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Tuesday October 13, 2015

Washington News

Washington Hotline

Clinton, Carson, Jindal and Rubio on Taxes

Four presidential candidates advanced specific tax proposals this week. Candidate Hillary Clinton proposed a tax on high-frequency trading. Her campaign published a brief and stated, “The growth of high-frequency trading (HFT) has unnecessarily burdened our markets and enabled unfair and abusive trading strategies that often capitalize on a two-tiered market structure with obsolete rules. The tax would hit HFT strategies involving excessive levels of order cancellations, which make our markets less stable and less fair.”

The Clinton proposal lacks specifics, but may be similar to a financial transactions tax advocated by candidate Bernie Sanders. His proposal is to levy a 0.5% tax on all stock trades and use the estimated $47 billion per year to fund free public college education.

Two different Washington tax research groups commented on the proposals. While they could raise revenue, the risk is that a financial transaction tax would cause the trading and jobs to migrate to London, Hong Kong or another financial center.

In a media interview, Dr. Ben Carson was asked how to enhance the economy. He pointed to the $2 trillion held overseas by U.S. corporations. Carson proposed to allow the companies to repatriate or return the funds to the U.S.A. without tax if at least 10% of the amount was used in “empowerment zones” in major cities. The urban zones would be designed to create good jobs. Carson suggested that creating these jobs for the unemployed would be “the biggest stimulus since the New Deal and FDR, and wouldn’t cost the taxpayers a penny.”

Louisiana Governor Bobby Jindal published a fairly comprehensive tax plan. He would reduce the current seven income tax brackets to a tax of 2% on the first $10,000, 10% on the next amount up to $90,000 and 25% over $90,000. The brackets would be doubled for married couples.

Gov. Jindal also suggests a $30,000 per year tax-free savings plan. He eliminates all itemized deductions except charitable gifts and mortgage interest, with a mortgage limit of $500,000. The plan repeals the corporate income tax, the alternative minimum tax and the estate tax. All capital gains would be taxed as ordinary income.

A nonpartisan Washington organization, the Tax Policy Center, suggested that the plan would stimulate the economy but could result in $9 trillion in lost federal revenue over a decade.

Sen. Marco Rubio spoke at a conference in New York this week. He emphasized the importance of new “sharing economy” companies such as Uber or Handy. The Handy organization allows individuals to connect with plumbers, maids or handymen. Handy employees earn approximately $18 per hour for their services.

Rubio notes that these service persons are not technically employees, but do not fit very well within the independent contractor status. He suggests that we follow some of the European nations and create a third status known as a dependent contractor. Companies such as Handy could then provide additional training and recommended actions to the service personnel based on customer feedback.

Editor’s Note: There is one aspect of the comprehensive plan by Bobby Jindal that is positive for philanthropy. As has been true of several other proposed comprehensive tax plans, lower tax brackets are funded through elimination of deductions. However, the plans all contemplate retaining the charitable income tax deduction. While it is still a very long way to tax reform, the principle to retain the charitable and mortgage deductions and eliminate other itemized deductions is very favorable for philanthropy.

Cost of Higher Education Hearing

On October 7th, the House Ways and Means Subcommittee on Oversight held a hearing to discuss the costs of higher education. Chairman Peter Roskam (R-IL) opened the hearing. He stated, “Today we are here to look at what is behind the rising cost of college and to consider whether this nation’s tax policies are partly to blame. We will come at the problem from a number of different angles.”

Roskam asked four questions. Does federal funding encourage tuition increases? Are increases in administrative staff and facilities needed? Is the level of executive compensation appropriate? Are schools using endowments effectively to provide student aid?

Terry Hartle, Senior Vice President of the American Council on Education, responded to many of the questions raised by Chairman Roskam. Hartle referred to a College Board study that stated the current public institution tuition is $9,140, but the net cost after student aid is $3,030. For private institutions, the published tuition is $31,230, but the typical net cost per student is $12,360.

Colleges and universities substantially increased grant aid over the past decade. It was $25.2 billion in 2003-04 and increased to $48.2 billion in 2013-14.

Hartle pointed to the “steep cuts by states in operating support for public higher education” as a major factor leading to increases in tuition over the past three decades. Between 1998 and 2015, there was a 29% reduction (after inflation) in state support of public institutions.

MaryFrancis McCourt is Senior VP and Chief Financial Officer of Indiana University. She spoke on behalf of the National Association of College and University Business Officers (NACUBO).

McCourt emphasized the importance of endowments. She stated, “Fundamentally, endowments are expected to provide stable funding to the university while creating inter-generational equity by balancing the current and future need of the university. Mandating endowment payouts to fund a ‘flavor-of-the-month’ would simply equate to poor financial management.”

McCourt also described efforts by colleges and universities to limit tuition increases. The Indiana University tuition increases for the current and next year are reduced to under 2%.

Tax Agenda Uncertain

Following the resignation of Rep. John Boehner (R-OH), the House Republican Caucus must select a new Speaker. Majority Leader Kevin McCarthy (R-CA) was running for the position, but withdrew when it appeared that conservative members would not support him.

Initially, House Ways and Means Chairman Paul Ryan (R-WI) declined to seek the Speaker of the House position. However, several members have suggested to him that he should reconsider and seek the position.

The challenge for the House is to maintain the legislative schedule in the midst of this uncertainty. Rep. Charles Boustany (R-LA) commented, “Having this disruption really undermines the ability of the House to do its work. It weakens the House with respect to the executive branch, and it is really a bad development.”

Several key bills are pending. The federal budget year commenced on Oct. 1 and $3.5 trillion in budget bills are in negotiation. The highway bill expires on Oct. 29. By Nov. 5, Treasury Secretary Jacob Lew predicts the nation will exhaust all options and must have an increase in the debt limit.

Chairman Ryan and Sen. Chuck Schumer (D-NY) were negotiating a six-year extension of the Highway Bill funded by international tax reform. The remaining Senate legislative time makes that bill quite difficult to pass.

Finally, the tax extenders (including the IRA charitable rollover) await action. Rep. Richard Neal (D-MA) noted, “You can always postpone” the tax extenders because they are retroactive to Jan. 1, but “you cannot do the debt ceiling retroactive.”

Editor’s Note: Passage of the IRA rollover and other tax extenders now seems to be deferred until November. With the passage of time, the House is more likely to accept the Senate plan for two years of temporary extenders.

Applicable Federal Rate of 2.0% for October -- Rev. Rul. 2015-21; 2015-40 IRB 1 (17 September 2015)

The IRS has announced the Applicable Federal Rate (AFR) for October of 2015. The AFR under Section 7520 for the month of October will be 2.0%. The rates for September of 2.2% or August of 2.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2015, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.

Published October 9, 2015
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