Fact-Checking the Tax Provisions in the 'Pledge to America'

FactCheck.org has published a report on the Republican Party’s Pledge to America and has criticized a number of "dubious factual claims." Check out their commentary on a number of tax provisions below, courtesy of the Tax Prof.

Pledge, page 14: Unless action is taken, a $3.8 trillion tax hike will go into effect on January 1, 2011 that will unravel these policies. A family of four with a household income of $50,000 a year will have to pay $2,900 more in taxes in 2011.

Fact: True, but misleading. What the Pledge fails to note is that Obama and Democratic leaders in Congress have consistently promised to extend the Bush tax cuts for all families making less than $250,000 a year, and singles making less than $200,000. It’s true that hasn’t happened yet, but the reason is that several House and Senate Democrats are agitating to extend the cuts for everybody, even those with the highest incomes.

Congress might yet fail to extend most or all the cuts before they are scheduled to expire next year. As we reported in a Sept. 3 Ask FactCheck itemon this issue, there’s always a possibility that Congress will grind to a halt in a stalemate. And sure enough, on Sept. 23 Senate Democrats announced they would put off any vote on extending the cuts until after the election. A spokesman for Democratic leader Harry Reid of Nevada said, "Democrats believe we must permanently extend tax cuts for the middle-class before they expire at the end of the year, and we will."

Pledge, page 14: [Obama] also wants to raise taxes on roughly half of small business income in America.

Fact: This is an exaggeration. Republicans are equating "net positive business income" reported on individual returns with "small business income," which isn’t correct. They rely on a report from the nonpartisan staff of the Joint Committee on Taxation (p. 12), which estimated that about 3% of taxpayers who have any business income on their personal returns would see a tax increase under Obama’s proposal, and that those 750,000 taxpayers account for about half of all the business income reported.

But some of that income is from big businesses raking in tens of millions of dollars a year. The JCT stated quite clearly that "These figures for net positive business income do not imply that all of the income is from entities that might be considered ’small.’" Some in fact are quite large, and those big businesses account for a good chunk of that income.

The JCT said: "For example, in 2005, 12,862 S corporations and 6,658 partnerships had receipts of more than $50 million."

Republicans do have a point here. Many small businesses and some large fraction of small-business income will be adversely impacted by raising the top rate on individual taxpayers.

The fact is, though, that the JCT couldn’t estimate how much of the total business income was accounted for by "small" businesses, or how many of the 750,000 individuals affected own "small" busineses. What we do know is that a good deal less than half the small business income, and something less than three percent of small business owners, would be subject to higher taxes.

Pledge, page 28: Roughly 16,500 IRS auditors, agents, and other employees may be needed to collect the hundreds of billions of dollars in new taxes levied on the American people by the new health care law.

Fact: This is simply not true. As we reported last March, this figure "stems from a partisan analysis based on guesswork and false assumptions, and compounded by outright misrepresentation." For an eye-opening account of how Republican staff members of the House Ways and Means committee came up with this inflated figure, see our Ask FactCheck item posted March 30. Most of what the IRS will do under the law is hand out tax credits, not collect penalties.

How can we pay for the tax extenders?

Last December, the House passed a measure to keep the tax breaks (such as the deduction for qualified tuition and related expenses or the deduction of state and local general sales taxes and 47 others) beyond their 2009 expiration date, but the Senate didn’t act on the bill until March of 2010. These tax provisions are called extenders because they are temporary and must be extended to remain in the tax code. According to Don’tMessWithTaxes, there were conflicting views about how to pay for the tax extenders so it created some delay while each side hashed it out. The goal for the Senators and Representatives is having the extenders done by the end of May. The official combined bill is now entitled, the Promoting American Jobs and Closing Tax Loopholes Act. The bill will include business and individual tax extenders, money for unemployment benefits, welfare funding to states, and Build America Bonds. It is expected to cost almost $200 billion.

How will we pay for it? Don’tMessWithTaxes’ Kay Bell explains it here:

About $50 billion of that cost will be offset by other taxes or program cuts. Here's a quick look at some of the most likely ways to pay.

• Carried interest will cost recipients more: negotiators are nearing an agreement to phase in higher taxes on carried interest, a type of compensation paid to managing partners of some partnerships, at the highest individual income tax rate. That's currently 35 percent, scheduled to increase to 39.6 percent in 2011. Now such remuneration is treated as capital gains, meaning it's taxed at 15 percent.

• Ending foreign tax credit abuses: Tax writers are said to be looking at ways to stop "creative use of the foreign tax credit."

Deloitte Tax LLP reports that Congress is examining a proposal in Obama's fiscal year 2011
budget that seeks to prevent the separation of foreign taxes from associated income.

According to a Treasury Department explanation, the proposal would allow a credit for
foreign taxes "when and to the extent the associated foreign income is subject to U.S. tax in the hands of the taxpayer claiming the credit."

The change would take effect in 2011 and Joint Committee on Taxation numbers crunchers
estimate it would raise an estimated $9.5 billion over 10 years.

• Other ways to pay for the massive bill might include allowing companies to delay pension funding requirements, imposing payroll taxes on service sector S corporations and barring treaty shopping by multinational companies.

A bank tax, however, is looking less likely as part of the extenders bill.

The only sure thing is that we can expect more -- and more esoteric -- payment provisions to be revealed as full consideration of the bill nears.

Timeline of Tax Provisions in the House Health Care Bill

As many of you have probably heard, yesterday the House of Representatives passed President Obama’s health care reform package in a 219 – 212 majority vote. It now heads to the Senate where it is widely expected to pass after the required 20 hours of debate time.

The complicated legislation includes dozens of tax provisions; some that will take effect immediately while others will not take effect until up to eight years from now. Listed below are all of the tax law changes included in the bill, organized by when they will go into effect courtesy of The Tax Foundation.

Retroactive provisions:

• Exclusion for assistance provided to participants in State student loan repayment programs for certain health professionals (retroactive to January 1, 2009)
• Qualifying therapeutic discovery project credit (retroactive to January 1, 2009) – provision expires at end of 2010
• Modification of section 833 treatment of certain health organizations (retroactive to January 1, 2010)
• Make the adoption credit refundable; increase qualifying expenses threshold, and extend the adoption credit through 2011 (retroactive to January 1, 2010)
• Small Business Tax Credit for certain small businesses (those meeting certain criteria) providing health insurance to employees (retroactive to January 1, 2010). In 2013, restricted only to insurance purchased through an exchange and only available for two consecutive years
• Exclusion of unprocessed fuels from the cellulosic biofuel producer credit (retroactive to January 1, 2010)

Provisions that will go into effect on the date bill is signed into law:

• Additional requirements for section 501(c)(3) hospitals
• Study and report of effect on veterans’ health care
• Provide income exclusion for specified Indian tribe health benefits
• Codify economic substance doctrine and impose penalties for underpayments
• Provision specifying that subsidies or tax credits received through health care reform will not affect individual's qualifications for other federal programs
• Tax Exemption for Certain Member-Run Health Insurance Issuers
• Tax Exemption for Entities Established Pursuant to Transitional Reinsurance Program for Individual Market in Each State
• Rules pertaining to how the IRS is involved in income-verification and individual status for the purposes of participation in the exchanges and subsidies received

Other provisions going into effect before the end of 2010

• July 1, 2010: Impose 10% excise tax on indoor tanning services

Continue reading at Tax Foundation.org…