Feb
 
6

Reid, Boehner spar over payroll tax

From – The Hill

Senate Democratic leaders said Friday they were crafting a backup plan to extend the payroll tax cut for an entire year, in case the conference committee tasked with coming up with a deal falls short.

In a conference call, Senate Majority Leader Harry Reid accused congressional Republicans of gumming up the works on the payroll tax by trying to tack unrelated issues on to an extension.

“I have great confidence in our conferees, but I’m not going to stand by when the GOP slows the process,” the Nevada Democrat said.

Reid’s comments come as Democrats and Republicans on the conference committee, which includes 20 lawmakers, are widely seen to still be far apart on a variety of issues — including, perhaps most importantly, how to pay for whatever package they develop.

The statements also drew a quick rebuke from House Speaker John Boehner, with the Ohio Republican noting that the Senate has yet to pass its own full-year extension of the tax break, which would affect some 160 million Americans.

“It would seem those energies could be better directed toward the conference negotiations themselves, in which Senate Democrats have not actually presented a full plan,” Boehner said in a Friday statement. “You can’t have a ‘backup plan’ if you haven’t offered anything to back up.”

The House passed a yearlong extension in December, but it incorporated items that Democrats oppose and that Reid was presumably referencing with his Friday comments, including a delay of industrial boiler regulations and certain reforms to the federal unemployment insurance system.

GOP conferees would like to see some of those items tucked into a package extending the payroll tax cut for a full year.

The Senate passed a two-month extension of the tax break after being unable to pass a full year of the cut. House Republicans, after taking a political pounding, eventually accepted that idea, leading to the current conference committee.

In addition to the payroll tax cut, unemployment benefits for millions of Americans will also expire if lawmakers don’t act by Feb. 29, and doctors treating Medicare patients would see a 27 percent cut in their reimbursement rate.

For the most part, conferees have said they want to see those three items extended for a full year.

But the conference committee, which will meet again on Tuesday, has also spent much of its time discussing issues in other areas, such as the Keystone XL oil sands pipeline and expired tax provisions.

The two sides also have separate visions on how to pay for any extension, as illustrated by the Friday statements from Reid and Boehner.

Reid reiterated that a surtax on millionaires could be used to pay for the tax relief, an idea embraced by other Democrats but that has failed to make it out of the Senate on multiple occasions.

Boehner, meanwhile, noted that a federal pay freeze, one of the GOP’s preferred offsets, easily passed the House this week. FOr more information please see, Reid, Boehner spar over payroll tax on The Hill.

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Feb
 
3

Jobless rate at 3-year low as payrolls surge

From – Reuters

The United States created jobs at the fastest pace in nine months in January and the unemployment rate unexpectedly dropped to a near three-year low, giving a boost to President Barack Obama.

Nonfarm payrolls jumped 243,000, the Labor Department said on Friday, as factory jobs grew by the most in a year. The jobless rate fell to 8.3 percent – the lowest since February 2009 – from 8.5 percent in December.

The gain in employment was the largest since April and it far outstripped the 150,000 predicted in a Reuters poll of economists. It hinted at underlying economic strength and lessened chances of further stimulus from the Federal Reserve.

“More pistons in the economic engine have begun to fire, pointing to accelerating economic growth. One of the happiest persons reading this job report is President Obama,” said Sung Won Sohn, an economics professor at California State University Channel Islands.

The payroll gains were widespread – from retail to temporary help, and from construction to manufacturing – an indication the recovery was becoming more durable.

A survey of households showed the unemployment rate declined even as new job seekers flooded into the labor force. Economists had expected the jobless rate, which has now fallen 0.8 percentage point since August, to hold steady.

“I think this is a sign that maybe the economy is reaching that holy grail of a self-sustaining economic expansion,” Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh, told Reuters Insider.

The outlook was further brightened by a separate report showing service sector activity quickened last month to a near one-year high. A gauge of service sector employment touched a six-year high.

The fairly upbeat data buoyed stocks on Wall Street, with the tech-heavy Nasdaq Composite index hitting an 11-year high. The Dow Jones industrial average rose to a near four year high, while the Standard & Poor’s index extended its 2012 advance to about 7 percent.

U.S. Treasury debt prices tumbled as investors dialed back expectations on Fed easing. The dollar was little changed against a basket of currencies after rising earlier in the session.

The employment report contrasted with a fairly glum assessment of the economy offered by the Fed last week.

Officials at the central bank have been debating whether to buy more bonds – a program dubbed QE3 – to drive interest rates lower. It also raised doubts about the Fed’s expectation that it could hold interest rates near zero at least through late 2014.

“At the very least this scales back QE3 (quantitative easing) odds. The surprisingly persistent decline in the unemployment rate also calls into question how firmly wedded the Fed is to the late-2014 rate guidance,” said Michael Feroli, an economist at JPMorgan in New York.

Interest rate futures indicated that at least some traders were beginning to lay bets the Fed could move interest rates up in early 2014.

Fed fund futures were pricing in a 38 percent chance of a January 2014 rate hike, up from 29 percent before the report, and the first better than even chance of a rate hike was in April 2014, according to CME Group, where the contracts are traded.

However, economists at most leading Wall Street firms still believe the Fed will undertake another bond-buying program, according to a Reuters poll.

DON’T MUCK IT UP

Obama welcomed the strong jobs report and urged Congress to extend a payroll tax cut and benefits for long-term unemployed, which expire at the end of this month.

“Now is not is not the time for self-inflicted wounds to our economy. I want to send a clear message for Congress. Do not slow down the recovery that we are on, don’t muck it up,” he said at a firehouse in Arlington, Virginia.

Republicans acknowledged the improvement in the labor market, but said the jobless rate was still too high.

“Our economy still isn’t creating jobs the way it should be and that’s why we need a new approach,” said House Speaker John Boehner.

While employment growth has quickened there are no jobs for three out of every four unemployed people and 23.8 million Americans are either out of work or underemployed. The level of employment is still 5.57 million from its pre-recession level.

But steady progress is being made. The economy added 60,000 more jobs in November and December than previously reported.

In addition, average hourly earnings rose four cents, which should help to support spending. The report suggested that expectations of a slowdown in U.S. economic growth in the first quarter were not yet impacting on companies’ hiring decisions.

Employment in the private sector surged 257,000 – the largest gain since April. Government payrolls fell 14,000, the least since September.

U.S. economic growth accelerated to a 2.8 percent annual rate in the final three months of 2011, but it was widely expected to slow as businesses ease back on efforts to rebuild inventories and exports slip amid a likely recession in Europe.

Some economists cautioned that January’s jobs figures could overstate the pulse of the recovery, citing still lackluster consumer confidence, income and spending growth.

While some said the jobless rate could drop below 8 percent by year end, others warned it would likely move up in the near-term as people who had given up the search for a job re-enter the workforce.

“For this to mark an upturn in the labor market, then businesses will have to continue to hire on this scale throughout the winter,” said Kathy Bostjancic, director of macroeconomic analysis at the Conference Board in New York.

CAUTIOUS OPTIMISM

The unemployment rate has now declined for five straight months, although part of the drop reflects discouraged Americans giving up the hunt for work.

A broad measure of unemployment, which includes people who want to work but have stopped looking and those working only part time but who want more work, slipped to a near three-year low of 15.1 percent in January from 15.2 percent in December.

Revisions to the payrolls figures showed 180,000 more jobs were created last year than previously believed.

Mild winter weather boosted employment last month in construction, which added 21,000 jobs after a 31,000 increase in December. Manufacturing payrolls surged 50,000, the largest gain in a year, after rising 32,000 the prior month.

Overall, the goods-producing sector added 81,000 jobs last month, the most since January 2006.

Transportation and warehousing employment increased 13,100 and courier jobs only fell 1,500. Last month, the Labor Department reported a large increase in courier jobs in December, but revisions showed they actually declined.

Retail employment rose 10,500 after gaining 6,200 in December. Temporary help services jumped 20,100 after rising 8,300, a potentially good sign for future permanent hiring. For more information please see Jobless rate at 3-year as payrolls surge on Reuters.

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Jan
 
24

IRS Issues Private Letter Ruling on Breakfast Cereals

From – Accounting Today


The Internal Revenue Service has provided cereal maker Ralcorp Holdings with a private letter ruling related to the tax implications of the separation of its Post cereals business.

Ralcorp said Friday that the IRS ruling confirmed the tax-free nature of the distribution of at least 80 percent of the outstanding shares of common stock of Post Holdings, Inc. to Ralcorp shareholders and related transactions.

Based on certain facts, assumptions, representations and undertakings set forth in the ruling, the ruling concludes that for U.S. federal income tax purposes, the separation of the Post cereals business will qualify as a tax-free distribution to Ralcorp and to the holders of common shares of Ralcorp (except in respect of cash received in lieu of fractional shares).

Ralcorp also said that subject to the consummation of the separation, the common stock of Post Holdings, Inc. has been approved for listing on the New York Stock Exchange under the symbol “POST.”

In connection with the separation, Ralcorp anticipates receiving approximately $900 million from the Post spin-off. The Ralcorp board intends to use the proceeds to reduce its debt, aggressively pursue private-brand acquisitions and pursue additional share repurchases under the company’s remaining share repurchase authorization of approximately five million shares. In addition, Ralcorp said it expects to retain up to 20 percent of the outstanding shares of Post.

Ralcorp had announced last week that its board approved the separation of Post, subject to the satisfaction or waiver of certain conditions including, but not limited to, the Registration Statement on Form 10 (the “Form 10″) for Post common stock being cleared by the Securities and Exchange Commission, the receipt of an opinion of tax counsel, the completion of related financing transactions, and the other conditions summarized in the preliminary form of information statement included in Amendment No. 3 to the Form 10 filed by Post with the SEC. The transaction does not require approval from Ralcorp shareholders.

Amendment No. 3 to the Form 10 includes as Exhibit 2.1, a preliminary form of the Separation and Distribution Agreement, including the closing conditions. The filings are available at www.sec.gov. For more information please see, IRS Issues Private Letter Ruling on Breakfast Cereals on Accounting Today.

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Jan
 
24

FHFA report: Mortgage principal reductions would cost $100 billion

From – The Hill


Reducing mortgage principal on government-owned mortgages would cost $100 billion, making it an unlikely option, a federal housing regulator said Monday.

In response to a request from lawmakers, Federal Housing Finance Agency (FHFA) acting director Edward DeMarco released an analysis by his agency saying that the costs would come on top of continued losses of mortgage giants Freddie Mac and Fannie Mae, according to three separate staff analyses prepared over the past year.

“Given that any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action,” DeMarco said in the letter sent to House Democrats.

Reps. Elijah Cummings, ranking member of the House Oversight and Government Reform Committee, and panel member John Tierney (Mass.) spearheaded a letter sent Wednesday to Chairman Darrell Issa (R-Calif.) asking him to issue a subpoena for the FHFA analysis on the viability of principal reductions.

The FHFA analysis showed that Fannie and Freddie, as of June 30, had nearly 3 million mortgages with outstanding balances estimated to be greater than the value of the home, and that principal forgiveness for all the loans would require funding of almost $100 billion.

“FHFA remains committed to assisting homeowners to stay in their homes and will continue to update and improve our analysis,” DeMarco wrote.

“FHFA would reconsider its conclusions if other funds become available and if the availability of other funds is at a level that would change the analysis to indicate potential savings to the taxpayers.”

Another factor to consider is that nearly 80 percent of those underwater borrowers were current on their mortgages as of that time and those with upward of market loan-to-value ratios above 115 percent, 74 percent are current.

As of June 2011, only 9.9 percent have negative equity in their homes while about 35.5 percent of private-label mortgages were underwater, according to the report.

Overall, forebearance offers greater cash flows to the investor than forgiveness, while achieving marginally lower losses for the taxpayer than forgiveness, “although both forgiveness and forbearance reduce the borrower’s payment to the same affordable level,” the report showed.

Fannie and Freddie recently announced they would offer up to 12 months of forbearance to unemployed homeowners.

On the eve of President Obama’s third State of the Union address, lawmakers expect the president to discuss the housing crisis and possibly suggest additional initiatives to help struggling homeowners, although they weren’t aware of specifics.

Rep. Dennis Cardoza (D-Calif.), a harsh critic of the Obama administration’s housing policy, called on the White House on Monday to include in this year’s agenda his mortgage refinancing proposal.

“Simply put, none of the current housing programs that President Obama has instituted have succeeded in stemming the tide of foreclosures still dragging down our country,” Cardoza said.

“People continue to suffer as their communities are devastated by the housing crisis, with no relief in sight,” he said.

“We need bold leadership from the president on this crisis.”

DeMarco said the agency would continue to focus on improving loss mitigation and foreclosure alternatives. Borrowers who remain current on their loan payments can look into the Home Affordable Refinance Program (HARP), which allows all underwater borrowers to refinance into lower interest rate mortgages.

Additionally, there would be associated costs to upgrade technology, provide guidance and training to servicers and change accounting and tracking systems in order to implement a principal forgiveness program, the analysis showed.

“Unless there is an expectation that principal forgiveness will reduce losses, we cannot just the expense of investing in major systems upgrades,” DeMarco said.

For more information please see FHFA report: Mortgage principal reductions would cost $100 billion at The Hill.

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Jan
 
6

Data show IRS is auditing more wealthy taxpayers

From – The Washington Post

WASHINGTON — If you earn less than $200,000 a year, there’s a strong chance you don’t have to worry about an Internal Revenue Service audit. But if you make more than $1 million annually, the odds have been rising that you’ll be hearing from the tax man.

The IRS released figures Thursday showing that 12 percent of millionaire earners were audited last year. That’s up from 8 percent in 2010 and 6 percent in 2009.

The data shows that for those making under $200,000, the rate has stayed steady at around 1 percent in recent years.

IRS officials said the growing audit rate for high earners is aimed at demonstrating that the tax code is being enforced fairly and is unrelated to President Barack Obama’s recent proposals to boost taxes on the rich. The White House and congressional Democrats are expected to continue taking similar populist stances with the approach of this November’s presidential and congressional elections.

Steven Miller, deputy IRS commissioner for services and enforcement, said in an interview that the higher audit rates for the highest earning individuals are designed to “assure that those at the lower end of the spectrum know that those at the higher end of the spectrum are subject to the same rules and enforcement as everyone else.”

“We base our audit decisions on tax issues, nothing else,” said IRS spokeswoman Michelle Eldridge. “We don’t play politics here.”

Four percent of individuals earning $200,000 and up were audited in 2011, up from around 3 percent the previous five years.

The IRS only provided data for three categories of individuals’ income: those earning under $200,000 annually, those making $200,000 and up and those earning $1 million and up.

Overall, the agency says, it audited nearly 1.6 million of 141 million individual returns in 2011, or just over 1 percent. That rate has been growing gradually and is almost double the 0.6 percent audited in 2001, the IRS said.

Only about a quarter of IRS’ audits involve dreaded meetings between taxpayers and agency officials. The rest are carried out using letters.

In 2010 — the most recent year available — more than 8 in 10 individuals audited ended up paying additional taxes.

Altogether, IRS enforcement efforts — including audits, legal action and other tactics — resulted in an extra $55 billion being collected. That’s down almost $3 billion from 2010, which Miller blamed on a falloff in estate taxes and corporations writing off their losses.

That $55 billion was a small part of the $2.3 trillion the agency collected in revenue last year.

The IRS also audited a greater proportion of large corporations than smaller ones, the data shows.

Last year, 1 percent of corporations with assets under $10 million were audited. Among corporations with assets of $250 million and up, 28 percent were audited.

The IRS figures also showed that:

In 2011, the agency garnisheed wages or seized money from bank accounts 3.7 million times, put liens on property 1 million times and seized 776 pieces of property.

Seventy-seven percent of individual returns were filed electronically last year, up from 69 percent in 2010.

Seventy percent of callers to IRS taxpayer information telephone lines got through, slightly less than the 74 percent who reached someone in 2010. Miller attributed that to budget cuts to the agency.

The information IRS officials dispensed over the phone to taxpayers was accurate 93 percent of the time, the same as the previous year.

The IRS website, http://www.irs.gov, was visited 319 million times in 2011, a slight increase.

The data was presented by federal fiscal years, which begin on the previous Oct. 1.

For more information please see IRS says more millionaire earners face audits, rate stable for those earning below $200k at The Washington Post.

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Jan
 
6

Tax issues to watch for when working from home

From – Journal of Accountancy

With unemployment still near the highest rate in decades, it is not surprising to find many people working out of their homes. Now may be a good time to review the criteria for claiming a deduction for the business use of part of a person’s residence.

Your home office must be used in a trade or business activity. You cannot take a deduction if you use your home for a profit-seeking activity that is not a trade or business. For example, if you use part of your home to manage your personal investments, you cannot take a home office deduction.

The home office must be used regularly and exclusively for business. You must regularly use a room or other separately identifiable area of your home only for your business. You do not meet this requirement if you use the area for both business and personal purposes. For example, an attorney who writes legal briefs at the kitchen table cannot claim a home office deduction for the kitchen.

You do not have to meet the exclusive-use test if you use part of your home to store inventory or product samples or as a day care facility.

Your home office must be one of the following:

  • Your principal place of business. Your home office also will qualify as your principal place of business if you use it regularly for administrative activities and you have no other fixed location where you conduct substantial administrative activities; or
  • A place to meet with patients, clients or customers in the normal course of your business. Using your home for occasional meetings and telephone calls is insufficient; or
  • A separate structure not attached to the dwelling unit used for trade or business purposes. The structure does not have to be your principal place of business or a place where you meet patients, clients or customers. For example, John operates a floral shop in town. He grows plants in a greenhouse behind his home and sells them in his shop. He uses the greenhouse exclusively and regularly in his business. Even though it is not his principal place of business, because it is separate from his dwelling, he can deduct the expenses for its use.

If you are an employee, you must use your home office for the convenience of your employer. If the employer does not require the employee to work from home and provides an office or work space elsewhere, a home office is likely to be considered a matter of the employee’s convenience and therefore not deductible.

Even if the taxpayer’s home office meets the above rules, the deduction may be limited. Expenses attributable to business use that you could deduct even if the home were not used for business, such as home mortgage interest and real estate taxes, are fully deductible. Otherwise, home office expenses are deductible only to the extent of gross business income, reduced by other allowable business expenses unrelated to the home; any expenses that are not deductible due to the income limitation may be carried forward.

For more information please see Home Office Deduction at Journal of Accountancy.

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Dec
 
27

Congress Passes Temporary Payroll Tax Cut Extension

From – Journal of Accountancy

The reduced 4.2% Social Security tax rate will remain in effect at least through February.

The Senate and the House of Representatives on Friday both agreed by unanimous consent to extend the reduced rate, and President Barack Obama signed the bill—the Temporary Payroll Tax Cut Continuation Act of 2011 (H.R. 3765)—the same day. The reduced rate had been scheduled to end after Dec. 31.

In the new year, a conference committee of representatives and senators will be appointed to discuss extending the reduced rate for the rest of 2012.

The employee portion of the Social Security tax was reduced from 6.2% of the first $106,800 of wages to  4.2% for 2011 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312. The employer portion remained at 6.2%. Under the law enacted Friday, the 4.2% rate is extended through Feb. 29, 2012.

The act provides special rules for 2012 so that taxpayers with self-employment income and income from employment in excess of $18,350 (one-sixth of the 2012 Social Security wage base of $110,100) do not receive an extra benefit. If a full-year extension of the payroll tax cut is not enacted, taxpayers with income from employment for January and February that exceeds $18,350 will be required to recapture the excess benefit they receive. The recapture provision was included instead of a cap on the amount of employment income because of the compliance difficulties that would cause employers.

Because the extension affects withholding and was enacted only a little over a week before the higher payroll tax was scheduled to go into effect, it is not clear how well employers and payroll companies will be able to handle that change. The IRS on Friday notified employers that they should implement the lower payroll tax rate as soon as possible in 2012, but not later than Jan. 31 (IR-2011-124). The IRS also said that if an employer overwithholds during January, it should make an offsetting adjustment in workers’ pay as soon as possible, but not later than March 31, 2012. The IRS also said that it will issue more guidance on implementing the provisions of the two-month extension, including revised employment tax forms and information for employees who may be subject to the recapture provision.

The act also extends certain unemployment benefits and blocks a cut in Medicare payments to doctors.

Congress’ use of unanimous consent to approve the extension allowed it to send the bill to the president without requiring lawmakers who had left the capital to return to Washington. For more information please visit Congress passes temporary payroll tax cut extension on Journal of Accountancy.

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Dec
 
20

IRS Announces New Voluntary Worker Classification Settlement Program

WASHINGTON – The Internal Revenue Service today launched a new program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers.

This new program will allow employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.

This is part of a larger “Fresh Start” initiative at the IRS to help taxpayers and businesses address their tax responsibilities.

“This settlement program provides certainty and relief to employers in an important area,” said IRS Commissioner Doug Shulman. “This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”

The new Voluntary Classification Settlement Program (VCSP) is designed to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers and the government. Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.

To be eligible, an applicant must:

  • Consistently have treated the workers in the past as nonemployees,
  • Have filed all required Forms 1099 for the workers for the previous three years
  • Not currently be under audit by the IRS
  • Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers

Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

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Dec
 
12

IRS Needs to Do Better Audits of Small Corporations

From AccountingToday

The Internal Revenue Service has been doing a better job of auditing small corporations in recent years, according to a new government report, but potential quality concerns remain.

The report, from the Treasury Inspector General for Tax Administration, reviewed whether IRS examiners followed the appropriate procedures and guidelines when they audited the tax returns of small corporations with assets of less than $10 million.

Many corporations in the United States are considered closely held because they are owned by one shareholder or a closely knit group of shareholders, TIGTA noted. These shareholders typically exercise significant control over managing and directing the day-to-day operations of the corporation, providing them with opportunities to improperly structure transactions that reduce the amount of income taxes owed by the small corporation or its shareholders.

TIGTA found that the IRS has established many key procedures and guidelines for auditing such returns. That may have contributed to the increasing amount of recommended additional taxes generated by the audits.

However, when TIGTA reviewed a nonstatistical sample of 51 closed corporate audits, it found potential quality concerns in 19 of them. For example, IRS examiners did not always document the steps taken to investigate significant differences between the labor costs deducted in the corporate return and the amounts reflected on employment tax returns filed with the IRS.

Many of the quality concerns involved issues between the corporate return and other tax returns that were or should have been filed by the corporation, such as information returns and employment tax returns, or which were related to it, such as the shareholder’s individual tax return).

“Corporations and shareholders that understate their tax liabilities can create an unfair burden on honest taxpayers and diminish the public’s respect for the tax system,” said TIGTA Inspector General J. Russell George in a statement.

TIGTA recommended that the IRS provide additional guidance to first-line managers to improve the feedback provided to field examiners on using the IRS’s automated information systems to enhance the quality of their required filing checks for audits of small corporations.

IRS officials agreed with the recommendation and plan to issue a memorandum to first-line managers concerning the use of automated information systems to enhance required filing checks and address feedback provided to field examiners.

“We believe ensuring compliance with the filing of all related returns is an important audit technique to enhance voluntary compliance and concur with your recommendation,” wrote Faris R. Fink, commissioner of the IRS’s Small Business/Self-Employed Division.

For more information please see IRS Needs to Do Better Audits of Small Corporations at www.accountingtoday.com.

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Dec
 
8

Senate Democrats Offer Smaller Surcharge in Payroll Tax Plan

From Bloomberg news

Democrats in the U.S. Senate will seek another vote on a payroll tax cut for workers this week in an attempt to pressure more Republicans to support an extension into 2012.

Legislation proposed by Senate Democrats yesterday would cut the payroll tax paid by employees to 3.1 percent next year from the current 4.2 percent. The $185 billion cost would be covered by a 1.9 percent surtax on annual incomes exceeding $1 million and by raising the fees charged to lenders by government-owned mortgage giants Fannie Mae (FNMA) and Freddie Mac.

The proposal was sponsored by Senator Robert Casey, a Pennsylvania Democrat who is facing a tough race for re-election next year.

The measure nods at concerns Republicans have raised about how to pay for the extension’s cost. The plan reduced the millionaire surtax rate from 3.25 percent to 1.9 percent and incorporated ideas that were raised during negotiations of the bipartisan congressional supercommittee. The proposal also trims the cost by eliminating a proposed payroll tax cut for employers.

Republicans said they were still unlikely to back the plan.

“This was not a compromise,” Minority Leader Mitch McConnell of Kentucky said today on the Senate floor. “This was nothing more than a bill designed to fail.”

Republican Support Needed

Democrats control 53 seats in the Senate and would need the support of at least a few Republicans to secure the 60 votes that will be necessary for passage. Senator Susan Collins of Maine was the only Republican to support advancing a Democratic payroll tax cut proposal last week. Three members of the Democratic caucus opposed the measure, which didn’t clear the 60-vote threshold.

Collins said she backed the Democratic bill last week to “send a signal” that lawmakers can “no longer continue to have these completely partisan votes where each side knows that it’s not going to succeed and it’s really political theater.”

She said she would join Senator Claire McCaskill, a Missouri Democrat, to offer alternative legislation today. That proposal would continue the 4.2 percent payroll tax for workers in 2012 and expand it to employers, according to a summary of the measure. It also would extend several other tax breaks that expire at the end of the year, including those for research and development and bonus depreciation.

Republicans aren’t likely to back the Collins-McCaskill measure because it includes a 2 percent surtax on income exceeding $1 million. Taxpayers who report business income on their individual returns would be exempt from the surtax.

Dec. 31 Deadline

Unless Congress acts, the current two-percentage-point reduction — from 6.2 percent to 4.2 percent — in the employee portion of the Social Security payroll tax will expire Dec. 31. Mark Zandi, chief economist at Moody’s Analytics, has said that failure to extend the payroll tax cut into 2012 could shave one- half of one percentage point from U.S. gross domestic product next year.

“Raising taxes by $1,000 next month will have an immediate negative impact on the economy,” Senate Majority Leader Harry Reid, a Nevada Democrat, said on the Senate floor yesterday. “We all know Congress can’t afford to play chicken with this economy.”

President Barack Obama said Republicans would be “leaving 1.3 million Americans out in the cold” next month if they allow the payroll tax cut to lapse.

‘Important Insurance’

“It’s important insurance for them against the unexpected,” Obama told reporters yesterday. “It will spur spending. It will spur hiring and it’s the right thing to do.”

Republican leaders indicated it was unlikely that they could support the proposal. “The only thing bipartisan about adding a tax hike on job creators is the opposition,” said Don Stewart, a spokesman for McConnell.

Senate Minority Whip Jon Kyl, an Arizona Republican, said he doesn’t think the Democratic plan will gain any more votes from his party than it did last week.

“I don’t think it’s different enough to make a significant difference,” he said. “It wouldn’t be enough to get my support.

Senator Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, criticized the surtax proposal in an e-mail, calling it a ‘‘permanent tax hike on small businesses to pay for temporary one-year tax policy.’’

10-Year Surtax

In response to criticism that Democrats were using a permanent tax increase for high earners to offset a temporary payroll tax cut, the legislation proposed yesterday would end the surtax in 10 years.

It also proposes means-testing eligibility for unemployment compensation and food stamps, a provision Republicans included in their plan. Democrats wouldn’t require high earners to pay higher Medicare premiums, as Republicans had earlier proposed.

The plan would require Fannie Mae and Freddie Mac (FMCC) to raise their guarantee fees by at least 12.5 basis points while allowing the director of the Federal Housing Finance Agency to determine the details. The higher fees would raise $38.1 billion, according to Casey’s summary.

House Republicans plan to propose legislation in coming days that would extend the 4.2 percent payroll tax rate for one year for employees. House lawmakers will seek to avoid cuts to physician reimbursements by Medicare and address expanded unemployment benefits that are set to expire at the end of the year. The Republican plan also is expected to include language expediting construction of the Keystone XL pipeline from Canada as well as an Environmental Protection Agency proposal to limit emissions for industrial boilers.

Romney Backs Extension

On the Republican presidential campaign trail, former Massachusetts governor Mitt Romney told a radio talk show yesterday that he supports a one-year extension, marking a shift from October when he appeared to reject the idea.

‘‘I would like to see the payroll tax cut extended just because I know that working families are really feeling the pinch right now,” Romney said yesterday on Michael Medved’s radio show. “Middle-class Americans are having a hard time.”

At an Oct. 10 Republican presidential debate hosted by Bloomberg LP and the Washington Post in Hanover, New Hampshire, Romney had said he didn’t want “temporary little Band-Aids” for the tax code. “I want to fundamentally restructure America’s foundation economically,” he said then.

Another contender for the Republican nomination, former House Speaker Newt Gingrich, has consistently supported continuation of the payroll tax cut.

“I am against tax increases in the middle of a depression,” Gingrich told Bloomberg Television in September. “We should extend tax cuts for working Americans just as I would extend the Bush tax cuts” for the wealthiest taxpayers.

For more information please see Senate Democrats Offer Smaller Surcharge in Payroll Tax Plan at www.bloomberg.com .

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