AED Washington Insights Newsletter
July 2006
Prepared by Christian A. Klein, AED Vice President of Government Affairs
and the AED Washington team
In this Issue:
"Extenders" bill strategy gives death tax relief new life
As Insights went to press, there were hints that we might be nearing a breakthrough on the death tax, but the situation was still very fluid.
Here''s where we are:
Congressional leaders announced Tuesday that a package of popular tax break "extenders," including the research and development tax credit, would not be included in the pension reform bill currently being finalized by a House-Senate conference committee. Death tax repeal advocates on Capitol Hill apparently hope to use the extenders bill as a vehicle to move death tax reform legislation through the Senate.
Under current law, the death tax is being phased out and will be repealed entirely in 2010. However, the repeal law expires in 2011, meaning that the death tax will return at the original, prohibitive 55 percent rate. The uncertainty surrounding the future of the death tax has become a major problem for family businesses. AED and other leading business groups have been pushing for a permanent solution to the death tax problem.
Last month a permanent death tax repeal bill (HR 8) failed to muster the 60 votes needed to receive an up or down vote on the Senate floor. The House then quickly passed a bill developed by the House Ways & Means Committee Chairman Bill Thomas (R-CA) to provide permanent death tax relief. The Thomas bill (HR 5638) would:
- Increase the exemption amount to $5 million per person (indexed for inflation) effective January 1, 2010.
- Peg the tax rate on estates up to $25 million to the capital gains tax rate (currently 15 percent, set to increase to 20 percent in 2011 unless extended).
- Set the tax rate on estates of $25 million (not indexed) or more at twice the capital gains rate (currently 30 percent, set to increase to 40 percent in 2011 unless extended).
- Allow married couples to take full advantage of the indexed $5 million exemption by carrying over any unused exemption to the surviving spouse.
- Maintain the "stepped-up" basis for property acquired from a decedent by repealing the modified carryover basis rules that would have gone into effect in 2010.
Although the Thomas bill is generally supported by death tax opponents, Senate leaders have been reluctant to bring the bill to the floor without a guarantee that it has the 60 votes needed to overcome a likely filibuster. There has also been concern expressed by business groups that tying the death tax to capital rains rates does not truly represent a "permanent solution" because of the risk that capital gains rates will increase in a few years.
By tying the death tax to the extenders bill, House and Senate GOP leaders apparently hope to attract enough Senate Democrats to pass permanent death tax reform before the November elections.
However, as of this writing there were several issues still unresolved. They are:
- The status of the pension bill. Although a deal is apparently close, the bill isn''t done yet. Until it is, the death tax/extender bill will almost certainly have to wait.
- Whether House and Senate GOP leaders will stick with the death tax/extenders bill strategy. Senate Finance Committee Chairman Charles Grassley (R-IA) and Ranking Member Max Baucus (D-MT) are apparently unhappy about the decision to decouple the extenders from the pension bill. If putting the extenders back in is what it takes to get a pension deal, death tax reform could be the loser.
- What form the death tax language in the extenders bill would take. Lawmakers are apparently considering improving on the Thomas bill by fixing the death tax rates at 15 and 30 percent rather than tying them to the capital gains rate. We think this would be a big improvement, provide more long-term certainty for small business owners, and facilitate their estate planning.
- What else might be included in the bill to attract Democrat votes. We''ve just spoken with a congressman who attended this morning''s House GOP conference meeting. There''s now talk that the death tax/extender bill may also include an increase in the minimum wage (currently $5.15 per hour). Other sources are reporting that language to make easier for small businesses to band together to obtain health insurance (the so-called association health plan (AHP) bill) is also under consideration.
- When the votes on the various bills will occur. House Speaker Dennis Hastert (R-IL) suggested yesterday that a death tax/extender bill could be on the House floor by today. However, everything is on hold pending a pension deal. House Majority Leader John Boehner (R-OH) has hinted that if necessary the House will stay in session through the weekend in order to pass pension reform rather than adjourning for the August recess tomorrow as originally planned. If a pension vote happens, the House could move immediately to the death tax/extenders package. The Senate is not set to recess until the end of next week. However, given the various procedural hurdles to getting legislation to the Senate floor, it''s unclear whether Senate action before the recess is possible and whether a death tax/extenders bill could be sent to the president''s desk before the August recess.
We''ll keep you posted as the story develops.
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Survey shows LIFO repeal could mean $870 million tax increase for equipment distributors
Since late April, AED has been playing a leadership role in efforts to prevent the repeal of the last-in, first-out (LIFO) accounting method. LIFO repeal was first proposed by the Senate GOP leadership this spring as a way to pay for a misguided $100 per family gas tax rebate. Although the proposal was quickly withdrawn under pressure from AED and other business organizations, once a bad idea is out of the bottle in Washington, it''s often hard to put it back in and some senators continue to express an interest in LIFO repeal.
Following a meeting between a delegation of Iowa equipment distributors and Senate Finance Committee Chairman Charles Grassley (R-IA) last month, we''re confident that the Finance Committee leadership is no longer promoting repeal. However, because the issue could arise again in the context of broader tax reform or potentially be brought to the Senate floor by any senator at any time, we''re remaining vigilant.
As part of our activities on the LIFO front, we conducted a survey of AED members in late-June and early-July to gauge the impact repeal would have on the equipment distribution industry.
Eighty-five AED members responded to the survey, representing approximately 15 percent of AED''s distributor membership. Members were encouraged to participate in the survey even if they did not use LIFO. Among the survey''s findings were the following:
- Forty-two percent of the survey respondents use LIFO to value their parts inventories, with 28 percent using FIFO (first-in, first-on), 20 percent using average cost, and nine percent using some other method.
- Of the survey respondents who used LIFO, 37 percent had LIFO reserves of less than $1 million, 29 percent had LIFO reserves of between $1 million and $5 million, nine percent had LIFO reserves of between $5 million and $10 million, 11 percent had LIFO reserves of between $10 million and $20 million, 11 percent had LIFO reserves of between $20 million and $50 million, and three percent had LIFO reserves of more than $100 million.
- We conservatively estimate the combined LIFO reserves of AED members responding to the survey at $354 million. If our survey sample is representative of AED''s membership as a whole, the combined LIFO reserves of AED''s members could be close to $2.5 billion. If LIFO were repealed, AED members would be forced to pay taxes on those reserves. Thus, assuming a 35 percent tax rate, LIFO repeal could mean a $870 million tax increase for AED members alone!
- Following were some of the responses we receive to the open-ended question about what impact LIFO repeal would have on respondents'' companies:
- "Devastating, it would create a large taxable income with no opportunity for planning to deal with it. These reserves are built over many years, in our case 25 years, and a sudden reversal would cripple our capital position."
- "Loss of the LIFO reserve and its resulting tax liability would drain capital from the company, limiting our ability to finance essential equipment inventories and hampering our ability to compete in the marketplace."
- "It would be devastating! With replacement of inventory consistently rising, it would hurt out ability to grow our company. Congress doesn''t have a clue as to what it would do to the economy!"
- "Would increase taxable income by approx 1/3 on the LIFO reserve that was repealed. THIS WOULD BE BAD."
- "LIFO repeal would have a significant tax impact on our company. The estimated tax impact would be over $30 million, which is a major negative cash flow."
The survey results have only confirmed our earlier belief that LIFO repeal would have a negative and dramatic impact on many equipment distributors. Needless to say, we''ll keep up the fight!
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OSHA previews pending crane and derrick regulations
AED representatives attended a Small Business Roundtable meeting on July 21 to discuss new Occupational Safety and Health Administration (OSHA) standards for cranes and derricks. The meeting previewed OSHA''s pending safety regulations governing the use of cranes and derricks at construction sites. Forklifts and backhoes are exempted from these new rules.
The new regulations will affect operators and their employees by tightening existing standards for ground conditions, inspections, assembly, work near power lines and signals on the worksite. Employers will likely have to conduct additional training for employees coming into contact with this equipment.
Input from an advisory committee helped establish consensus based standards, meaning if more than two members did not agree, the proposal was not included in the final submission. Members of the committee included manufacturers, labor, contractors and government representatives. Currently OSHA is conducting a panel to determine the cost of these new rules to small businesses. Once that is complete, the proposed standard will be published in the Federal Register.
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EPA adds to soot docket
In February, the Environmental Protection Agency (EPA) released an advance notice of proposed rulemaking indicating a desire to tighten air quality standards for particulate matter (a.k.a., PM or soot). This week the EPA released its latest study on the health effects of PM and added the study to the rulemaking docket. If new soot regulations are promulgated, counties could potentially lose federal highway funding for failure to meet these stricter air quality standards. This could bring infrastructure projects in many areas to a halt.
Although rules have not yet been released, the EPA is under pressure to enforce existing standards rather than create new ones. By maintaining current standards, counties in compliance would continue to receive federal highway funding, keeping crucial infrastructure projects moving.
We anticipate the EPA will release air quality standards rules in the coming months and will continue to monitor the situation.
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Bill would give visibility to cost of Endangered Species Act compliance
By a 17-10 vote, the House Resources Committee this month passed the Endangered Species Compliance and Transparency Act (HR 4857). The bi-partisan legislation requires power marketing administrations to list the cost estimates associated with Endangered Species Act (ESA) compliance. Through this listing, consumers and businesses can see what portion of their energy bill payments are spent on compliance with the Endangered Species Act.
"Consumers deserve to know where their money is going," said Resources Committee Chairman Richard Pombo (R-CA).
The bill now moves to the full House for consideration.
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Senate tackles water, highway funding issues
This month, the Senate passed the Water Resources Development Act (WRDA) of 2005 (S. 728), which would authorize more than $12 billion for waterway, port, dam and lock improvement projects. The WRDA bill would also approve more than 200 projects, ranging from flood control to environmental restoration.
The House version of the bill was passed last year. Differences in the bills will now be worked out in conference, which is expected to happen quickly. If signed by the president, it will mark the first time federal port and waterway funding has been reauthorized since 2000.
Senate Approps Committee approves record highway funding
Meanwhile, the Senate Appropriations Committee this month approved a proposed FY 2007 transportation funding bill. Highway, transit, and airport spending would be increased by $10.2 billion above FY 2006 levels. Under the bill, the highway program would receive $39.1 billion in FY 2007, a $3.4 increase over this year''s funding level and the full amount authorized in last year''s SAFETEA-LU law. Federal transit programs would, however, receive $100 million less than authorized. The funding level for highways in the Senate''s bill mirrors that passed by the House in June. AED estimates that the market impact of a $39.1 billion highway bill on equipment distributors would be approximately $2.7 billion.
Given the limited number of legislative days left between now and the elections, the outlook for the transportation bill (and for the eleven other appropriations bills that fund government operations) is uncertain. Many are predicting that final action will have wait until a lame duck session of Congress after the November elections.
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Don''t miss out on AED''s newest PAC publication
AED unveiled the first issue of the AED PAC Bulletin, our new political action committee newsletter, on July 12. The newsletter will be published on a quarterly basis and is designed to keep distributors informed about the association''s efforts to elect pro-growth candidates to Congress. To ensure compliance with federal election laws, only companies who have given AED PAC solicitation consent will receive the publication.
If your company has not given solicitation consent and you would like to receive future issues of the AED PAC Bulletin, download a copy of the solicitation consent form here: http://www.aednet.org/government/pdf/aed-pac-solicit-form.pdf
You can return it via e-mail to aedpac@aednet.org or via fax to 703-299-0254.
If you''re not sure whether your company has given solicitation consent, you can check on our website at:
http://www.aednet.org/government/pdf/2006-Solicitation-Consent-Givers.pdf
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Chicago AED members ImPACt key 2006 House race
On July 12, AED hosted an ImPACt luncheon for State Sen. Peter Roskam, the Republican
congressional candidate in Illinois'' Sixth Congressional District. Roskam is the GOP nominee running for the seat currently held by Rep. Henry Hyde, who is retiring after 16 terms. The race has important national implications and is considered a "must win" for the GOP if Republicans are to maintain their House majority. The Sixth District is also the home of AED headquarters.
AED President Toby Mack presented Roskam with a $2500 AED PAC check and several local distributors attending the meeting made personal contributions to Roskam''s campaign.
The Roskam luncheon marked the ninth AED ImPACt 2006 event of the 2005-2006 election cycle. Through the ImPACt program, AED''s Political Action Committee (PAC) encourages distributors around the country to join together at the local group level to support House and Senate candidates. At each ImPACt event, AED PAC matches the combined local group contributions to the candidate up to $2,500.
ImPACt meetings for six more candidates are in the works around the country. AED local group leaders interested in organizing an ImPACt event should contact AED''s Washington office at aeddc@aednet.org or 703.739.9513.
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