The current state of the economy and the gloomy outlook by many continues to be the leading story in various media outlets. Stimulus packages continue to make their way through Congress, and hopefully, as you read this, the final bill will be sent to the president for his signature.
The exact look of the package is in process as this column goes to print, as the House and Senate resolve their differences and the president makes his case to the public for the need of a stimulus package. All that can be said is that a package is expected, with a price tag in excess of $800 billion.
The package of tax incentives contains credits, rebates and deductions intended to give some liquidity to taxpayers. Some of the provisions have been used before. It is likely some tax provisions that were used immediately after the events of 9/11 may return in an effort to provide more tax incentives for businesses.
Based on recent proposals and reports from Washington, a five-year carry-back for tax losses is included. The ability to carry back tax losses and receive a refund on previously paid taxes is, under current law, only available for the prior two tax years. The additional three years may allow some taxpayers to access taxes paid in earlier tax years. This is a federal tax proposal and many states may not adopt such a provision. In fact, many states are limited in their ability to use tax losses as either a carry-back or carry-over item since they have budget statutes that mandate balanced budgets. Using certain tax attributes from one tax year in another tax year creates additional stress on already over-stressed state budgets.
The past year has provided several pieces of tax legislation: last year’s stimulus package, the farm act in May, the housing bill in the summer, and the bail-out bill in the fall. All contained elements of tax legislation that were targeted in some way at various elements of the economy. Contained in most of theses packages were provisions targeted at spurring business investment by increasing expensing of capital expenditure by small business and accelerating depreciation deductions for certain capital expenditures. The current discussion is to continue and extend many of these provisions for additional amounts of time. Of course, to encourage certain capital expenditure, there must be a need for the capital investment as well as financing available to finance the investment. The current credit crisis has obviously had some impact on the effectiveness of the changes and incentives enacted over the past 12 months.
Many of the proposals include provisions related to tax credits for individual and business taxpayers. The issue with tax credits is that the amount of credits often exceeds an actual liability, and many credits actually require these be a tax liability in order to claim a tax credit to reduce the tax. Unless the tax credit is refundable (not dependent on tax liability), it is often difficult for many taxpayers to access the cash benefit of the tax credit.
Even when tax credits or rebates are refundable, the unpredictability of the use of the cash is often guesswork in trying to evaluate how it may or may not spur certain behaviors by the recipient of the benefit. Last year’s tax rebate checks reportedly have received mixed reviews on whether the cash actually was used for the purchase of products or services or whether a portion was used to reduce consumer debt and did not help prime the economic pump. Also, recall that when the checks were received by many taxpayers, energy prices were at a near all-time high. If energy prices remain at current levels, that liquidity infusion may be larger in annual economic impact. The reduced energy prices have impact on the country’s trade deficit and the liquidity of certain of our trading partners.
We haven’t actually seen much in the stimulus proposals for a “fix” rather than an annual “patch” for the alternative minimum tax, or AMT, for individuals. As states and local municipalities may be forced to raise income and property taxes, the result may be to push middle-income taxpayers into a situation of triggering the AMT. A fix or a longer-term patch may be as significant in terms of the impact as any rebate checks or tax credits to individual taxpayers.
Staying on the AMT theme, perhaps the current economic environment may be a good opportunity to examine our overall tax code and whether it meets the demands and requirements of a country in a global economy, and in that context, make sure it is competitive in how it taxes profits, rewards investment and provides incentive for the type of investment needed on both a short-term and long-term basis. Unfortunately, some of the immediate needs won’t allow the required study and reflection that may be needed to accomplish more long-term focus.
Perhaps, as in the 1980s, a major reform effort may happen. Many of us recall the Tax Reform Act of 1986, which attempted to streamline tax brackets, flatten the tax base and create some simplification for federal taxes.
Unfortunately, over time, major pieces of tax legislation, almost on an annual basis and some years more often, have certainly changed the tax code, primarily by adding additional tax brackets, creating a myriad of tax credit programs (especially for individuals) and phase-in and phase-out of deductions, credits and other tax attributes that have added much complexity to our tax system. That complexity and the fact that very few taxpayers can actually prepare their tax returns without the benefit of an outside preparer or software is proof that the tax code and the ability to properly apply it can pose problems. The problems of several of the Obama cabinet nominees may be, in part, the result of the complexity built into the tax system over the past 20-plus years.
In the coming weeks, there will be many tax changes to digest and absorb, and whether they actually provide the desired impact to the economy, only time will tell. In the meantime, all affected should take note of the provisions that impact their own situations and consider what actions, if necessary, are required to fully take advantage of the measures. If the past 12 months is any indication, there may be more changes in store as the U.S. economy is nursed back to health.
William F. Roth III is a tax partner with BDO Seidman LLP. The views expressed above are those of the author and are not necessarily those of BDO Seidman.