Supercommitee Failure – Changes Tax Outlook

On November 22, 2011, the Congressional “Supercommittee” on deficit reduction abandoned its efforts to reach an agreement. Many lawmakers had hoped that a Supercommittee agreement would help to solve the dispute over policy priorities such as tax reform and stimulus tax provisions.

The Joint Select Committee on Deficit Reduction (AKA the “Supercommittee”) was created by a bill passed in August that also increased the federal debt limit. The Supercommittee was put in charge of crafting a plan to shave over $1 trillion of debt by a cutoff date of November 23.

In the end, Republicans and Democrats, which were equally represented on the Supercommittee, could not bridge division of goals: raise taxes versus spending cuts. Republicans offered significant revenue increases, but only as part of a package that extended previous tax cuts and introduced a lower top rate of 28 percent. Democrats agreed to reduce revenue demands, but not as part of legislation that would significantly alter entitlement programs.

The failure of the Supercommittee does not mean an end to tax reform deliberations. The President has expressed an interest in developing revenue-neutral corporate tax reform. However, many obstacles will need to be cleared before tax reform is possible. While there is much agreement that some tax incentives should be repealed to lower the corporate rate, there is much less agreement on which incentives to target.

Many lawmakers had hoped the Supercommittee agreement could be used to enact or extend incentives such as:

• 100 percent bonus depreciation (scheduled to be reduced to 50 percent for most qualified property placed in service in 2012);
• a repatriation holiday; and
• a payroll tax holiday.

President Obama has already proposed extending 100 percent bonus depreciation and extending and expanding the payroll tax holiday to include a benefit to employers. It may be more difficult to enact a repatriation holiday. During 2004 a provision was in place that offered corporations a temporary opportunity to deduct most of the qualifying dividends received from their controlled foreign corporations. Any similar repatriation provision to the one enacted in 2004 would cost almost $80 billion over 10 years.

Also on the table include many valuable tax benefits are scheduled to expire at the end of 2011, such as relief from the alternative minimum tax (AMT) and the tax provisions known as extenders. The extenders include more than 30 popular temporary provisions for individuals and businesses, including the following:

• Research credit
• Itemized deduction for state and local sales taxes
• A 15-year cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements

Congress may consider extending these tax benefits before the end of the year or they may try to pair the extenders with legislation to extend stimulus provisions such as the payroll tax holiday. They extenders could also be drawn into a debate over other types of tax reform. Under all circumstances, Marcum LLP will keep you up to date on the Committee decisions.