There Are Several Fiscal Cliffs This Year!
The tax side of the fiscal cliff has been pushed forward temporarily. The United States Senate overwhelmingly passed legislation to avert the so-called “fiscal cliff” on January 1, 2013 by a vote of 89 to 8, sending the American Taxpayer Relief Act of 2012, “Act of 2012,” to the house, where it was summarily approved on January 1, 2013 by vote of 257 to 167. The Act of 2012 allows the Bush–era tax rates to expire after 2012 for individuals with incomes over $400,000 in families with incomes over $450,000; patching the Alternative Minimum Tax (AMT); revise many of the currently expired tax extenders, including the research tax credit in the American Opportunity Tax Credit: in provides for a maximum estate tax of 40% the $5 million exclusion. The 2012 Act also delays the mandatory across-the-board spending cuts known as “sequestration.”
A common misconception about the Act of 2012 is that it is permanent. While the first fiscal cliff settlement resolves several of the most pressing tax and budget issues, it leaves a few items on the table that will need to be addressed in the near term. First, the settlement does not address the automatic spending cuts under the Budget Control Act’s sequester; it only postpones the first round of cuts which were scheduled to begin in early January until March. Second, the United States reached its statutory debt ceiling at the end of 2012, and Treasury is taking what it calls “extraordinary measures” to keep from breaching the limit; but those measures probably cannot carry us beyond the end of February. Finally, federal government’s operations are only funded at FY2012 levels through March 27, 2013 requiring congressional action to prevent the government shutdown beginning March 28.
Failure to resolve these pressure points and others that may surface as well could have wide-reaching economic effects, and, in what is likely to be a replay of the fiscal cliff drama at least two time this year and the White House and Congress will have to come together again to work out more deals.
The Act of 2012 is massive and has several categories and sub-categories. This article will be the first of four articles that discusses the Act of 2012 with comments from the author. The following categories will be discussed below:
Article I.
Individual income tax provisions
Income tax rates
Alternative minimum tax relief
PEP & Pease limitations
Marriage penalty relief
Child tax credit & other family tax benefits
Education tax incentives
Roth IRA conversions
Extensions of temporary individual tax provisions
Individual income tax planning considerations
Article II.
Estate & gift taxes
GST tax
Transfer tax planning considerations
Business tax provisions
Research credit
Bonus depreciation
AMT credit in lieu of bonus
Leasehold improvements
Section 179 limitations
Active financing income exception & CFC look through
Energy provisions
Other provisions
Article III.
Financial statement impact
State tax implications
Provisions left out in the cold
Article IV.
Looking ahead
ARTICLE I.
As the nation grazed the edge of the so-called “fiscal cliff,” Congress approved and sent to President Obama legislation that among other provisions permanently extends and/or modifying the reduced Bush-era income tax rates for lower-and middle-income taxpayers, and allows the top rates on earned income, investment income, and estate and gifts to increase from their 2012 levels for higher income taxpayers. The Act of 2012 cleared the House of Representatives and the Senate on January 1, 2013. It is the product of a compromise between Senate Republicans and Vice President Joe Biden in the hours leading up to the expiration of the Bush tax cuts at midnight on December 31, 2012. The Act of 2012 also provides a permanent “patch” for the individual alternative minimum tax (AMT) and extends through 2013 dozens of temporary business and individual tax “extenders” provisions. The Act of 2012 includes provisions related to spending programs.
The four Articles will examine the tax provisions in the new law and looks ahead to the tax policy challenges facing the president and the 113th Congress in the coming year.
INDIVIDUAL INCOME TAX PROVISIONS
Significant provisions of the Act:
• Permanently extend most of the individual income tax relief provided in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) for unmarried taxpayers with income of $400,000 or less and married taxpayers with income of $450,000 or less;
• Permanently set the top marginal tax rate at 39.6 percent (up from 35 percent in 2012) for unmarried taxpayers with income over $400,000 and married taxpayers with income over $450,000;
• Permanently set the top rate on income from capital gains and qualified dividends at 20 percent (up from 15 percent in 2012) for unmarried taxpayers with income over $400,000 and married taxpayers with income over $450,000;
• Increase the individual AMT exemption to $50,600 for unmarried filers and $78,750 for married filers for 2012, permanently index those exemption amounts for inflation beginning in 2013, and allow nonrefundable personal credits against the AMT;
• Permanently reinstate the personal exemption phase-out (PEP) and limitation on itemized deductions (Pease) for single taxpayers with adjusted gross income (AGI) above $250,000 and joint filers with AGI over $300,000, with the thresholds indexed annually for inflation;
• Permanently set the top estate tax rate at 40 percent for estates worth more than $5 million (indexed for inflation); and
• Extend through 2013 an array of expired and expiring tax provisions such as the research and experimentation credit, the subpart F active financing exception, and the look-through rule for payments between related controlled foreign corporations.
The new law does not extend the reduction in payroll taxes that was in effect in 2011 and 2012, nor does it reduce or delay new tax increases on earned and unearned income that were enacted under the Patient Protection and Affordable Care Act of 2010 and that took effect on January 1, 2013.
INCOME TAX RATES
The Act of 2012 is notable in several respects. First, it ends, at least for now, a debate between President Obama and congressional Republicans over the future of the Bush-era tax cuts that has been simmering since those provisions were last extended in 2010. Second, the inclusion of higher tax rates for upper-income taxpayers marks a significant concession on the part of many Republicans in Congress who have maintained that any increases in federal revenues should come primarily from economic growth generated by tax reform. Third, it is likely to set the stage for a larger debate on deficit reduction and fundamental tax reform that will continue to play out in 2013 and beyond. Although the Act of 2012 does not include specific instructions or call for expedited floor procedures that would allow lawmakers to quickly move tax reform legislation, the increased progressivity that the new law has built into the current tax code is likely to be a focus of discussion as Congress and the president consider what a reformed tax code should look like.
President Obama campaigned on a platform that called for allowing top Bush-era tax rates to return to their pre-2001 levels for taxpayers generally earning above $250,000 annually ($200,000 for single filers), while Republicans held firm in their position to extend the Bush tax cuts for all taxpayers. The Act of 2012 achieves the president’s goals of making the tax code more progressive and setting the tax burden on high-income individuals, although not to the degree he had sought by setting the top individual ordinary income tax rate at 39.6 percent, setting the top tax rate for investment income at 20 percent, and scaling back the benefit provided by deductions and personal exemptions, all beginning in 2013.
For low and middle income taxpayers, the Act of 2012 permanently extends the majority of tax provisions that were originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 and extended two years ago by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
The Act of 2012 permanently leaves in place the six individual income tax brackets ranging from 10 to 35 percent for married taxpayers earning taxable income below $450,000 and unmarried taxpayers earning below $400,000. For taxpayers earning annual taxable income above these thresholds, however, there is an additional bracket of 39.6 percent, equal to the top marginal rate in effect prior to 2001. The income thresholds are indexed annually for inflation.
The top tax rate on income from qualified dividends and long-term capital gains has similarly changed under the Act of 2012 relative to 2012 law. The top rate on income from both sources increases to 20 percent (up from 15 percent) for married taxpayers with income above $450,000 ($400,000 for unmarried taxpayers). The 15 percent rate for both long-term capital gains and qualified dividends will remain in place for taxpayers with annual income below those thresholds.
ALTERNATIVE MINIMUM TAX RELIEF
The Act of 2012 provides permanent relief from the individual AMT, thus ending what had become an almost annual ritual in Congress of adopting temporary “patches” to address the fact that the AMT was not previously indexed for inflation. The last AMT patch expired at the end of 2011, allowing the AMT exemption amounts for 2012 to drop to $33,750 for single taxpayers and $45,000 for joint filers. The Act of 2012 increases exemption amounts under the individual AMT to $50,600 for unmarried filers and $78,750 for married-joint filers for 2012, and indexes these amounts annually for inflation starting in 2013. The change provides greater protection from the AMT, particularly to taxpayers who claim large itemized deductions for state and local taxes and those who have a large number of dependents. The Act of 2012 allows nonrefundable personal credits to be taken against the AMT starting in 2012.
New health care taxes also effective in 2013
In addition to the new top rates on ordinary and investment income under the Act of 2012, married taxpayers generally earning in excess of $250,000 and unmarried taxpayers earning over $200,000 are subject beginning in 2013 to the following new taxes that were enacted in the Patient Protection and Affordable Care Act of 2010:
• An additional 0.9 percent Medicare Hospital Insurance tax on wages and self-employment income that exceeds these thresholds and
• A 3.8 percent net investment income tax on certain types of investment income. The tax applies to the lesser of the applicable individual’s net investment income or modified adjusted gross income in excess of these threshold amounts.
Increasing the AMT exemption amounts will prevent roughly 28-million taxpayers from being swept into the AMT system for 2012 (though even at the higher exemption levels, it will still catch approximately 4 million taxpayers). Indexing the increased exemption amounts for inflation going forward will stem the growth of the AMT system in future years. Permanent AMT relief, in lieu of the unpredictable annual patches, will provide added long-term certainty to taxpayers who either routinely owe AMT liabilities or may potentially be subject to the AMT regime because of certain types of income, deductions, or preferences.
PEP & PEASE LIMITATIONS
After being phased out completely in 2010 by the Bush tax cuts, two provisions that effectively increase marginal tax rates for higher-income individuals are now reinstated permanently for certain taxpayers. The PEP and Pease limitations generally require taxpayers with income above a certain threshold to reduce their personal exemptions and itemized deductions. Under the Act, both provisions will apply, beginning in 2013, to married taxpayers earning AGI in excess of $300,000 and unmarried taxpayers with AGI over $250,000. These threshold amounts are indexed annually for inflation. The Act of 2012 permanently repeals PEP and the Pease limitations for taxpayers earning annual income below those thresholds.
MARRIAGE PENALTY RELIEF
In 2001, EGTRRA protected some two-earner couples from the so-called “marriage penalty” — the phenomenon of a married couple paying higher income taxes than they would have paid if they were not married and filed individual income tax returns — by (1) expanding the standard deduction for joint filers to twice the deduction for single filers and (2) expanding the 15 percent bracket for joint filers to twice the size of the corresponding rate bracket for single filers. The Act of 2012 permanently extends these provisions effective for taxable years beginning after December 31, 2012.
CHILD TAX CREDIT & OTHER FAMILY TAX BENEFITS
The Act of 2012 makes permanent the $1,000 child tax credit and expanded refund ability as provided under EGTRRA, effective for taxable years beginning after December 31, 2012. In contrast, the Act of 2012 extends for five years (through 2017) the modifications to the credit enacted under the American Recovery and Reinvestment Act of 2009 (ARRA), the economic stimulus bill enacted in the early days of the Obama administration. The ARRA modifications include allowing earnings in excess of $3,000 to count toward the credit.
Other family-related tax benefits in the Act of 2012include:
• A permanent extension of the expanded 35 percent dependent care credit that applies to eligible childcare expenses for children under age 13 and disabled dependents;
• A permanent extension of the $10,000 tax credit for qualified adoption expenses and the $10,000 income exclusion for employer-assistance programs;
• A permanent extension of the tax credit for employers who acquire, construct, rehabilitate, or expand property used for a child care facility; and
• A five-year extension (through 2017) of provisions in the ARRA that increased the earned income tax credit (EITC) for families with three or more children and increased the phase-out range for all married couples filing jointly.
EDUCATION TAX INCENTIVES
Expansions of education tax incentives enacted as part of EGTRRA are extended permanently under the Act of 2012. These provisions, which are effective for taxable years beginning after December 31, 2012, include:
• The $5,250 annual employee exclusion for employer-provided educational assistance and its expansion to include graduate-level courses;
• The expansion of the student loan interest deduction beyond 60 months and increased income phase-out range;
• The increased Coverdell education savings account contribution limit (from $500 to $2,000) and the expansion of the definition of “qualified education expenses” to include expenses most frequently and directly related to elementary and secondary school education;
• The expansion of the scope of “qualified scholarships” to include awards under the National Health Service Corps Scholarship Program and the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program; and
• Expanded tax preferences (including the arbitrage rebate exception) for certain bond-financing mechanisms for education facilities.
The modifications made by the ARRA to the American Opportunity Tax Credit are extended for five years (through 2017). These modifications include increasing the amount of the credit, extending it to cover four years of schooling, raising the income limits to determine eligibility for the credit, allowing up to 40 percent of the credit to be refunded, and expanding the expenses eligible for the credit.
ROTH IRA CONVERSIONS
To partially cover the cost of the two-month delay of the budget sequester that is a part of the Act of 2012, lawmakers included a tax revenue offset related to Roth conversions for retirement plans. Specifically, the revenue offset which Joint Committee on Taxation staff estimated would raise $12.2 billion over 10 years would allow individuals to convert any portion of their balance in an employer-sponsored tax-deferred retirement plan accounts into a Roth account under that plan. Under current law, taxpayers can convert a traditional IRA, rollover retirement plan distributions, or retirement plan accounts that are eligible for distribution, into a Roth account. The rollover amount is included in income, and there is no early withdrawal penalty.
The conversion option for retirement plans would only be available if employer plan sponsors include this feature in the plan. The amount converted, however, would be subject to regular income tax. The provision is effective for post-2012 transfers, in taxable years ending after December 31, 2012. Similar to the temporary Roth IRA conversion opportunity in 2010-2011, this change creates both an opportunity for taxpayers and boosts revenues for the government. The JCT estimates that the provision will generally result in increased revenues as taxpayers make the conversions and pay related taxes.
EXTENSIONS OF TEMPORARY INDIVIDUAL TAX PROVISIONS
The Act of 2012 permanently extends certain tax preferences applicable to Alaska Native Settlement Trusts for taxable years beginning after December 31, 2012. It also permanently disregards the refundable components of the EITC and child tax credit for purposes of means-tested benefit programs effective for any amount received after December 31, 2012. In addition to addressing the Bush-era tax cuts, the Act of 2012 also extends a number of expired and expiring temporary tax deductions, credits, and incentives for individuals. Among these so-called “extenders” are:
• Deduction for state and local sales taxes – The election for taxpayers to deduct state and local general sales taxes under section 164(b)(5) expired at the end of 2011. The Act of 2012 retroactively extends the election through the end of 2013.
• Above-the-line deduction for tuition – Similarly, the above-the-line deduction for qualified tuition expenses under section 222 also expired at the end of 2011. The Act of 2012 retroactively extends the deduction through 2013 and keeps the maximum deductions based on income thresholds the same as under prior law.
• Distributions from individual retirement plans for charitable purposes – Before its expiration at the end of 2011, section 408(d)(8) allowed tax-free distributions of up to $100,000 annually per taxpayer from an individual retirement arrangement held by an individual age 70 or above. The Act of 2012 retroactively extends this provision through 2013 and allows individuals who took a distribution in December 2012 to contribute the amount to charity and have it count as an eligible rollover.
• Mortgage insurance premiums – Section 163(h)(3) allowed taxpayers to deduct premiums for mortgage insurance as qualified residence interest. The provision expired at the end of 2011, but the Act of 2012 retroactively extends it through 2013.
• Mortgage debt relief – The Act of 2012 extends through 2013 section 108(a)(1)(E), which allows a taxpayer to exclude from income up to $2 million in cancellation-of-indebtedness income from the forgiveness of mortgage debt on a principal residence.
Despite early attempts by the Obama administration and some Democratic lawmakers, the Act of 2012 does not include an extension of the temporary partial payroll tax holiday. As a result, wage earners and self-employed individuals that are subject to Social Security tax will experience an increase in the Social Security payroll tax beginning in 2013 relative to what it was in 2011 and 2012. For those years, the 6.2 percent and 12.4 percent rates that were applicable under current law were reduced to 4.2 percent and 10.4 percent, respectively. The relief applied to all individuals subject to Social Security tax regardless of any limit on the amount of wages or other income they receive.
MORE COMPLICATIONS:
Economists often debate the impact of tax code complexity on taxpayer behavior and decision-making. In a worst case scenario, a more complex tax system places an economic drag on the economy and makes the tax system more opaque, complicating and impeding economic and financial decisions.
By making permanent many expiring provisions of law, by some metrics the American Taxpayer Relief Act will reduce the complexity driven by uncertainty about future tax rates. In other ways, however, the Act of 2012 can be seen as increasing the complexity of the code. To illustrate, long-term capital gains from the sale of typical appreciated stock and dividend income paid by a publicly traded company will now potentially be subject to four different tax rates:
• Zero percent for long-term capital gains or dividends for taxpayers in the first two tax brackets (10 and 15 percent);
• 15 percent for long-term capital gains or dividends of taxpayers taxed in other brackets up to the AGI thresholds ($200,000 and $250,000 for single and joint filers, respectively) used for determining the applicability of the 3.8 percent net investment income tax enacted in the Patient Protection and Affordable Care Act of 2010 that became effective on January 1 of this year;
• 18.8 percent for long-term capital gain and dividend income taxed between the net investment income tax thresholds and the new thresholds for defining high-income taxpayers for the top ordinary income tax bracket ($400,000 and $450,000 for single and joint filers, respectively); and
• 23.8 percent for long-term capital gains and dividends taxed above the top ordinary income tax bracket thresholds (the combination of the new top 20 percent tax rate on net capital gain and the 3.8 percent net investment income tax).
This range of tax rates does not take into consideration other types of capital gains transactions that have unique rates, for example, unrecaptured section 1250 gain and collectibles taxed at 25 percent and 28 percent, respectively.
It is little better for ordinary income. High-income taxpayers will face the new 39.6 percent tax bracket. However, they will also need to understand the effect of the additional 0.9 percent Medicare Hospital Insurance tax that is triggered when AGI exceeds $200,000 or $250,000 for single and joint filers, respectively. On top of that, the Act of 2012 renews hidden marginal rate increases — the scaling back of itemized deductions (Pease limitation) and the phase-out of personal exemptions (PEP). These so-called “stealth” taxes kick in under the new law when the AGI of a single or joint filer exceeds $250,000 or $300,000, respectively, which is less than the entry point for the new highest marginal rate but above the entry point for the new 0.9 percent Medicare tax.
For both ordinary and investment income there will be the application of “stacking rules” to determine which income is taxed at the lower rates and which at the higher. Thus, while taxpayers may cheer the fact the Act of 2012 makes permanent many unsettled areas of law, the added complexity it creates will no doubt also drive calls for Congress to consider fundamental tax reform sooner rather than later.
INDIVIDUAL INCOME TAX PLANNING AND THOUGHTS
In general – Despite some alteration of the individual income tax landscape for 2013 and beyond, tax-planning methods used by individuals during the past decade will largely go unchanged. Much of the planning will focus on the individual’s specific fact pattern and objectives; for example, managing tax on income when realized and enhancing the benefit of deductions and exclusions rather than issues related to changing income tax rates.
Investment income – Those who have substantial investment income can now make decisions about rebalancing investment portfolios with a sense of certainty about the tax impact of earning dividend income or capital appreciation. Other tax planning issues such as acceleration of income or deferral of deductions become less relevant in the short term.
Planning for net investment income tax – Taxpayers should also examine the effect of the new net investment income tax for high-income individuals enacted as part of the Patient Protection and Affordable Care Act that took effect at the start of 2013. This 3.8 percent tax applies to income traditionally considered “investment income” (interest, dividends, rents, royalties, capital gains), but also applies to “passive income” (typically, business income if the taxpayer does not participate in the business). Proper planning, especially with respect to passive income, may reduce this tax.
AMT planning – Individuals should examine their tax position every year to understand the possible effects of the AMT and how best to plan their taxes in that light. Someone who expects to be in AMT one year but not the next could consider accelerating ordinary income or deferring deductions that provide no AMT benefit. Conversely, a taxpayer who owes no AMT in the current year but expects to in the next could consider accelerating deductions that would not be allowable for AMT purposes next year into the current year or deferring ordinary income. A chronic AMT taxpayer would want to consider avoiding private activity bond investments, paying off home-equity debt that is not deductible for AMT purposes, or if possible, taking some deductions “above the line” — that is, taking a deduction prior to calculating adjusted gross income.
Roth conversions for deferred retirement accounts – The Act of 2012 now expands opportunities for individuals to convert pre-tax balances in employer-sponsored retirement plans into designated Roth accounts. Individuals should consider the appropriateness of these conversions, recognizing that a conversion will be subject to current tax. A conversion can take place only if an employer plan sponsor makes this plan feature available.
Tax reform – If lawmakers and the president are successful in orchestrating comprehensive tax reform, individuals and their tax advisors will likely need to evaluate a wider range of tax benefits than those commonly considered in the past. For high-income individuals, certain tax benefits, such as deductions or exclusions, could be scaled back or eliminated as part of a tax reform process. The president, for example, has suggested limiting the tax benefit of itemized deductions and certain income exclusions as part of tax reform.
In general – Despite some alteration of the individual income tax landscape for 2013 and beyond, tax-planning methods used by individuals during the past decade will largely go unchanged. Much of the planning will focus on the individual’s specific fact pattern and objectives; for example, managing tax on income when realized and enhancing the benefit of deductions and exclusions rather than issues related to changing income tax rates.
Investment income – Those who have substantial investment income can now make decisions about rebalancing investment portfolios with a sense of certainty about the tax impact of earning dividend income or capital appreciation. Other tax planning issues such as acceleration of income or deferral of deductions become less relevant in the short term.
Planning for net investment income tax – Taxpayers should also examine the effect of the new net investment income tax for high-income individuals enacted as part of the Patient Protection and Affordable Care Act that took effect at the start of 2013. This 3.8 percent tax applies to income traditionally considered “investment income” (interest, dividends, rents, royalties, capital gains), but also applies to “passive income” (typically, business income if the taxpayer does not participate in the business). Proper planning, especially with respect to passive income, may reduce this tax.
AMT planning – Individuals should examine their tax position every year to understand the possible effects of the AMT and how best to plan their taxes in that light. Someone who expects to be in AMT one year but not the next could consider accelerating ordinary income or deferring deductions that provide no AMT benefit. Conversely, a taxpayer who owes no AMT in the current year but expects to in the next could consider accelerating deductions that would not be allowable for AMT purposes next year into the current year or deferring ordinary income. A chronic AMT taxpayer would want to consider avoiding private activity bond investments, paying off home-equity debt that is not deductible for AMT purposes, or if possible, taking some deductions “above the line” — that is, taking a deduction prior to calculating adjusted gross income.
Roth conversions for deferred retirement accounts – The Act of 2012now expands opportunities for individuals to convert pre-tax balances in employer-sponsored retirement plans into designated Roth accounts. Individuals should consider the appropriateness of these conversions, recognizing that a conversion will be subject to current tax. A conversion can take place only if an employer plan sponsor makes this plan feature available.
Tax reform – If lawmakers and the president are successful in orchestrating comprehensive tax reform, individuals and their tax advisors will likely need to evaluate a wider range of tax benefits than those commonly considered in the past. For high-income individuals, certain tax benefits, such as deductions or exclusions, could be scaled back or eliminated as part of a tax reform process. The president, for example, has suggested limiting the tax benefit of itemized deductions and certain income exclusions as part of tax reform.
LOOKING FORWARD
As the expected skirmishes related to these questions play out in the coming months, many in Washington will also want to turn the conversation to tax reform. The administration and members of Congress in both parties generally agree on the need to overhaul the federal tax code, and congressional legislative staff tax drafters have already invested significant time and effort in tax reform, laying the groundwork that will be necessary to develop a detailed legislative proposal.
In his statement supporting the Act of 2012, House Ways and Means Committee Chairman Dave Camp, R-Michigan, reiterated his intention to have his panel consider fundamental tax reform in 2013. Similarly, Senate Finance Committee Chairman Max Baucus, D-Montana, agreed that the Act of 2012 would help make tax reform more likely in 2013.
“There are no tax expenditure provisions here, which make it easier to do tax reform — at least individual tax reform. And . . . there are virtually no corporate provisions in here so the road is clear to do corporate reform, which is also very important,” Baucus said. “So does it help? I think it makes it easier.”
By resolving, at least for now, the disagreement between the “current policy baseline” and the “current law baseline”, the Act of 2012 provides legislative staff tax drafters with a clearer target for how much revenue a “revenue neutral” tax reform bill should generate. That is not to say tax reform does not face real challenges going forward, including disagreements about the scope and distribution of income tax burdens, the size of the tax base, and what tax benefits in the form of tax expenditures could be targeted for repeal or modification to offset the cost of any reduction in tax rates.
With House Republicans highly unlikely to agree to any legislation that increases tax rates and President Obama pledging in a statement delivered shortly after the Act of 2012 passed the House that future efforts to reduce the deficit will not rely solely on spending cuts, the parties are likely to find tax reform one of the few ways to accommodate these competing priorities.
In the short term, the press will focus on what is likely to be another showdown between the executive and legislative branches over raising the debt limit. Any legislation emerging from that process could include an effort to jump-start tax reform, such as instructions to the legislative staff tax drafters committees to produce legislation by a certain date and/or procedural protections to limit the ability of the Senate to delay or block action on tax reform. Such provisions in a debt limit deal would certainly enhance the prospects for tax reform, but even without them, it is likely fundamental tax reform will be at the top of the agenda for the 113th Congress for 2013.
Michael Nelson, Esq.
