AED Washington Insights Newsletter
May 2006
Prepared by Christian A. Klein, AED Vice President of Government Affairs
and the AED Washington team
In this Issue:
AED takes on leadership role in fight against LIFO repeal
It was a shocker.
Late last month, in response to record gas prices, the Senate Republican leadership unveiled a plan to give middle-income families a $100 gas tax rebate check. The idea was universally panned as a transparent, election year gimmick. The construction industry called it an assault on the integrity of the user-fee financed Highway Trust Fund. Some of the most vocal criticism of the rebate plan came from conservatives who saw it as an abandonment of the free market principles that are at the core of the Republican Party platform.
The gas tax rebate may have been a bad idea, but how the GOP leadership proposed to pay for it – by repealing LIFO - was even worse.
LIFO (which stands for "last in, first out") is an accounting method that assumes the goods most recently produced or acquired by a company are the first to be sold. The major advantage to LIFO is that it matches current revenues with current costs. Lower net profit calculations – and therefore lower taxes – result from matching income against the most expensive items in a company''s inventory. LIFO has therefore become an important tool companies - including equipment distributorships - use to manage tax liability and more accurately measure economic performance in the face of rising inventory prices.
Unfortunately, LIFO has been in the crosshairs in recent months because oil companies use it too. Some on the Hill have called it loophole that the oil industry is using to dodge taxes and support for legislation to prohibit the oil companies from using LIFO has been building. The proposal to disallow LIFO for all business grew out of the attack on petroleum producers.
In repealing LIFO, the Senate proposal would have forced taxpayers using the accounting method to report their built-up LIFO reserves (which for some AED members exceed $10 million) as income, resulting in huge tax bills for equipment distributors and others. By some estimates, the LIFO reserves of all US companies combined equal more than $100 billion. Assuming a 35 percent tax rate, repealing LIFO would therefore be the equivalent of a $35 billion tax increase.
Fortunately, a firestorm of inside the Beltway lobbying by AED and others led Senate GOP leaders to quickly withdraw the proposal. However, once a genie has been let out of the bottle in Washington, it''s often hard to put it back in. Senate Finance Committee Chairman Chuck Grassley (R-IA) has indicated an interest in reconsidering the issue at hearings, possibly as soon as early June. Others on the Hill are continuing to refer to the "LIFO loophole" and are looking covetously at the money repeal would generate for federal coffers.
AED has therefore joined forces with the National Association of Wholesaler-Distributors (NAW) and other trade associations to take a tough stand against LIFO repeal. AED Washington staff is actively lobbying the issue on the Hill and has helped develop briefing materials for other coalition members.
Help AED save LIFO
If your company uses the LIFO accounting method, it''s important that you get engaged on this issue.
A list of Senate Finance Committee members appears below. If one of your two senators is on the list, we ask that you contact him or her and urge them to oppose any effort to repeal LIFO.
| Senate Finance Committee |
Republicans (11)
Charles E. Grassley (R-IA)
(Chairman)
Orrin Hatch (R-UT)
Trent Lott (R-MS)
Olympia Snowe (R-ME)
Jon Kyl (R-AZ)
Craig Thomas (R-WY)
Rick Santorum (R-PA)
Bill Frist (R-TN)
Gordon Smith (R-OR)
Jim Bunning (R-KY)
Mike Crapo (R-ID) |
Democrats (8)
Max Baucus (D-MT)
(Ranking Democratic Member)
John Rockefeller (D-WV)
Kent Conrad (D-ND)
Jeff Bingaman (D-NM)
John Kerry (D-MA)
Blanche Lincoln (D-AR)
Ron Wyden (D-OR)
Charles Schumer (D-NY)
Independents (1)
James Jeffords (I-VT) |
Contact information, including the names of the senators'' legislative directors and tax legislative assistants is available from this page: http://www.congress.org/congressorg/directory/committees.tt?commid=sfina. Just click on the senator''s name and when you get to their congress.org page, click on the "staff" bar on the left side of the screen.
When you talk to your senators'' offices, explain to them why your company uses LIFO, what impact repealing it would have on your tax situation, and how repeal would affect your ability to deal with inflation. You should also point out that although LIFO can mean a lower tax bill when prices are rising, it means a higher tax bill when prices fall. Please consider following up your call with a personalized letter explaining your position.
To read the LIFO briefing document developed by AED and our LIFO Coalition allies, click here: http://www.aednet.org/government/pdf/LIFOBriefer.pdf
Stand by for more information as the issue develops.
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Congress extends Sec. 179 increases, cap gains rate cuts
President Bush this month signed the Tax Increase Prevention and Reconciliation Act (TIPRA) into law. The legislation extends major tax law changes adopted during the president''s first term, including capital gains tax rate cuts, Alternative Minimum Tax (AMT) relief, and higher small business expensing levels.
In order to stay within budget limits and avoid Senate filibusters, recent tax bills have contained sunset provisions that cause the tax cuts to expire after a few years. Failure by Congress to extend the tax cuts would have resulted in an eventual reversion to prior law and an effective tax increase.
Highlights of the bill include:
- Extension of lower capital gains and dividends tax rates for two additional years. Under current law, capital gains and dividend income are taxed at a maximum rate of 15 percent through 2008. For taxpayers in the 10 percent and 15 percent tax brackets, the tax rate is five percent through 2007 and zero in 2008. TIPRA extends the rates effective in 2008 through 2010.
- Extension and expansion of AMT relief. The new law extends and increases the AMT exemption levels though the end of 2006. The new exemption levels for 2006 are $62,550 for joint filers and $42,500 for single filers. Under TIPRA, most non-refundable personal tax credits (e.g., dependent care credit, the credit for the elderly and disabled, the credit for interest on certain home mortgages, the Hope credit for certain college expenses and the Lifetime Learning credit, etc.) may continue to be claimed against the AMT.
- Extension of increased Section 179 expensing for small businesses. Under current law, small businesses may expense up to $100,000 of investments in depreciable assets. The deduction phases out dollar-for-dollar to the extent the business'' annual investments exceed $400,000. Without action, the expensing limit would have declined to $25,000 and the phase-out threshold would have declined to $200,000 after 2007. AED is a leading proponent of capital investment incentives, including the depreciation bonus and higher expensing levels. Extending the higher small business expensing levels was one of AED''s top legislative priorities for the 109th Congress.
- Easier Roth IRA conversion. TIPRA allows more taxpayers to convert to Roth IRAs by removing the modified adjusted gross income limitations on rollovers from an IRA to a Roth IRA. Under the provision, taxpayers can elect to pay tax on amounts converted in 2010 in equal installments in 2011 and 2012.
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Senate death tax vote looms
Death tax repeal has again fallen victim to the Senate''s ever changing agenda. Although a vote on full repeal was anticipated for May 17, other issues, including immigration and healthcare, have taken center stage. Senate Majority Leader Bill Frist (R-TN) is apparently planning to bring death tax repeal to the Senate floor sometime in mid-June.
Under current law, the death tax is being phased out and will be permanently repealed in 2010. However, the repeal law expires in 2011 and the death tax will come back with an exclusion amount of $1 million and a top rate of 55 percent. The goal of AED and its coalition allies is to make the repeal permanent in 2010, killing it once and for all.
However, several procedural hurdles will need to be cleared before a vote on death tax repeal legislation can occur. Preventing a filibuster requires 60 votes for "cloture." This procedural step ends debate, allowing for an up or down vote on the bill. Although this sounds simple, there are a number of factors complicating this process.
Opponents of the repeal are raising concerns about the cost, despite studies showing that more money is spent on death tax avoidance planning and IRS administration of the death tax than it generates in revenue. In addition, election year pressure from party leaders may force some Democrats who support repeal to vote along party lines, i.e., to vote against cloture and (if it gets to a final vote) against the bill itself.
Talks on a compromise are apparently continuing behind the scenes. Senate Finance Committee Ranking Democrat Max Baucus (D-MT) and Sen. Jon Kyl (R-AZ), the Senate''s leading death tax repeal champion, are reportedly working on a measure that would trade full repeal for a substantial increase in the death tax exemption (perhaps as high as $10 million), a substantial decrease in rates (possibly to the 15 percent capital gains rate), and a retention of the step up in basis. Whether a compromise is reached, what it will look like, and what impact it will have on the vote remains to be seen.
Targeted contact needed
Death tax repeal has been at the top of AED''s legislative agenda for more than a decade. We''re entering a critical stage. There are several senators'' whose support could make all the difference but whose current position on repeal is uncertain. They are:
Max Baucus (D-MT)
Evan Bayh (D-IN)
Lincoln Chafee (R-RI)
Mary Landrieu (D-LA)
Blanche Lincoln (D-AR)
John McCain (R-AZ)
Mark Pryor (D-AR)
Ken Salazar (D-CO)
Olympia Snowe (R-ME)
George Voinovich (R-OH)
If you see one of your senators on this list, contact their offices and explain to them why death tax repeal is so important to capital-intensive, family businesses like yours. Tell them to help kill the death tax once and for all. Contact information is available at http://www.congress.org.
Look for more news on death tax repeal as we get closer to a Senate vote.
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Small business health insurance legislation fails to muster Senate votes
In an effort to focus on the plight of healthcare for Americans, Senate Majority Leader Bill Frist (R-TN) dedicated a full week in May to consideration of health care legislation. High on the agenda was Health Education, Labor and Pensions Committee Chairman Mike Enzi''s (R-WY) association health plan (AHP) bill, which would allow small businesses to band together through trade associations to obtain affordable healthcare for employees. Enacting legislation to help small businesses deal with ever-increasing health insurance costs is a top priority for AED.
Sen. Enzi''s bill was the first AHP bill to make it out of committee and be considered on the Senate floor. Touted as a major stepping stone to affordable healthcare, the bill would help associations cut through the morass of state insurance laws that make it difficult to offer health plans in multiple states. Opponents argued that the bill would give insurance providers a green light to avoid state laws mandating coverage of existing conditions and certain procedures. In an effort to win over Democrats, several amendments were offered that expanded coverage mandates.
Unfortunately it was not enough. Supporters were unable to obtain the 60 votes needed to prevent a filibuster and the bill did not receive an up or down vote.
Although there''s still a chance that a compromise could be reached and AHP legislation could be back on the floor, given the Senate''s abbreviated election year schedule it''s likely that small business health insurance legislation will have to wait until next year.
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More cuts to federal water construction programs?
Despite estimates of a $500 billion, 20-year water infrastructure deficit, the House of Representatives this past month approved an appropriations bill that would cut funding for the Clean Water State Revolving Fund (SRF) program by 22 percent, from $886.8 million in FY 2006 to $687.6 million next year. The Safe Drinking Water SRF appropriation would be increased slightly above the current year total, from $837.5 million to $841.5 million in FY 2007.
Over the last three years, funding for federal sewer and drinking water construction programs has fallen nearly 30 percent.
Although Congress'' water infrastructure funding levels are above what was proposed by the Bush Administration earlier this year, they still fall short of the funding needed to maintain safe and clean drinking water.
Water infrastructure advocates are now shifting their focus to the Senate, which in past years has restored some of the money cut by the House.
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