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# Legislative Bulletin..............................................February 16, 2007

**Contents:**

**H.R. 976**---Small Business Tax Relief Act

H.R. 976---Small Business Tax Relief Act (*Rangel, D-NY*)

**[Order of Business]{.underline}**: The bill is scheduled to be
considered on the House floor on Friday, February 16^th^, under a motion
to suspend the rules and pass the bill. This process is a violation of
House Rules, and thus a special rule (H.Res. 161) must be passed to
allow the consideration of this one suspension on a Friday:
<http://www.rules.house.gov/SpecialRules_details.aspx?NewsID=2513>.
House Rule XV, Clause 1(a) provides that suspensions can only be
considered on Mondays, Tuesdays, and Wednesdays---and during the last
six days of a session of Congress.

**[Summary (as passed by the Ways & Means Committee)]{.underline}**:
H.R. 976 would ***permanently*** increase taxes on some taxpayers to
"pay for" ***temporary*** tax cuts for other taxpayers. [The bill, as
scored by the Joint Committee on Taxation, would yield a **net tax
increase** of \$225 million over the FY2007-FY2012 period, and a **net
tax increase** of \$45 million over the FY2007-FY2017
period]{.underline}: <http://www.house.gov/jct/x-8-07.pdf>. Highlights
of the legislation are as follows:

[TAX INCREASES and SHIFTS]{.underline}:

***Costs taxpayers \$1.380 billion over the FY2007-FY2017 period.***

-   **[Denies the lowest maximum capital gains tax rate for certain
    minors and adults]{.underline}.** Beginning in tax-year 2007,
    taxpayers would be denied the lowest maximum capital gains and
    dividends tax rate (5% in 2007, 0% in 2008, 0% in 2009, 0% in 2010,
    and 8% or 10% thereafter) if they are under age 19 (age 24, in the
    case of a student) and if their earned income is less than half of
    their financial support (i.e., if they are more than 50% dependent
    on their family's financial support).  **Increases taxes by \$874.0
    million over the FY2007-FY2017 period.**

-   **[Extends the suspension of interest payments due to the
    IRS]{.underline}. ** Beginning six months after this legislation's
    enactment, taxpayers who underpay their taxes and are subject to
    interest penalties on the unpaid amounts would not have their
    interest payments suspended until 22 months after the IRS has failed
    to contact the taxpayers about the underpayments (as opposed to the
    current-law 18 months).  Under current law, the interest begins to
    accumulate on April 15 of the year the taxes were due.  Interest
    suspensions ends when the IRS notifies the taxpayer of the
    underpayment.  **Increases taxes by \$506.0 million over the
    FY2007-FY2017 period.**

-   **[Adjusts the deadlines for corporate estimated tax
    payments]{.underline}.** Increases the corporate estimated tax
    payments due in the summer of FY2012 for corporations with assets of
    at least \$1 billion. This provision does not yield a net tax
    increase; it merely requires a higher quarterly payment of corporate
    estimated taxes in the summer of 2012, and a correspondingly lowered
    estimated payment thereafter. Last year's tax reconciliation bill
    (Public Law 109-222) included a similar tax-payment shift. That is,
    under current law, the estimated payments due in the summer of
    FY2012 have to be 106.25% of what would otherwise be paid (100% =
    one quarter of the year's estimated tax payment due). H.R. 976 would
    increase that amount from 106.25% to 112.75%, requiring businesses
    to pay even more of their taxes early. **Estimated to capture
    \$4.026 billion in additional revenues in FY2012, yet reduce
    revenues by the same amount in FY2013, yielding a net zero score
    over the FY2007-FY2017 period.**

[TAX CUTS]{.underline}:

***Saves taxpayers \$1.335 billion over the FY2007-FY2017 period***

-   **[Extends and expands the Work Opportunity Tax Credit
    (WOTC)]{.underline}.  ** The WOTC would be extended for one year
    (through the end of 2008), as modified. The WOTC allows employers to
    claim the maximum \$2,400 credit when they hire individuals from
    nine "target" groups (such as families receiving public assistance,
    high-risk youths, ex-felons, qualified veterans, and food stamp
    recipients age 18-39). The credit applies only to cash wages. H.R.
    976 would expand the qualified veterans' targeted group to include a
    disabled individual who has a hiring date that is not more than one
    year after having been discharged or released from active duty in
    the U.S. Armed Forces, or has been unemployed for six months or more
    (whether or not consecutive) during the one-year period ending on
    the date of hiring. The amount of qualified first-year wages for
    disabled veterans would be \$6,000, instead of \$12,000, thus doubly
    the effective credit for hiring a disabled veteran. H.R. 976 would
    also expand the high-risk youth targeted group (to individuals that
    have a maximum age of 39, instead of current-law 25), as well as the
    vocational rehabilitation targeted group. **Saves taxpayers \$695.0
    million over the FY2007-FY2017 period.**

-   **[Extends section 179 expensing]{.underline}**. Extends the sunset
    date for one year (from the end of 2009 to the end of 2010) for the
    expanded Section 179 expensing provisions in current law. Presently,
    small businesses may expense (i.e., deduct in the first year) up to
    \$112,000 of certain asset investments, phasing out
    dollar-for-dollar to the extent the business' annual investments
    exceed \$450,000. H.R. 976 would also immediately increase the
    \$112,000 and \$450,000 thresholds to \$125,000 and \$500,000, and
    index them for inflation through and including 2010. After 2010, the
    expensing limit will decline to \$25,000 and the phase-out threshold
    will decline to \$200,000. **Saves taxpayers \$68.0 million over the
    FY2007-FY2017 period (but \$3.5 billion over the FY2007-FY2012
    period).**

-   **[Extends the restaurant tip credit]{.underline}.**  The restaurant
    tip credit would be extended at the current level of \$5.15 per
    hour.  The federal minimum wage under the Fair Labor Standards Act
    (FLSA) is \$5.15 per hour. In the case of tipped employees, the FLSA
    provides that the minimum wage may be reduced to \$2.13 per hour if
    the combination of tips and cash income equals the federal minimum
    wage. Under current law, employee tip income is treated as
    employer-provided wages for purposes of the Federal Insurance
    Contributions Act (FICA). A business tax credit is provided equal to
    an employer's FICA taxes paid on tips [in excess of]{.underline}
    those treated as wages for purposes of meeting the minimum wage
    requirements of FLSA. If this provision were not included in the
    bill, restaurants would not be able to claim the tip credit on
    payroll taxes paid for tipped employees on income between \$5.15 and
    a new higher hourly minimum wage.  Because H.R. 976 does not include
    an increase in the minimum wage (that was included in H.R. 2), the
    Joint Committee on Taxation scores this provision as having no
    revenue effect.  However, if a minimum wage increase were included
    in H.R. 976, more employer-provided wages would be subject to the
    tip credit, and thus this provision would be scored as providing
    some tax relief (reportedly as much as \$400 million over the
    FY2007-FY2017 period) from the restaurant tip credit extension. **No
    revenue implications as currently written.**

-   **[Allows the WOTC and the tip credit to be claimed against the
    Alternative Minimum Tax (AMT)]{.underline}.** Generally, business
    tax credits cannot be used to offset any liability under the AMT.
    H.R. 976 would allow the WOTC and the restaurant tip credit to
    offset tax liability under the AMT beginning in tax-year 2007.
    **Saves taxpayers \$572.0 million over the FY2007-FY2017 period.**

-   **[Adjusts the self-employment taxes of married
    couples]{.underline}.**   H.R. 976 would allow a qualified joint
    venture whose only members are a husband and wife filing a joint
    return not to be treated as a partnership for tax purposes (as they
    currently are required to do). A qualified joint venture is a joint
    venture involving the conduct of a trade or business, if the only
    members of the joint venture are a husband and wife, both spouses
    materially participate in the trade or business, and both spouses
    elect to have the provision apply. Income, gains, losses,
    deductions, and credits would be divided between the spouses
    according to their respective venture interests.  Each spouse would
    then account for his or her share on the appropriate form.
    **Negligible savings to taxpayers.**

 

**[Additional Background]{.underline}**: On January 10, 2007, the House
passed H.R. 2, a bill raising the federal minimum wage by 41% over
two-plus years. On February 1, 2007, the Senate amended H.R. 2 by adding
a variety of tax incentives for small businesses and then passing the
bill 94-3. Because revenue bills must originate in the House (see
Article I, Section 7, Clause 1 of the U.S. Constitution), and because
H.R. 2 did not have tax provisions in it, H.R. 976, once it passed the
House, will presumably be used as a vehicle into which can insert its
provisions of H.R. 2 and ask for a conference on H.R. 976 with the
House. The conference will have to primarily address the tax provisions
because the tax language in the Senate-passed H.R. 2 is markedly
different from that in H.R. 976. The minimum wage language is the same
in the House and Senate versions of H.R. 2.

**[RSC Bonus Fact]{.underline}**: If H.R. 976 included language raising
the federal minimum wage, it would yield a larger tax cut (possibly as
much as \$400-500 million over the FY2007-FY2017 period) from the
restaurant tip credit extension (see discussion above) and thus make the
consideration of H.R. 976 subject to a PAYGO point of order (House Rule
XXI, Clause 10), if it were not being considered on suspension.

This potential minimum wage link is where news reports about this bill's
supposed \$1.8 billion in tax cuts comes from (\$1.34 billion in actual
tax cuts over 11 years plus a possible \$400-\$500 million additional
tax cut **[if]{.underline}** this bill were merged with a minimum wage
increase).

**[Committee Action]{.underline}**: On February 9, 2007, the bill was
referred to the Committee on Ways & Means, which, on February 12, 2007,
marked-up and ordered the bill reported to the full House by voice vote
with no amendments considered (beyond the chairman's amendment in the
nature of a substitute, which was only slightly different from the
chairman's mark).

**[Possible Conservative Concerns]{.underline}**: Some conservatives may
be concerned that the Joint Committee on Taxation's revenue estimate for
this bill shows a net tax increase over the FY2007-FY2012 period and
over the FY2007-FY2017 period. Some conservatives may also be concerned
with *permanently* increasing taxes on some taxpayers to "pay for"
*temporary* tax cuts for other taxpayers. Additionally, some
conservatives may be concerned that H.R. 976 is being used as a vehicle
to make it **easier** to pass a 41% increase in the federal minimum
wage. Furthermore, the bill [chips away at the capital gains and
dividends tax cut]{.underline} (by preventing certain students under age
24 and certain non-students under age 19 from getting the lowest rate
available under current law), while effectively increasing interest
penalties for certain taxpayers, and accelerating certain quarterly tax
payments for corporations.

**[Administration Position]{.underline}**: The Statement of
Administration Policy (SAP), among other things states that:

-   "The Administration supports House passage of H.R. 976 as a step
    toward\
    legislation to increase the minimum wage by \$2.10 over two years,
    but\
    believes the bill should be strengthened by adding additional small\
    business tax relief to mitigate potential job loss."

-   "The Administration does not think it is necessary to tie this small
    business\
    tax relief to revenue increases."

<http://www.whitehouse.gov/omb/legislative/sap/110-1/hr976sap-h.pdf>

**[Cost to Taxpayers]{.underline}**: The Joint Committee on Taxation
estimates that H.R. 976 would:

-   Reduce taxes by \$162 million in FY2007;

-   Reduce taxes by about \$5.798 billion over the FY2007-FY2011 period;

-   Increase taxes by \$225 million over the FY2007-FY2012 period;

-   Reduce taxes by about \$263 million over the FY2007-FY2016 period;
    and

-   Increase taxes by \$45 million over the FY2007-FY2017 period.

**[Does the Bill Expand the Size and Scope of the Federal
Government?]{.underline}**: No.

**[Does the Bill Contain Any New State-Government, Local-Government, or
Private-Sector Mandates?]{.underline}**: No.

**[Does the Bill Comply with House Rules Regarding Earmarks and Limited
Tax Benefits?]{.underline}**: Although a statement about any limited tax
benefits in the bill, as required by House Rule XXI, Clause 9(a),
remains unavailable, such a statement is not necessary, by definition,
for legislation considered under suspension of the rules.

**[Constitutional Authority]{.underline}**: A committee report citing
constitutional authority was unavailable at press time.

**[Outside Organizations]{.underline}**: Americans for Tax Reform is
remaining officially silent on this legislation (because the net score
is nearly zero over 11 years), while the National Taxpayers Union is
opposing the legislation (because of the net tax increases and the
facilitation of the minimum wage increase), and the U.S. Chamber of
Commerce is supporting the legislation.

**[RSC Staff Contact]{.underline}**: Paul S. Teller,
<paul.teller@mail.house.gov>, (202) 226-9718