.
CRS Report RL32367, Temporary Tax Provisions (“Extenders”) Expiring in 2007 (November 5, 2007) available here.