Tax Foundation Study: Corporate Exemptions “Generally Available” to All Industries

A new report by Washington D.C.-based think tank Tax Foundation suggests that most corporate tax exemptions in the US apply to all businesses, dispelling the prevailing thought that they target specific industries.

The study found that only about 8% of corporate tax expenditure benefits are targeted to specific business areas, such as renewable energy, insurance, oil and gas, and coal. Contrary to popular opinion, the vast majority of exemptions can be availed by nearly all corporations as part of their cost-cutting arsenal.

Tax Foundation President Scott A. Hodge says the report compares the various corporate income tax expenditures with popular exemptions for individuals and state and local governments. Most of the corporate tax exemptions were enacted for the benefit of specific policy goals defined by lawmakers, rather than favoring a particular industry.

The report further found that benefits for state and local governments were nearly twice the amount for specific industries. For instance, state and local governments enjoy up to $640 billion in tax benefits, through the combination of the deductions for state and local income and property taxes, as well as exemptions for state and local bonds.

However, the benefits for individuals far outweigh corporate tax expenditures, such as the exclusion for employer-provided health insurance and the mortgage interest deduction for homeowners.

There are roughly 80 different corporate tax expenditures, amounting to nearly $660 billion over fiscal years 2012 to 2016. In addition, the five-year budgetary cost of the exclusion for employer-provided health insurance for individuals exceeds $1 trillion, while the mortgage interest deduction amounts to over $609 billion for the housing industry.

“With the mounting federal deficits, corporate tax expenditures have come under increased scrutiny as a potential source of new tax revenues,” Hodge said. “However, considering the fact the US has one of the highest corporate tax rates in the world, lawmakers would be far wiser to consider reducing or eliminating them within the broader context of corporate tax reform and lowering the federal corporate tax rate.”

Moody’s: Obama Tax Package Hurts US Credit Rating

Credit ratings agency Moody’s recently warned that President Barack Obama’s planned tax package could result in a negative outlook for the US’ AAA long-term credit rating.

The fiscal proposals aim to extend all of the previous administration’s income tax cuts by two years, retain unemployment insurance for 13 months, and introduce a 2% cut in the payroll tax this year. According to Moody’s, such fiscal policies might worsen the national fiscal deficit and level of public debt.

The agency does foresee prospects for additional tax revenues as the US economy recovers in the next two years following the likely passage of the policy. However, it sees such benefits being outweighed  by the reduced tax collected, and higher benefits paid out by the government.

Unless accompanied by other counterbalancing measures, such as reductions to government spending, Moody’s therefore predicts a downgrading of the country’s credit outlook in the next two years.

US Treasury Releases HIRE Act Report

The US Treasury Department has just released an updated report on the number of newly-hired workers eligible for tax credits under the recent Hiring Incentives to Restore Employment (HIRE) Act.

Passed in March, the HIRE Act offers an exemption from Social Security payroll taxes for every worker hired after February 3, 2010, and before January 1, 2011, who has been unemployed for 60 days or longer. The maximum value of the credit is equal to 6.2% of wages up to $106,800, the Federal Insurance Contributions Act wage cap. There is also an additional $1,000 income tax credit for every new employee retained for 52 weeks, creditable on on the employer’s 2011 income tax return.

The Internal Revenue Service’s data on the HIRE Act will not be available until after the filing of tax returns in 2011. However, the Treasury Department’s Office of Economic Policy has provided estimates on employers who potentially qualify for the HIRE tax exemption.

According to the report, between February and October this year, businesses hired an estimated 8.1 million new workers who had been unemployed for 60 days or longer. Such businesses are thus eligible for HIRE tax exemptions and credits.

These newly hired workers constitute approximately 11.7% of all workers who were unemployed for eight weeks or longer since the law’s passage. This means that one in eight workers who have been unemployed for eight weeks or longer are hired in the subsequent month.

The report also shows estimates by state on the number of eligible hires. Many states with high unemployment rates have large numbers of potentially eligible new hires. This includes California (over 1.1 million), Ohio (around 350,000), and Michigan (over 260,000).

“Targeted programs like the HIRE Act tax credit provide an incentive for private-sector employers to hire new workers sooner than they otherwise would,” said Alan B. Krueger, Assistant Secretary for Economic Policy and Chief Economist at the Treasury Department. “Since it’s only in effect through the end of the year, the HIRE Act encourages businesses to accelerate hiring in order to get the maximum benefit from this temporary tax credit.”

Loopholes Bill Struggling to Survive Senate Passage

After being shot down on the Senate floor, the Senate Finance Committee has submitted a revamped version of the American Jobs and Closing Tax Loopholes Bill of 2010.  The bill was rejected after being called a “watered down” version of the original House legislation passed at the start of June.

The so-called weaker version decreased the proportion of carried interest (the share of investment fund profits that accrues to the managers of the fund, currently taxed as capital gains at 15%) that is to be recharacterized as ordinary income from 75% to 65%. The bill also proposed increasing the amount treated as capital gains from 25% to 35% in taxable years starting December 12, 2012. Assets held for more than seven years would have been even less harshly treated. However, the provisions were rejected by the Democrats.

The revised version is now proposing that 75% of fund managers’ income be taxed at regular tax rates, and better treatment for 50% of income derived from assets held for at least 5 years.

Senate Finance Committee Chairman Max Baucus said that the new propositions are less costly, after removing several spending measures. Baucus also claims that new rules for carried interest rules will pay for more than half of the cost of extension of the tax breaks.