Lead taxwriters in the House and Senate have emerged from lengthy negotiations to announce a deal on legislation to extend various popular tax breaks that expired at the end of 2009. For individuals these include the deduction for state and local sales taxes, the additional standard deduction for real property taxes, and the above-the-line deduction for qualified tuition and related expenses. These tax breaks aren’t particularly controversial, but every year there’s a struggle to reach agreement on whether to offset the revenue loss with a tax increase somewhere else, and if so, how to do that. Despite the agreement between Democrats Max Baucus of the Senate Finance Committee and Sander Levin of the House Ways and Means Committee, it isn’t yet clear that the votes are available to pass this legislation.
A key hangup is the treatment of carried interests. Current rules allow managers of investment partnerships — hedge funds, venture capital operations and others — to treat much of the compensation they receive for their services as capital gains. The rest of us would love to be able to do that, of course, as the effect is to reduce the tax rate on this income by more than half. It’s an advantage that unfairly shifts billions of dollars in income tax liability away from super-wealthy individuals and onto the rest of us. Yet some in Congress on both sides of the aisle have achieved enlightenment on the broader economic benefits of permitting this income to remain lightly taxed after accepting hefty campaign contributions from the loophole’s beneficiaries.
Levin and Baucus agreed to split the baby, treating 75% of this compensation as ordinary income and allowing the rest to continue to be taxed as capital gain. The deal provoked some grumbling among Democrats (and the expected derision from Republicans), so it remains to be seen whether the taxwriters be able to persuade enough members of their respective chambers to vote for the compromise.
Tags: extenders
