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WASHINGTON -(Dow Jones)- Corporations would see their top tax rate cut to 30.5% from 35% under a tax plan unveiled Wednesday by House Ways and Means Committee Chairman Charles Rangel, D-N.Y., to fellow committee members.
Rangel plans to publicly announce the plan Thursday morning.
To offset the cost of the lower tax rate, the plan would alter a number of business tax provisions, according to lawmakers, congressional staff and lobbyists familiar with the plan as outlined Wednesday night.
The plan will repeal a tax deduction for domestic manufacturers. It will prevent companies from using an accounting method known as last-in, first-out, or LIFO, that can cut their taxes during times of rising prices. Repealing LIFO could result in a substantial tax for companies currently using the method, but aides briefed on the plan say the change would be phased in over eight years, thereby blunting the initial impact.
The plan would also require companies to defer deductions for certain expenses of foreign subsidiaries of U.S. companies until the money is repatriated to the U.S.
A lobbyist tracking the bill said the provision would likely hurt those who benefited most from an October 2004 Act allowing a one-time amnesty to repatriate foreign income at reduced tax rates. Companies lobbied for the break arguing they would be able to use the money to create new jobs, but there has been little evidence to suggest that is what happened.
"That's going to get thrown into their faces," the lobbyist said.
Middle and upper-middle income families would benefit under the plan by a repeal of the alternative minimum tax starting Jan. 1, 2008.
Upper-income families, however, would pay for that repeal with a 4% surtax on incomes above $150,000 for a single earner or incomes above $200,000 for a married couple. That surtax would grow to 4.6% for incomes above $500,000.
The surtax will also make possible an expansion of the earned income tax credit, an increase in the standard deduction, and an increase in the value of the child tax credit for those earning too little to owe federal income taxes.
A third section of the plan would address a number of pressing tax issues, including a temporary patch of the alternative minimum tax prior to Jan. 1, 2008, and the extension of a number of expiring tax provisions.
Absent a patch, the alternative minimum tax will expand to hit roughly 25 million taxpayers, up from 4.4 million in 2006, increasing their taxes by a total of nearly $50 billion, according to congressional estimates.
Expiring tax breaks, known colloquially on Capitol Hill as "extenders," include the research-and-development tax credit, tax breaks for teachers buying schools supplies and a deduction for state and local sales taxes.
Part of the cost of the third section of the bill would be offset by taxing carried interest paid to financial managers as regular income and not as capital gains. While some said the change wouldn't apply to real estate investment trust managers, a source familiar with the plan said all industries are included.
Revenue-raising measures in this third section also include a tax on deferred compensation plans of offshore hedge funds and a requirement that financial service providers give customers information on basis of sold securities.
The plan also changes current laws to require small businesses in the services sector to pay payroll taxes for their workers.
Rangel doesn't expect his plan to come to a vote before the House this year. But the third section of temporary provisions will be stripped from the plan and introduced as a separate bill next week.
Rangel said Wednesday night he may disaggregrate the bill further, splitting the third section into an AMT patch bill and an extenders bill, both with separate revenue offsets.
This two-bill approach could help Senate Democrats maintain fiscal discipline.
Lawmakers there are balking at raising revenues to offset the cost of the AMT bill. Separating the extenders from the AMT bill, therefore, could protect the extenders from getting stuck in that fight, Rangel said Wednesday night.
Rangel plans to publicly announce the plan Thursday morning.
To offset the cost of the lower tax rate, the plan would alter a number of business tax provisions, according to lawmakers, congressional staff and lobbyists familiar with the plan as outlined Wednesday night.
The plan will repeal a tax deduction for domestic manufacturers. It will prevent companies from using an accounting method known as last-in, first-out, or LIFO, that can cut their taxes during times of rising prices. Repealing LIFO could result in a substantial tax for companies currently using the method, but aides briefed on the plan say the change would be phased in over eight years, thereby blunting the initial impact.
The plan would also require companies to defer deductions for certain expenses of foreign subsidiaries of U.S. companies until the money is repatriated to the U.S.
A lobbyist tracking the bill said the provision would likely hurt those who benefited most from an October 2004 Act allowing a one-time amnesty to repatriate foreign income at reduced tax rates. Companies lobbied for the break arguing they would be able to use the money to create new jobs, but there has been little evidence to suggest that is what happened.
"That's going to get thrown into their faces," the lobbyist said.
Middle and upper-middle income families would benefit under the plan by a repeal of the alternative minimum tax starting Jan. 1, 2008.
Upper-income families, however, would pay for that repeal with a 4% surtax on incomes above $150,000 for a single earner or incomes above $200,000 for a married couple. That surtax would grow to 4.6% for incomes above $500,000.
The surtax will also make possible an expansion of the earned income tax credit, an increase in the standard deduction, and an increase in the value of the child tax credit for those earning too little to owe federal income taxes.
A third section of the plan would address a number of pressing tax issues, including a temporary patch of the alternative minimum tax prior to Jan. 1, 2008, and the extension of a number of expiring tax provisions.
Absent a patch, the alternative minimum tax will expand to hit roughly 25 million taxpayers, up from 4.4 million in 2006, increasing their taxes by a total of nearly $50 billion, according to congressional estimates.
Expiring tax breaks, known colloquially on Capitol Hill as "extenders," include the research-and-development tax credit, tax breaks for teachers buying schools supplies and a deduction for state and local sales taxes.
Part of the cost of the third section of the bill would be offset by taxing carried interest paid to financial managers as regular income and not as capital gains. While some said the change wouldn't apply to real estate investment trust managers, a source familiar with the plan said all industries are included.
Revenue-raising measures in this third section also include a tax on deferred compensation plans of offshore hedge funds and a requirement that financial service providers give customers information on basis of sold securities.
The plan also changes current laws to require small businesses in the services sector to pay payroll taxes for their workers.
Rangel doesn't expect his plan to come to a vote before the House this year. But the third section of temporary provisions will be stripped from the plan and introduced as a separate bill next week.
Rangel said Wednesday night he may disaggregrate the bill further, splitting the third section into an AMT patch bill and an extenders bill, both with separate revenue offsets.
This two-bill approach could help Senate Democrats maintain fiscal discipline.
Lawmakers there are balking at raising revenues to offset the cost of the AMT bill. Separating the extenders from the AMT bill, therefore, could protect the extenders from getting stuck in that fight, Rangel said Wednesday night.
