October 29, 2007

On October 25, House Ways and Means Committee Chairman Charlie Rangel (D-NY) unveiled the most sweeping reform of the U.S. tax system in two decades, promising relief for middle-class families and a reduction in corporate rates. The package is being dubbed the “mother of all tax bills".  Meanwhile, the business community is calling the Tax Reduction and Reform Act of 2007, "the mother of all tax hikes," since the tax increases far exceed the benefits of the proposed tax relief.

While the package does include some tax relief for business, such as the repeal of the individual alternative minimum tax (AMT), reduction of corporate tax rates from 35% to 30.5% and permanent section 179 expensing, the package also includes a number of revenue raisers that would increase taxes on manufacturers.

Specifically, the bill would:

• Impose a 4 percent surtax on adjusted gross incomes (AGI) over $150,000 ($200,000 per couple) and a 4.6 percent surtax on AGI's over $250,000 ($500,000 per couple);

• Repeal last-in, first-out method of accounting known as LIFO [LIFO is an established, widely-accepted inventory accounting method that has been used since the 1930s. Repealing LIFO would be a massive tax increase on hundreds of thousands of large and small American manufacturers]; and,

• Repeal the section 199 manufacturing deduction [Companies with manufacturing based in the U.S. and/or selling, leasing, or licensing items that have been manufactured in the U.S. are eligible to take a tax deduction of 6% in year 2007.]

Chairman Rangel is planning to introduce a separate bill during the week of Oct. 29 that will include just a one-year AMT patch and also extend several tax breaks that are set to expire at year end before pursuing broader reforms.  He did not disclose how he would pay for those changes, which could cost as much as $65 billion. Congressional rules require that tax cuts be offset with tax increases or spending reductions, though lawmakers have been debating whether to waive the pay-for rules for this stopgap bill.  

Tax lawyers, lobbyists, and policy analysts expressed doubts that much of the tax reform proposal will pass in the foreseeable future, but it does provide some insight into the specifics of tax ideas that will be pursued by House Democrats in 2008 and beyond.

We will continue to keep you apprised of the tax proposals.  In the meantime, we would appreciate hearing any feedback from you about the Rangel proposal.  Please contact Stephanie Salmon, NADCA Washington office, 202/898-1444 or ss@wafed.com if you have any questions or comments regarding the tax package.