ataxingmatter

Defending the IRS Against Right-Wing Attacks

The IRS is a government agency that endures all kinds of hostile attacks.  Most people don't really like to pay taxes.  Even I don't really "like" paying taxes, though I do recognize the importance of paying taxes and supporting the societal infrastructure that pays for the Centers for Disease Control, basic research, the space telescope, programs for those in or near poverty, Pell Grants for students to attend college and many other important and necessary federal programs (not to mention the tax-guzzling military budget that probably could be cut in half, if only we had the gumption to do it).  So the right-wing effort to "drown the government in a bathtub" and make the world safer for the corporatist elites to sock away their wealth without paying a dime to support the society that made that wealth possible tends to demonize the IRS at every possible opportunity under a Democratic president. 

ASIDE:  This is on a par with the way other things are treated.  Reagan cut taxes in 1981 and then increased them every year thereafter, mostly increasing the burden on those in the lower end of the income distribution, so Reagan is remembered as the great tax cutter.   Reagan's administration had the Beirut bombing that killed 241 U.S. soldiers in their barracks, but Obama's administration bears the millions of dollars spent in eight (and counting) investigations of the four deaths in the Benghazi attacks.  There is a tendency for people to remember events and fiscal policy to suit their preconceived view of things.

So the New York Times on Friday reported on the havoc that the right's attacks on the IRS's budget and its employees' morale has wrought.  Congress writes the tax laws, but the right tends to talk about the executive agency as though it 'owns' the tax laws instead.   I.R.S. Fights Back Against House Republicans' Attacks, New York Times, Apr. 22, 2016.   As the article notes, "the agency even got the blame for the hated tax code, which Congress writes and Republicans have promised for five years to rewrite and simplify."  (And remember, simplification is the wrong aim--it is part of the propaganda that wants ordinary Americans to support a tax code rewrite that tilts the code even further towards the wealthy.  See the last two posts on A Taxing Matter.)

As certain as death and taxes, tax season political attacks on the I.R.S. go back decades. But in recent years, the intensity has grown and the agency’s funding in turn shrank more than any other time in memory. The campaign gained strength in 2013, when Republicans seized on management failures to allege that I.R.S. employees had singled out conservative groups for greater scrutiny and delays in reviewing their applications for tax-exempt status as “social welfare” organizations, though liberal-leaning groups were examined as well, investigations showed.

Clearly, the IRS is a centrally important agency that cannot be eliminated.  We need to collect taxes, and we need an agency with the expertise to advise Congress about tax law and policy as well as to interpret the laws in a way that makes it possible to implement them.  (Congress has a tendency to leave anything really difficult to the IRS to figure out, by authorizing or ordering the Secretary of the Treasury to promulgate regulations carrying out the intent of specific provisions.)  We need to have sufficient IRS staffing to enforce the law through tough audits, especially of the wealthy and corporate enterprises.  We need to have sufficient funding to maintain updated technology--one of the problems with the cuts in funding to the IRS is that the computer systems are more easily hacked than they should be.  That fault lies with Congress, which expects managerial miracles from an agency with constant battering from the right-wing to try to demoralize its employees and constant resource cuts that make budget planning and regular maintenance of systems practically impossible.  When Congress adds additional functions to the agency (whether in the form of additional tax systems to oversee, such as the penalty provisions in the Affordable Care Act,  or additional tax expenditures operating as a subsidy to one or another of Congress's favored groups, such as the section 199 "manufacturing" deduction) but fails to add funding to cover the additional responsibility, it means that the IRS's ability to carry out its task well will be jeopardized, and service to taxpayers will decline.

“The Congress on one hand adds complexity to the tax system by the tax laws they enact but will not recognize the costs and administrative burdens placed on the agency to carry out the laws it passes,” said G. William Hoagland, who was a senior budget adviser to Senate Republican leaders for more a quarter-century.

The fact is, the IRS makes money when Congress gives it funding to ensure tax compliance:  as the article states (and many studies support), "the agency collects at least $4 for every $1 it spends for tax compliance."  Former IRS commissioners--during Republican and Democratic administrations--therefore joined together to urge Congress to undo the perverse results of underfunding the IRS.

“Over the last 50 years, none of us has ever witnessed anything like what has happened to the I.R.S. appropriations over the last five years and the impact these appropriations are having on our tax system,” they wrote.

Federal reports document the impact. Tax audits are at the lowest level in a decade, affecting fewer than 1 percent of taxpayers. Reduced efforts to enforce compliance cost an estimated $6 billion in uncollected revenues in 2014 and $8 billion in 2015. The I.R.S. has a backlog of almost a million pieces of correspondence from taxpayers.

Stan Collender, a budget analysis, is right when he says (as quoted in the article):

“You really shouldn’t be able to reduce the amount you spend on I.R.S., decrease their performance ability and then complain about their performance.”

 

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The GOP Plan to Wreck Government Is Doing Great, Thanks Very Much

Tax Extenders: where the Senate stands

Today (August 28), the Senate Finance committee provided an updated revenue estimate and text for the bill --the so-called "Family and Business Tax Cut Certainty Act of 2012"--that it had approved on August 2 to extend $205 billion-worth of "temporary" tax cuts through 2013.  Most of these provisions are further extensions of the Bush cuts put in place going back to 2001, such as the annual "AMT patch" that comes about because the Bush tax cuts reduced the regular tax so much that the AMT does capture somewhat more taxpayers than it otherwise would have.  This is expected to be brought to the Senate floor in September.

Here's what the Senate Finance extenders bill would do, with a cost of 143.221 billion for FY 2013.:

A. Main Individual Provisions

1. AMT exemption:  increase the exemption amount for the AMT (see table below:  the first amounts shown are post-2011 without the bill, the first increased amounts are for 2012 with the extender bill and the second increased amount is for 2013 with the extender bill) and allow the entire regular and AMT liability to be offset by nonrefundable personal credits during 2012 and 2013.

• married filing jointly and surviving spouses:  45,000 increased to 78,750 and then to 79,850
• other single individuals:                                33,750 increased to 50,600 and then to 51,150
• married filing separately:                              22,500 increased to 39,375 and then to 39,925

Note that the AMT would only affect .9 million taxpayers in 2013 under this schema.  The cost of this provision for increasing the exemption amount and allowing 100% of tax liability to be offset with credits is slightly more than 104 billion for FY 2013

2. Above the line deduction for classroom expenses of $250, at a cost of 273 million

3. Exclusion of income from discharge of indebtedness on principal residence (up to $2 million of discharged debt), at a cost of 199 million

4. parity for mass transit and parking benefits (extended retroactively to Jan 1, 2012), at a cost of 218 million 

5. extend deductibility of mortgage insurance premiums as qualified residence interest (rationalized as a way to encourage home ownership), at a cost of 791 million

6. deduction for state and local sales taxes, at a cost of 1.64 billion

7. deduction for qualified tuition expenses, at a cost of 2.32 billion

8. tax free distributions from IRAs to public charities up to $100,00 per year per taxpayer, at a cost of 594 million

B. Main business provisions (nothing less than 5 million covered here)

1. Extend and modify R&D credit (applying it retroactively back to 12/31/11), at a cost of 6.2 billion

2.  Indian employment tax credit, at a cost of 69 million

3.  50% tax credit for expenditures to maintain tracks, at a cost of 232 million

4.  work opportunity tax credit, at a cost of 947 million

5. special, shorter depreciation recovery for restaurants, leaseholds, motorsports racing facilities and businesses on Indian reservations, at a cost of 335 million

6. enhanced charitable deduction for food inventory, at a cost of 218 million

7. Increase in section 179 expensing amounts, with thresholds of 500,000 and 2 million, at a cost of 8.088 billion

8. election to expense mine safety equipment, at a cost of 27 million

9. special expensing rules for film

9. special deduction for income attributable to Puerto Rican production activities, at a cost of 236 million

10. modification of payments under existing arrangements to controlling exempt organizations, at a cost of 35 million

11. treatment of RIC dividends, at a cost of 124 million

12. extension of treatment of RICs as qualified for FIRPTA purposes, at a cost of 48 million

13. active financing exception to subpart F (for big banks with foreign subsidiaries), at a cost of 9.399 billion

14. look-through rules for CFCs, at a cost of 1.199 billioin

15. S corporation stock basis adjustment for charitable contributions of property, at a cost of 93 million

16. shorter period during which S corporations have to recognize built-in gains tax, at a cost of 184 million

17. empowerment zone tax incentives, at a cost of 360 million

18. Increase in excise taxes paid to Puerto Rico and the Virgin Islands, at a cost of 199 million

19. Extension and modification of credit for American Samoa, at a cost of 38 million

C. Main Energy provisions

1. Section 25C nonbusiness energy property extension/modification, at a cost of 1.456 billion

2. Alternative fueld vehicle refueling property provision, at a cost of 34 million

3. Cellulosic biofuel credit, and special depreciation for celluslosic biofuel plant properties and other items at a cost of 44 million

4. extension of numerous credits for biodieself and renewable diesel, at a cost of 1.881 billion

5. extension of various credits for renewable energy, at a cost of 122 million

6. energy-efficient home construction credits, at a cost of 74 million

7. energy-efficient appliances credits, at a cost of 155 million

8. Cost of "special rule for sales or dispositions" to implement FERC or state electric restructuring, at a cost of 596 million

9. excise tax creidts and outlays for alternative fuels, at a cost of 305 million

 The IRS made available an analysis of the difficulties in responding to potential changes to the AMT in time for filing of returns; that report is available at IRS Complexity Analysis (Aug. 13, 2012).  Links to pdfs of the Senate Finance Committee Report on the Family and Business Tax Cut Certainty Act of 2012 (Aug. 28, 2012); Estimated Revenue Effects; and text of the proposed legislation are available at the Senate Finance Committee website.

Many of these provisions--including the chartiable contribution deductions for value rather than actual investment, the R&D credit extension and the active financing exception extension for businesses, as well as the accelerated depreciation and expensing provisions, don't appear to contribute to growth in the way that the proponents of the provisions claim.   The Finance Committee hasn't made a strong case for continuing to include so many of these tax expenditure subsidies in the Internal Revenue Code.

Two of the business provisions are particularly unjustifiable.  There is no indiciation that businesses will not do research without getting a credit (instead of a deduction) for research expenses.  The Finance Committee justifies allowing this partly retroactive extension of the credit based on the benefit of research itself.  But the Committee hasn't answered the right question--is it essential to research that businesses get a credit, rather than the deduction otherwise available, for research?  The Committee just states that research is important and the Committee "believes it is appropirate to extend the present-law research credit" [that's the TEMPORARY credit that was created more than a decade ago!] and the Committee has enhanced the credit by permitting someone who is selling the business to use the credit for expenses incurred before the sale and by making it easier for a controlled group to manipulate their income by allocating research expenses among the controlled businesses.

The norm in Congress is that all of these temporary provisions will be renewed year after year, no matter what the cost, while a significant faction in the House and Senate continue to push the idea that it is necessary to cut spending on health care and other social safety net costs, cut taxes for the wealthiest amongst us, and increase spending on our already bloated military.

Change to section 249 barring deduction for repurchase premium on certain convertible bonds

Congress passed the H.R. 658, the FAA Air Transportation Modernization and Safety Improvement Act.  Included in it is a change to Code section 249, a provision that disallows certain deductions in connection with bond premium paid on repurchase of  debt convertible into the stock of issuing or a corporation in control of issuing, to the extent the repurchase price exceeds the adjusted issue price plus a normal call premium payable on nonconvertible debt. 

Prior to this change, the provision applied to conversion of the debt into stock of the issuing corporation or of a corporation in control of issuing under the definition of control in section 368(c) (requiring 80% of the voting power and 80% of each other class of shares to be owned). 

The change applies the provision to debt convertible into stock of the issuing corporation or to a corporation in the same parent subsidiary controlled group, as defined in section 1563.  Under that provision, a parent-subsidiary group is a chain of corporations where stock representing 80% of the vote or 80% of the value of each corporation (other than the common parent) is owned by one or more of the other corporations and the common parent owns at least 80% of the vote or 80% of the value of one of the other corporations.

Payroll Tax Committee in Partisan Snit

The committee working on the extension of unemployment benefits and the payroll tax cut is not making much headway.  A number of issues set the GOP's intent to cut assistance for those at the bottom of the income distribution as much as possible against the Dems' desire to fund the needed additional aid by a reasonable increase to the taxes of those who have enjoyed the most benefit from the last decade of tax cuts--those with a million or more in income.  See Needham et al, Payroll tax, jobless benefits land on weekend agenda, The Hill (Feb. 9, 2012).

Number of weeks:  The Republicans want to limit assistance to 59 weeks, incredibly stingy when many Americans are still jobless from the Great Recession.  The Dems offered a cut to 93 weeks, but the GOP wants to cut the unemployed much more than that so they said no deal.

Pay-fors:  The Democrats offered a surcharge on millionaires.  The GOP  wants federal workers to face more job cuts and  a third year of pay freezes.  Not hard to see which of those two proposals makes the most sense and is the most humance, but the GOP hasn't been into being humane for quite a while now.

Whose to blame:  Dave Camp knows that the GOP's obstructionism was noticed last fall, so he wants to be sure the Dems get the blame for this round.  He's already badmouthing the Democrats, claiming that they are "dragging their feet".   One wonders how one side can drag feet when the other side is not willing to negotiate on anything that doesn't give them 95% of what they want.  The GOP, meanwhile, treats the Dems' bargaining positions as a "joke"--as though nobody on the right can imagine ever deciding to tax millionaires more than their currently very low rates.  See David Dayen, Payroll tax cut committee on brink of failure, FireDogLake (Feb. 7, 2012).

Payroll tax cut extension:  Boehner has made noises to suggest he doesn't want the House Republicans to cut their noses to spite their faces like they did the last time the payroll tax cut came up.  But at least some in the GOP don't want to extend the payroll tax cut, because they think that will make it look like Obama is an effective President.  Id.  Maybe those Congresspeople should start thinking more about the wellbeing of the Americans who are their constituents and less about whether their party will win the presidency in this year's election.  Simon Johnson's Baseline Scenario essay on the issue of mean-spiritedness is worth reading (hat tip: Mark Thoma's Economist's Blog):

In negotiations currently under way, House Republicans propose to cut back dramatically on these [unemployment] benefits, asserting that this will push people back to work and speed the recovery. Does this make sense, or is it bad economics, as well as being mean-spirited? ...

Why would anyone now seek to punish these people when they seek work but cannot get it? ... Extended unemployment benefit provides on average about $300 a week – ...only about 70 percent of the poverty level for a family of four. If you strip even this money from people who remain out of work through no fault of their own, you will push more individuals and families onto the streets and into shelters. The cost of providing those fall-back services is very high – and much higher than providing unemployment benefits.

How does it help any economic recovery when the people who lose jobs cannot even afford to buy basic goods and services – enough to keep their family afloat? ...

Finance moves transportation bill--revenue sources at issue

Senate Finance committee approved on a 17-6 vote the transportation financing proposal (13 Dems and 5 GOP voting yes; the GOP were Snowe, Crapo, Roberts and Thune).

The GOP --Jon Kyl a favorite spokesperson--claimed that the Committee's rush had "lost the opportunity to have a truly bipartisan deal."  See BNA Daily Tax RealTime 020712.  What that means is that the GOP doesn't like the revenue provisions in the bill (surprise).  In particular, they don't like the "black liquor" provisions (see my earlier post about that) and the pension provision.

What's the pension provision?  It is expected to raise about $4.648 billion over ten years. It provides that inherited  IRAs and 401(k)s must pay out (and therefore be taxed) over a 5 year period instead of over the expected life of the beneficiary, unless the beneficiary is the account holder's age, a child with special needs, or past 70 years old.   Those Congressmen interested in protecting fat cat privileges can be expected to boo-hoo over the poor beneficiary who inherits a windfall of cash and, gee, has to pay tax as it gets paid to him over 5 years instead of getting to defer most of it by taking it into acccount over his lifetime.  But taxing that to the beneficiary up front is clearly the right answer. The beneficiary did  nothing to earn it.  It is funds that have been accumulating over time in the IRa without tax.  If beneficiaries are allowed to keep it in the IRA and continue the tax-free growth over most of their productive lives as well, they really receive a windfall--millions of tax free accumulation.  See Richard Rubin, Senate Baucus Eyes Inherited IRAs for $4.6 Billion, Bloomberg.com (Feb. 7, 2012).

As the Bloomberg story notes, the intended purpose of IRAs is as a retirement planning tool, not a way for wealthy estate holders to pass even more of the estate to beneficiaries essentially tax free.  Ending that tax bonus makes sense.  Not unexpectedly, estate planners don't like the idea:  one estate planner objected that this deal would be a "non-starter" because "there's too much invested in the whole stretch IRA concept."   In other words, wealthy people like their perks, so the Congress won't have the guts to eliminate a provision that made no sense as a policy provision from the outset!

Senate Finance Committee's Transportation Markup

Baucus announced a committee markup session on Feb. 7 for its $10 billion Highway Investment, Job Creation and Economic Growth Act of 2012.   See Baucus Unveils Chairman's Mark to Fund Highway Bill, Create Infrastructure Jobs, Senate Finance Committee (Feb. 3, 2012).  The bill extends various fuel and transportation taxes through 2015 and ensures sufficient funds in the Highway Trust Fund to pay for an upcoming appropriation of  $109 billion under S. 1813 for highway, transit and safety measures. 

The bill raises revenues through various means. One is further closing of the noose on the "black liquor" loophole under the cellulogic biofuels credit that allowed wood pulp producers to take a tax credit on a decades old byproduct of their industry (and hence clearly wasn't incentivizing new and needed innovation).  That will raise about $2.8 billion over ten years.  Another provision gets at tax scofflaws--passports will be revoked for US taxpayers owing $50,000 or more in(in inflation adjusted dollars) in taxes, raising about $743 million over ten years. The bill also would increase the levy authority of the US from 15% to 100% on tax delinquent Medicare service providers, raising about $841 million over ten years.  Much of the rest of the revenues come from transfers from one fund to another--the gas guzzler tax that raises about $70 million a year would now be dedicated to the Highway Trust Fund rather than going to general funds, and about $3 billion in purportedly excess funds currently in the "leaking underground storage tank" fund will be tranferred to the Highway Trust Fund (and then the rate  to replenish the LUST will be reduced from 0.1cents to 0.066 cents).  

Meanwhile, the House Ways and Means Committee approved, on a partisan 20-17 vote, a surface transportation financing bill, the American Energy and Infrastructure Jobs Financing Act of 2012 (H.R. 3864) that also extends the Highway Trust Fund. But the GOP-dominated committee is out to get mass transit. The financing bill eliminates the Mass Transit Account of the Highway Trust Fund and ends the earmarking of 2.86 cents per gallon on fuel taxes for transit.  Instead, it provides for a one-time transfer from the general fund of $40 billion for mass transit support (but Ways & Means' GOP Chair Dave Camp didn't bother to find where the $40 billion would come from--staffers said it will come from cuts to federal workers' pension benefit funding).  That will impede the development in the US of the kind of mass transit infrastructure that Europe enjoys. According to BNA Daily Tax RealTime (Feb. 3, 2012), Rep. Earl Blumenauer (D-Ore.) noted that the move represents a step backwards in mass transit for this country, but added that "I don't think it will be enacted into law.”  (Ways & Means also rejected a renewal of the Build America Bonds program.)

Payroll Tax Cut -Keystone vote up Saturday at 9 in Senate

Apparently, Senate leaders on Friday ironed out the difficulty between the GOP and the Democratic party.  The GOP got most everything it wanted, and the Dems got just barely more than nothing.  That's the way "negotiating" seems to go in the Congress these days.  The right demands and demands and demands and gets most of it by obfuscating and obstructing. 

This time the Dems were worried about not getting a spending bill.  So while the House passed a spending bill to carry the Federal Government through September 2012, the Senate caved on all the things they'd said they wouldn't cave on--like the ridiculous provision for expedited approval of the Keystone Pipeline.  All to get just a 2-month extension of the payroll tax cut and expanded unemployment benefits--which the GOP knew it could not afford not to pass, no matter what.  And Obama has already flipped on his earlier looks-like-he's-finally-figured-out-how-to-stand-tall position that he would veto any bill that carried the expedited Keystone approval provision.  See Steinhaur & Pear, Senate Agrees to a Two-Month Extension of the Tax Cut, New York Times (Dec. 16, 2011). 

The GOP continues to call the Keystone pipeline project a "job creator", even though it will create no more than 50 permanent jobs, at a considerable environmental cost.  Schumer calls the Keystone provision a "Pyrrhic victory" for the GOP, because he says Obama will not approve it if pushed.  That's not so clear to me.  Schumer also spins the cave-in as a victory for Dems! saying that the GOP won't have the leverage of the need to pass a spending bill when this issue comes back.  See  Rubin et al, U.S. Senate Leaders Agree on Two-Month Payroll Cut , Bloomberg.com (Dec. 16, 2011). 

Again, past experience suggests this may be too rosy an assessment.  There were commentators who thought that surely the Congress would not pass further tax cuts after the 2001 tax cuts resulted in large deficits but instead we got the 2003 bill and the 2004 tax giveaway for corporations bill and many others, with the deficits mounting with each one.  One would have thought that the sunset of the various Bush tax cuts in 2010 would have been a perfect time for the Dems to develop a spine, but they didn't.  And the Dems weren't even able to pass a bill ending the carried interest subsidy for hedge fund managers, in spite of the Great Recession and the need to reign in financial institutions.

The Senate bill will apparently at least not include some of the bad stuff  that was in HR 3630 as passed by the House--it is "scaled back" so it looks like medicare premiums won't rise for seniors, and  the GOP won't win its attempt to end medicare's coverage of outpatient rehabilitative therapy for stroke victims and medicare payments to doctors will not be affected.   Nor will it include the "extensions" of expiring tax provisions like the R&D credit or the active financing exception for the financial  industries' deferral of its offshoreprofits.  Id.

The Senate bill will apparently be paid for by raising the guarantee fees for Freddie and Fannie, something that was included in HR 3630.  Id.  Vote is to take place at 9 am Saturday.

Payroll Tax Extension Passes

The House voted 234 to 193 to pass the GOP-written H.R. 3630, including a payroll extension alongside significant curtailing of EPA regulatory authority, expedited approval of the controversial Keystone XL pipeline project, federal pay freezes, privatization of national flood insurance program, broadband spectrum sales, medicare premium increases for everyone making $80,000 or more, doctor-owned hospital expansions (leading to more unnecessary and expensive testing and procedures), drug-testing and means-testing for receipt of benefits under the unemployment compensation insurance program  (because some 2600 millionaires got about $8,000 apiece in 2010 through the insurance program when they lost their jobs) along with curtailment of the time period for those benefits even in the midst of a still dampened growth economy, and other "ideological candy" (using Senator Reid's term for the Republican agenda encapsulated in the bill).

Now it is on to the Senate, where Reid says there will be substantial amendments.  Actually, they should take out everything and start over with a clean bill for extension of unemployment compensation and the payroll tax cut, funded by a millionaire's surtax and an increase in the capital gains tax rate (transitioning towards complete elimination of the preference).  There's not much that's worth retaining in the House version.

GOP's payroll tax cut bill (with a lot of other stuff) up for vote on Tuesday

[edited 2 pm 12/13 to provide additional links to news coverage of some of the changes]

Congress has been playing politics as usual over the few policies that are on the table that have a real chance of assisting, to some degree, the plight of ordinary Americans and perhaps even the slow recovery that is still trying to gain steam--extension of the reduction in payroll taxes (from 6.2% to 4.2%) and extension of unemployment compensation.

The Republicans have refused to pay for these common sense tax reductions for ordinary Americans with a similarly common sense tax increase on the wealthiest Americans who have continued to capture all the productivity gains in the economyt.  Republicans in the House think that these kinds of provisions should be offset by more goodies for the "uberclass"--at least as evidenced by the H.R. 3630, the bill introduced by Dave Camp (R-MI) and to be voted on today at about 4:30 pm. 

• It would restructure unemployment compensation in ways that add hurdles and make it less likely that unemployed Americans will qualify--providing more state flexibility and experimentation (including paying employers to cover part of cost of wages exceeding the recipient's prior benefit level), permitting demeaning drug testing of all unemployment compensation recipients (section 2127), and requiring a high school diploma or participation in state "reemployment services" for which recipients may be charged up to $5 weekly out of their unemployment compensation.  It would severely curtail the total number of weeks for which federal unemployment assistance is available--moving to a 59-week limit from a 99-week limit.  Methinks I see Scrooge here.....
• It will interfere with the Environmental Protection Agency's ability to regulate, letting corporations continue to harm the environment at the expense of ordinary Americans.   See Subtitle B.  Section 1102(b) lists rules that are "stayed" by the legislation and provides that no new rules can have an effective date earlier than 5 years out and requires consideration of various factors in determining that date.  Further, it requires adoption of the laxer 2000 definitions for certain key terms and the imposition of the "least burdensome" among potential regulatory alternatives.  This is a key cave-in to corporate polluters. 
• It will expedite the KeystoneXL pipeline by requiring a permit to be issued within 60 days unless within that time the President determines that the pipeline will not serve the national interest (in which case within 15 days the President must provide various committees and members of Congress a report justifying that conclusion from various perspectives).  It indicates that the environmental impact statement from August will be treated as satisfactory for environmental and historical preservation purposes and shall not have to be supplemented if there are modifications to the plan  and no further federal environmental review shall be allowed.  This is a clearly ideologically driven provision, failing to give due regard to the potential longterm environmental impact on drinking water aquifers or historical preservation impact. 
• It would provide yet another tax reduction for US corporations that have paid less and less taxes over the last decade, with a renewal of the ill-advised 100% expensing provision in section 168(k)(5) (along with the alternative of accelerating AMT credits)
• it makes further changes to medicare such as applying a cap to hospital outpatient therapy services and reversing part of the Health Reform Act passed earlier, by permitting new doctor-owned hospitals and permitting existing ones to expand, even though it has been shown that such hospitals spend more on testing and procedures (and profit more from them).  See, e.g., Pear, G.O.P. Bill Would Benefit Doctor Owned Hospitals, New York Times at A24, Dec. 13, 2011.
• it would continue funding for the "healthy marriage and responsible fatherhood" initiative, see 42 U.S.C. section 603(a)(2)  (the cynic in me suspects that these funds primarily go to programs supported by religious institutions and that they proselytize more than they teach reasonable relationship skills)
• it includes an extensive section remaking flood insurance provisions, including, in section 3005, lifting the cap for premium increases for flood insurance from 10% to 20% (an apparent boon to insurers), and another section prohibiting the administration from "disregarding" any levee or floodwall, even if it is not accredited.  The goal, made clear in section 3009, is privatization of the national flood insurance program.
• It includes extensive broadband spectrum auction provisions in Title IV, Subtitle A, reallocating spectrum from federal to nonfederal use.  These provisions, among many detailed ones, e.g., permit private administrators of state public safety networks to use the public spectrum for private purposes as well as the public safety  purpose and prevent states from denying requests for modifications of existing wireless towers that do not substantially change the physical dimensions thereof.
• It increases the guarantee fees charged by Fannie Mae and Freddie Mac.
• It requires a social security number for the refundable child credit
• It provides in section 5895 a 100% tax on "excess unemployment benefits" that go to millionaires (unemployment compensation is reduced proportionately as the adjusted gross income increases from $750,000 to $1 million)--The Times today has an article on the bill and notes that the number of millionaires receiving unemployment compensation is very small, but that their participation is predicated on the fact that the unemployment compensation program is a type of insurance into which payments are made to cover payouts.  Means testing such insurance programs is in sync with the right-wing goal of means-testing as a prelude to privatizing and/or eliminating all federally administered social welfare insurance programs, such as medicare and Social Security (and, see above, national flood insurance).
• It increases pension contributions from longterm federal workers by .5% a year for 2012-2014 and for those "secure annuity employees" with less than five years of service, by more than 10% a year and using 5 year average pay rather than 3 year average pay, sets annuity amounts, and ends the annuity supplement for post-2012 retirees.
• it extends the general freeze on federal pay for another year
• It increases the premiums for Medicare Part B and Part D for those making $80,000 or more (for those making $200,000 or more, the applicable percentage is 90%)--this again appears to move these national social welfare insurance programs towards more means-testing that will facilitate privatization or eventual elimination. 
• It sets up a number of procedural hurdles in the Senate, which is already hogtied by the ease with which a minority of its members can filibuster and thus stop legislation that is supported by a solid majority of its members.  For examples,
  • it requires a 2/3 vote in the Senate to amend the dates for section 601(c) of the 2010 Tax Relief Act--that's the temporary employee payroll tax cut;
  • it provides that a point of order by any Senator against an emergency designation in a bill eliminates that designation and makes it impossible to bring the designation through a floor amendment unless there is a supermajority 3/5 vote in favor of doing so (limiting debate to 1 hour)--thus one right-wing Senator intent on obstructionism can make it very unlikely that an important provision can pass by preventing even reasonable debate about the importance of the provision!

The GOP, of course, touts its bill as creating jobs.   While the Keystone pipeline may create some short-term jobs (the New YorkTimes reports estimates from Transcanada itself  and the State Department of only about 6500 temporary construction jobs  and maybe 50 permanent new jobs--see Keystone Claptrap, Editorial, New York Times at A34, Dec. 13, 2011), the potential negative impact on aquifers could be life-threatening.  Most of the other provisions are Scrooge-like additions of hurdles and caps on social welfare provisions or attempts to roll back the social welfare insurance provisions into means-tested ones that will be even more susceptible to the derogatory and inflamatory class-action warfare that the right has increasingly unleashed on anything that doesn't give a break to the wealthy and corporate clients of the all-powerful Washington lobbies. 

On lobbies, just read the New York Times article about the wealth that online educators are getting from state and federal taxpayer dollars for delivering no or sub-standard education, and the amount of taxpayer money being spent on lobbying to ensure the continuous flow of that wealth.  See Saul, Profits and Problems at Online Charter Schools, New York Times, Dec. 12, 2011.  It's obvious that the corporatist agenda sees no problem with siphoning off taxpayer dollars for private benefit with little public good created, but complains mightily about any siphoning off of exorbitant corporate profits--that tend to go to wasteful excess managerial compensation or portfolio enhancement--for taxes intended for public benefit.

The inclusion of the Keystone and other right-wing-rhetoric-driven items in a bill to provide the payroll tax cut and a limited unemployment extension (with hurdles) demonstrates the absurd level of ideological partisanship engaged in by the House Republicans.  Senate Majority Leader Reid characterized the bill as loaded with "ideological candy" that the Senate would reject.  Sloan & Rubin, House to Vote on Payroll Bill as senate Eyes Tax Sweeteners, Bloomberg.com (Dec. 13, 2011).    Of course, most of the sweeteners that Reid proposes adding are components of the right-wing corporate-friendly agenda--like the R&D credit that rewards what companies do anyway; the active financing exception for big banks, insurers and other financial institutions that lets them defer taxation on their financing income earned overseas; and accelerated depreciation for restaurants and motorsports tracks that provide special tax subsidies to particular industries!

Should reinsurance using foreign affiliates be deductible to US corporations?

Foreign-owned US insurance companies frequently reinsure through their foreign affiliates and then claim a deduction under section 832(b)(4)(A) for the reinsurance premium paid to the affiliate to reduce the US tax liability of the US company.

Rep. Richard Neal (D-Ma) introduced a bill on October 12 that has been referred to the House Ways & Means Committee, where it now languishes unattended by the Republican chair, David Camp of Michigan.  H.R. 3157 amends the Internal Revenue Code to create a new section 849, which disallows the deduction for certain reinsurance premiums and related amounts paid to non-taxed foreign affiliates, defined as members of a controlled group, with 50% rather than the usual 80% used to define a control relationship. 

The President's FY 2012 Budget included a similar proposal for disallowing some affiliated reinsurance premium amounts.  Earlier iterations of a disallowance bill were introduced in 2000 and 2001.  A bill with somewhat broader disallowance provisions, H.R. 3424, was introduced by Representative Neal in 2010 and did receive a hearing at Ways & Means that year.  The Joint Committee on Taxation issued a report on reinsurance with offshore affiliates prior to the hearings on H.R. 3424 in 2010, titled "Present Law And Analysis Relating To The Tax Treatment Of Reinsurance Transactions Between Affiliated Entities", JCX-35-10 (including a description of HR 3424 and the President's FY 2012 proposal, beginning at page 22).  As noted in the JCT report:

When these assets are shifted from a U.S. insurer to an offshore reinsurer with a foreign parent, these earnings may no longer be subject to U.S. income taxation. If the U.S. insurer and the offshore reinsurer are affiliated, the profits attributable to the reinsured risks remain within the affiliated group, although the earnings on the assets may no longer be subject to U.S.income taxation. (footnotes deleted)

If the offshore affiliate is in a low or no-tax jurisdiction, the result may be almost no tax  on the reinsurance premium amounts (other than the applicable excise tax, if not eliminated by treaty).  Not surprisingly, the trend over the last few decades has been towards reinsurance arrangements with affiliates:  between 2001 and 2008, ceding of insurance of offshore affiliates grew by more than 108%, while ceding of insurance to nonaffiliated offshore entities grew by only 16%.  See JCT report at 11, n.21 and accompanying text.  Bermuda, a jurisdiction with no corporate tax and one especially friendly to insurers, is the most frequent jurisdiction for these affiliated reinsurance transactions.  The JCT report notes that the lack of a market price for affiliate transactions provides an incentive to shift income between affiliates at off-market prices.

Also not surprisingly, lobbyists for these foreign-owned insurance companies have fiercely fought the possibility that this handy tax-reduction technique might be legislated away.  The "Coalition for Competitive Insurance Rates" put out a press release on November 29, praising Republican lawmakers from Florida who had joined in a letter, available here, opposing the bill. The claim is that eliminating the tax avoidance technique will be a "punitive tax on reinsurance" that would "lead to higher premium costs" because it would "impose a tariff on international reinsurance firms"  and that this would amount to "punitive and anti-competitive taxes." 

The Florida Republican representatives note that 90% of Florida's insurance is reinsured offshore.  The fact that such affiliate reinsurance is widespread does not mean that it is a better means of risk management.  The regular amount of US taxes that would be charged on those US affiliates'' income is not a "punitive" tax: it is merely the amount of tax that those firms would pay if they do not use affiliates as reinsurers. 

Note that moving the insurance to an affiliate doesn't achieve the risk-shifting that reinsurance is designed to accomplish--it retains the risk within the controlled group.  (The IRS litigated a number of captive insurance cases under the theory that a controlled group constitutes a single economic "family" and hence cannot achieve risk-shift or risk-diversification.  Although courts were hesitant to adopt this theory, it does seem to capture the essence of the affiliate reinsurance problem.  The JCT report noted above also suggests the theory as a means of addressing the tax avoidance technique.)  Although lobbyists claim that reinsurance with affiliates is a valuable "risk-management" tool and that reinsurance with affiliates accomplishes the same risk management as reinsurance with non-affiliated parties, it seems that reinsurance within a controlled group does not provide the same risk protection as nonaffiliated reinsurance.   A catastrophic event covered by the reinsurer could result in liquidation of its assets, including its interest in the US affiliate.

Insurers using offshore affiliate reinsurers claim that there are nonetheless real non-tax advantages: (i) reducing adverse selection/moral hazard from information asymetry between insurer and reinsurer and (ii) "allowing risk and capital to be moved more easily ... to respond to changing market conditions."  See Cragg, Cummins & Zhou, The Impact of a U.S. Tax on Offshore Reinsurance Market, The Brattle Group , May 1, 2009 (research funded by the Coalition for Competitive Insurance Rates projecting a 2.1 - 2.4% rise in insurance costs upon elimination of the affiliate reinsurance scheme) (also cited in the JCT report for these claims). 

These so-called advantages of affiliate reinsurance appear spurious.  First, while the interests of the insurer and its affiliated reinsurer are aligned (so that the insurer will have less incentive to select the worse policies for that affiliated reinsurer or to be lax in its policy making for policies it will reinsure with its affiliate), the absence of real risk-shifting would make that alignment of little real value.  Alternatively, as the JCT report notes, the aligning of interests may mean that the premium paid to affiliated reinsurers should be lower than the third-party premium, meaning that much of the affiliated reinsurance market may result in understatement of the US company's income. Furthermore, nonaffiliated reinsurers may well undertake more comprehensive due diligence connected with taking on real reinsurance risk, and thus in fact contribute to a better risk-balanced insurance market.  

Second, the claim that reinsuring with offshore affiliates allows for easier movement of capital in response to market conditions is of little real benefit to the U.S. insurance market.  The foreign parent that reinsures the U.S. affiliate has received an advantage from having that reinsurance premium as its capital while at the same time reducing its US affiliate's tax liability, but that merely substantiates the complaint of domestic companies that the ability to reinsure with a foreign affiliate gives an unjust  competitive advantage--the double whammy of the tax deduction to the US affiliate and the capital infusion to the foreign company.  Further, as we saw in the 2008 financial crisis,  globalization of interactions among financial companies can have deeply negative systemic effects. 

On balance, eliminating the deduction for affiliate reinsurance premiums is not the creation of an "anti-competitive tax" whenthe insurer is using the affiliate to shift income offshore and avoid paying U.S. corporate taxes.   In fact, the ability of some insurance companies to offshore preimums is itself anti-competitive, since it puts wholly domestic U.S. insurance companies at a disadvantage.