Press Room: Tax Release

November 19, 2013

Legislative Update – Senate Democrats Circulate List of Tax Preferences Targeted for Elimination

Senate Democrats have circulated a list of 12 tax preferences they are targeting for elimination in order to raise tax revenue as part of ongoing bipartisan budget talks. The Democrats believe that, in addition to responsible spending cuts, the sequestration should be replaced by closing wasteful corporate loopholes and ending special interest subsidies in our bloated tax system. The House Republicans continue to reject the idea of replacing the sequestration spending cuts with tax revenue.

The 12 items (listed below) include many familiar proposals that target high-income individuals, small businesses, and U.S. based multinationals. If eliminated, these proposals would raise $264.2 billion over a ten year period and result in significantly higher taxes for many taxpayers.

                          Tax Preference Targeted for Elimination 10-Year Revenue
from Repeal (billions)
                    Items Affecting Individuals and Small Businesses   
Tax carried interests as ordinary income $17
Tax derivatives on a mark-to-market basis and characterize income or loss as ordinary $16
Repeal the mortgage interest deduction for second homes $15
Require business profits of owner-employees to be subject to employment taxes $12
Tighten tax rules around accumulation of large balances in tax deferred retirement accounts to limit their use in estate planning $10
Change the recovery period for corporate jets (5 years) to be the same as the recovery period for commercial aircraft (7 years) $4
Require grantor annuity trusts (GRAT) to have a 10-year term $3
   
                                 Items Affecting Large Businesses   
Repeal the check-the-box rules for foreign affiliates $80
Defer interest deductions related to the production of foreign income until the foreign income is repatriated $50
Limit the tax deductibility of certain executive compensation in excess of $1 million $50
Tax foreign corporations that are primarily managed and controlled in the United States as domestic corporations $7
End tax deductions for shipping jobs overseas $0.2
   
                                                       Total $264.20

Significantly, the list includes a proposal that would require taxpayers to mark derivative contracts to market and treat the resulting gain or loss as ordinary. A similar provision was included in House Ways and Means Committee Chairman Dave Camp’s (R-Michigan) legislative discussion draft on tax reform for financial products as well as in the Obama Administration’s fiscal year 2014 budget proposals. In addition, traditional business and individual tax extender provisions are set to expire at the end of 2013. Key expiring tax provisions include the following:

  • 50% bonus depreciation
  • Research credit
  • Look-through treatment of payments between CFCs
  • Active financing exception
  • 15 year recovery period for qualified leasehold improvements, retail and restaurant property
  • Special expensing rules for certain film and television productions
  • 5 year holding period for S Corp built-in-gains
  • Increased expensing levels for small businesses

It is critical for the taxpayer community to be involved in the short-term and long-term debates on the federal budget and deficit reduction. Attempting to raise additional revenue from individuals and businesses for sequestration replacement instead of tax reform would make it more difficult to reduce rates in tax reform and enact a competitive international tax system.