Lawmakers want to extend $31 billion in popular tax breaks, including an income tax deduction for sales and property taxes. The problem: how to pay for it.
The House planned to vote Wednesday on a big tax increase for investment managers to help finance the renewal of 45 tax deductions and credits for businesses and individuals. The tax breaks are scheduled to expire at year's end.
The bill would tax fees collected by managers of investment funds as regular income — instead of capital gains — increasing their tax liability an estimated $24 billion over the next decade. The House has passed similar measures in recent years, but they have died in the Senate.
The House proposal would raise $7.7 billion from a crackdown on international tax cheats.
Tax breaks that would be extended include a sales tax deduction for people in states without income taxes, a property tax deduction for people who do not itemize and lucrative credits that help businesses finance research and development.
The tax breaks are supported by Democrats and Republicans alike and are routinely extended each year. The tax increases are not. The dispute, combined with the Senate's prolonged debate on health care, makes it unclear whether the tax package will be enacted this year.
Lawmakers could retroactively pass the package early next year, but that would make tax planning difficult for businesses and individuals. Some business leaders complain that the practice of passing one-year extensions each year — rather than enacting permanent tax law — already makes it tough to plan.
President Barack Obama supports the tax package, including the tax increase on investment managers and the crackdown on international tax havens.
Investment managers typically get a fee to manage funds, plus a share of the profits earned for investors above a certain level. Under current law, the profit-sharing fees, called carried interest, are taxed as capital gains, with a top rate of 15 percent.
The bill would tax the fees as regular income, with a top tax rate of 35 percent. That is scheduled to rise to 39.6 percent in 2011.
Rep. Richard Neal, D-Mass., said it is hard to justify a 15 percent tax rate for wealthy fund managers while other workers must pay higher tax rates.
Republicans argue the bill would also raise taxes on income from real estate partnerships, affecting investors across the country.
"We're in a recession and for the obvious reasons you don't raise taxes in a recession," said Rep. Dave Camp of Michigan, the top Republican on the tax-writing House Ways and Means Committee. "What we want to try to do is stimulate investment, not tax it."
The crackdown on tax havens would impose new reporting requirements on foreign financial institutions doing business in the United States and on American advisers who help U.S. residents make investments overseas.
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