The other major provision extends and increases the exemption levels for the Alternative Minimum Tax (AMT). Even though the dividend and capital gains tax cuts are not set to expire until 2008, extending them now through 2010 is considered vital to preserve economic stability and maintain a robust investment climate.
Another provision of interest to our industry extends the Section 179 expensing for small businesses for two years - through 2009. Small businesses may deduct in the first year up to $100,000 of investments in depreciable assets. If Congress had done nothing, after 2007, the expensing limit would have declined to $25,000.
The “Death Tax”The second tax measure of particular interest - permanent repeal of the death tax. Repeal legislation has passed the House several years in a row, but Senate consideration is routinely derailed due to the lack of 60 firm votes to beat a filibuster. Previously, Congress voted to gradually end death taxes starting in 2001. The 2001 legislation provided immediate relief through rate reduction and an expanded exemption, with complete repeal occurring in 2010. However, the repeal provision expires in 2011.
Without further Congressional action, not only will the death tax return in 2011, but it will do so at the original rates that applied under prior law. Permanent repeal legislation passed the House last year, but action in the Senate stalled. A Senate vote was scheduled for last September, but then Hurricane Katrina consumed the Senate's attention and the repeal measure was pulled from the Senate schedule. Senate Majority leader Bill Frist (R-TN) has promised to schedule a vote in May on the death tax measure, but that deadline may slip into June.
Senator Jon Kyl (R-AZ), the Senate leader for full repeal, continues to support repeal but at the same time urges political pragmatism. Senator Kyl warns repeal supporters that they must seriously consider accepting something less than full repeal or risk having the old, draconian death tax return in 2011. The task of obtaining 60 votes in the Senate was challenging enough last year, but will be even more difficult this election year. Senate staff has told ASA's Legislative Counsel that the best count shows only 59 votes. Moreover, some fiscal conservative Senators who generally support full repeal are deeply concerned about the budgetary impact of full repeal. With the federal deficit already ballooning out of control, fiscal conservatives in the Senate may back away from supporting full repeal of the death tax.
All of these factors have led Senator Kyl to hold discussions with Senate colleagues to work toward a compromise, which many business groups insist they will oppose. Senator Kyl's approach is that something has to be done! The compromise his staff has discussed with ASA would raise the exemption to $5 million for an individual and $10 million for a couple, indexed for inflation, and a rate of 15% for estates that are taxed.
Family-owned businesses and the Senate face some hard decisions over permanent repeal of the death tax. Will the supporters of repeal maintain their “all or nothing” hard-line position or will the various factions work together toward some type of compromise? In this election year, it is a tough choice for the Senators and family-owned businesses. As Senator Kyl recently said, “A lot of people in the business community are still very desirous of having permanent repeal. But if they see that the votes are not there, realistically they would see that certain types of compromise would be almost as good as full repeal.”
A Repeal of LIFO?The third tax issue of interest to our industry - repealing the LIFO method of inventory accounting. Prompt, decisive action by the business community killed a surprise proposal by the Senate Republican leadership to permanently repeal the LIFO inventory accounting method. A repeal of the LIFO method of inventory valuation would have created serious tax liabilities for many ASA wholesalers and manufacturers. While we won the immediate battle, we expect the Senate Finance Committee to hold hearings on LIFO repeal as early as mid-June. The Chairman of the Finance Committee, Senator Charles Grassley (R-IA), has said that the hearings will look at the pluses and minuses of LIFO.
LIFO repeal will have a major impact on many wholesaler-distributors and is an issue that bears watching in this election year - especially given Congress' willingness to raise business taxes to fund increased spending. ASA and others in the business community are diligently working to stop any efforts to repeal LIFO.
Predictions are difficult. It is, after all, an election year and one-third of the Senators are facing a political race in the fall. Tax legislation will arise in a highly volatile atmosphere, making it all the more important for us to remain vigilant.