Paul Ferraresi

Congress is on the hunt for revenue raisers. Watch your wallet. Call your lobbyist

Comments by Paul Ferraresi:

In all my teaching seminars I ask the class if they think tax rates in the future will be higher, lower, or the same. An overwhelming majority always say higher why? They answer… the war on terror will continue for 25-30 years, present budget deficits, baby boomers beginning to extract from Social Security and Medicare and so forth. In addition, the cycle of taxes goes from high (Carter years) to low (Reagan years) to high (Clinton years) to low (Bush Jr. Years). What’s the next cycle?

Here is an excerpt from a recent Forbes article. See the slight of hand starting. I expect over 200 more moves like this will come in the next year. Hold on to your wallets. Remember, you asked for it last November with your vote (or not voting).

Do you pick up extra income selling rare books or toy soldiers on EBay? When calculating your taxable capital gains, do you guess (and maybe guess a little high) about what you paid for stock you’ve sold? Do you have a deferred compensation plan? Watch out. The politicians are hunting for “revenue raisers”—don’t call them tax hikes!—and you’re in their sights.

Driving this hunt is the Democrats’ promise to return to a more responsible form of budgeting known as pay as you go. Under “Paygo” Congress can’t fatten entitlement programs such as Medicare, adopt new tax goodies or even renew expiring tax breaks unless it pays for them with equal entitlement cuts or tax increases. (President Bush’s new embrace of a balanced budget means the Treasury is looking for raisers, too.)
So in January when the Senate Finance Committee approved $8.3 billion in tax breaks to soften the blow on small business of an increase in the minimum wage, it offset the breaks by unanimously adopting $8.3 billion in revenue raisers (such as imposing a $1 million annual cap on tax deferred compensation for executives). But that $8 billion is just the beginning. For instance, a just expired measure that keeps 19 million additional families from being hit by the alternative minimum tax will cost nearly $50 billion to renew for 2007—meaning Democrats must find $50 billion in revenue raisers unless they break their paygo pledge.

Where will they find the money? Many of the measures under scrutiny are aimed at closing the tax gap—the $345 billion a year the Internal Revenue Service estimates taxpayers owe but don’t fork over voluntarily. Others aim at perfectly legal breaks that can be portrayed
as unwarranted special interest loopholes. When Congress didn’t care about deficits, narrow tax measures, known as “cats and dogs,” were mostly friendly giveaways. But “in this new revenue driven environment, the cats and dogs can bite:’ warns veteran tax lobbyist Kenneth Kies.

Key tax law writers—House Ways & Means Committee Chairman Charles Ran-gel (D-N.Y.), and the leaders of the Senate Finance Committee, Chairman Max Baucus (D-Mont.) and ranking member Charles Grassley (R-Iowa)—have all made closing the tax gap a priority. And with Bush likely to veto any general tax rate hike, Congress hasn’t got much choice.

Here are some options kicking around that are ripe for revenue hunters:

Securities Basis Reporting

The IRS estimates $11 billion of the tax gap is due to underreporting of capital gains. Brokers and mutual fund companies are now required to send the IRS a 1099-B form reporting the stocks and funds you’ve sold, but not your “basis” that is, what you paid for them. Even the securities industry now sees enactment of required basis reporting as inevitable.

Auction Sales

Citing a study that found three-quarters of a million people make their primary or secondary living selling on EBay, and IRS advisory committee recently recommended that online auction sites be required to report seller’s taxpayer identification numbers. Separately, the Bush administration has proposed requiring credit card companies to report the proceeds paid to each merchant. It will be harder for self employed folks to cheat.

Shelters

A common-law doctrine allows courts to deny tax benefits for a transaction that was arranged simply to save tax. Law makers want to solidify what is now inconsistent application of this “economic substance” doctrine. Congress’ Joint Committee on Taxation has scored the proposal as a big revenue enhancer $18 billion over 10 years.

Employment Taxes

Owners of S corps and limited liability corporations pay employment taxes (Social Security and Medicare) only on what they take as salary; their profits are subject to income but not employment taxes. Some high income self-employed folks incorporate and treat most of their earnings as profit, not salary. Those in service business, such as lawyers and performers, might have to pay employment taxes on more of their earnings. Lots of opposition to this, but it could raise tens of billions of dollars over ten years.