|Committee||Ways and Means|
|Date||March 4, 2010 (111th Congress, 2nd Session)|
|Staff Contact||Andy Koenig|
The House is scheduled to consider H.R. 2847, the Hiring Incentives to Restore Employment Act, on Thursday, March 4, 2010, under a closed rule. H.R. 2847 was originally passed as the Commerce-Justice-Science Appropriations Act of 2010 on June 18, 2009. The legislation was later amended and used as the vehicle for the Jobs for Main Street Act of 2010, which passed on December 16, 2009, by a vote of 217-212. On Monday, February 22, 2010, the legislation was amended again in the Senate, which passed the Senate on Wednesday, February 24, 2010, by a vote of 70-28. The House amended the bill further on March 4, 2010.
H.R. 2847 contains a suspension of payroll taxes for employers that hire new workers that had been unemployed for the previous 60 days, a $1,000 tax credit for retaining employees, increased expensing of new equipment purchased by small businesses in 2010, and expanded tax credit bonds sold by local government and private entities and subsidized by the government. In addition, the legislation includes an extension of surface transportation programs through December 31, 2010, and includes a $19.5 billion transfer from the general fund to the Highway Trust Fund (HTF) to compensate for the projected FY 2010 shortfall. The following analysis is based on the House amendment to H.R. 2847.
Incentives for Hiring Unemployed Workers: H.R. 2847 suspends employers' requirement to pay payroll taxes for certain new employees through December 31, 2010. In order to qualify, the employee must sign an affidavit that they have not been employed for more than 40 hours in the previous 60 days, and the employer must ensure that the employee isn't employed to replace another worker unless they left voluntarily or were fired for cause. In addition, the bill would provide a tax credit of the lesser of $1,000 or 6.2 percent of an employee's wages to an employer if they retained an employee hired under this provision for 52 weeks, essentially subsidizing employment. According to the Republicans staff of the House Ways and Means Committee, employers would receive a subsidy less than $1,000 only for workers making less than $16,129 annually. In addition, the House amendment would delay the application of tax benefits until the second quarter of 2010. The House amendment would also apply the retention credit to U.S. possessions, such as Guam and Puerto Rico, which the Senate amendment did not.
According to JCT, this provision would lower revenues, and in turn increase deficits, by $13.04 billion over ten years.
Increase in Expensing of Certain Businesses Assets: H.R. 2847 increases the amount of small business expensing allowed under section 179(b) of the Internal Revenue Code for 2010 in an attempt to encourage new purchases of equipment. Under the legislation, a small business can expense up to $250,000 against their tax liability through December 31, 2010, instead of depreciating the costs over time. Under the bill, the expensing amount would decrease at a dollar for dollar rate for any total spending on qualified business property over $800,000. Under current law, small businesses may only expense $150,000 of qualified business equipment, which begins to phase out at $500,000. The bill would re-instate the $250,000 and $800,000 levels for expensing which were included in the Democrats' "stimulus" bill and expired in December.
According to JCT, this provision would lower revenues, and in turn increase deficits, by $35 million over ten years.
Qualified Tax Credit Bonds: The bill expands Build America Bonds, which were created in the Democrats stimulus bill, and through which the government subsidizes purchasing bonds from State and local governments or qualified private entities. Under H.R. 2847, issuers of certain current government-supported tax credit bonds may elect to take the higher federal subsidies offered to issuers of Build America Bonds. The bill would allow four bonds to offer the higher federal subsidy: 1) new clean renewable energy bonds, 2) qualified energy conservation bonds, 3) qualified zone academy bonds, and 4) qualified school construction bonds. The legislation provides a tax credit subsidy of 65 percent of the interest on bonds issued by a "qualified small issuer" (a bond issuer not expected to issue more than $30 million in bonds in a calendar year) and 45 percent for all other issuers.
According to JCT, this provision would increase the deficit by $4.5 billion.
Federal Aid to Highways: The bill extends the authorization of surface transportation programs under SAFETEA-LU through December 31, 2010. In addition, the bill increases authorization levels and transfers $19.5 billion from the general fund to the HTF. In addition, the House bill provides that at least 10 percent of certain highway funds "shall be expended through small business concerns owned and controlled by socially and economically disadvantaged individuals."
Authorizations: The legislation increases the authorization levels for transportation programs, raising the authorized funding levels compared to current law. According to CBO, the bill increases budget authority for highway programs by $20.8 billion in FY 2010 and by $12.1 billion each year from FY 2011 through FY 2020. Under the bill, authorization levels would increase by $142.4 billion over ten years. Because the authorizations are subject to appropriation, they are not, however, projected as a direct cost in the CBO score. According to the Senate Budget Committee Republicans, the cost will have an impact on deficit spending. "How is the HTF supposed to cover the outlays that will flow from the $142 billion increase in spending authority in this bill? Absent enactment of an increase in taxes dedicated to the HTF, future transfers from the general fund to the HTF (and a commensurate increase in the deficit and the debt) will be required to allow those outlays to occur." Some Members may be concerned that the bill authorizes $142.4 billion in new highway spending, laying the groundwork for future deficit spending, without defining a dedicated source to pay for the funding.
Transfer: The bill transfers $19.5 billion from the federal government's general fund to the HTF to compensate for the projected FY 2010 shortfall due to a lack of sufficient revenues from the gas tax. Under the bill, $14.7 billion of the transfer would be dedicated to the Highway Account, while $4.8 billion would go into the Mass Transit Account in the Highway Trust Fund.
In order to facilitate the transfer, the bill repeals a provision of the Transportation Equity Act for the 21st Century Act of 1998 (TEA 21) which stated that the HTF would not receive interest payments on funds that were transferred to the general fund in 1998. The section which transfers the funds is titled "Restoration of Certain Foregone Interest to the Highway Trust Fund," implying that the funds are merely interest payments and not new spending. However, under current law, the HTF is not owed or entitled to interest payments. In addition, according to the Republican staff of the Senate Budget Committee, "the $19.5 billion of ‘interest' is a totally imaginary number that is ‘conveniently' close to the amount the Administration says is needed in the HTF to get through the end of FY 2011." Some Members may be concerned that in the last two years, the HTF has already received $15 billion in transfers from the general fund-$8 billion in 2008 and $7 billion in 2009-and this legislation would bring that total to $34.5 billion in the past three years without doing anything to address the HTF's annual shortfalls.
Because the $142.4 billion in increased budget authority is subject to appropriation, CBO does not score the increased authorizations as a direct cost. In addition, CBO does not score the $19.5 trillion transfer as a direct cost because it is viewed as a transfer between two government accounts. Therefore, CBO's score only shows $334 million in direct spending increases from provisions extending surface transportation programs.
Foreign Account Tax Compliance: In order to offset the loss of revenue from the temporary tax relief provisions H.R. 2847 includes provisions which require stricter reporting on U.S.-held foreign assets in an effort to raise more revenue by detecting tax evasion. Identical provisions were passed as offsets to Tax Extenders Act of 2009, H.R. 4213, which passed the House on December 9, 2009, by a vote of 241-181.
Reporting on certain foreign accounts: The bill requires foreign financial institutions, foreign trusts, and foreign corporations to obtain and provide information from each of their account holders to determine if any account is American-owned. Foreign financial institutions would also be required to comply with verification procedures and to report any U.S. accounts maintained by the institution on an annual basis.
Any foreign financial institution that did comply with the new verification and reporting standards would be subject to a 30 percent tax on income from U.S. financial assets held by the foreign institution. The withholding tax would not apply to any payment if the owner is a foreign government, an international organization, a foreign central bank, or any other class identified by the Treasury Department as posing a low risk of tax evasion.
The bill's requirements would exclude U.S. accounts in foreign institutions if the aggregate value of the account did not exceed $10,000.
Under Reporting With Respect to Foreign Assets: H.R. 2847 requires any U.S. taxpayer with a foreign financial asset exceeding $50,000 in value to report the asset with their tax return. The penalty for failure to report a foreign financial asset would be $10,000 and could possibly increase to as much as $50,000.
Other Disclosure Provisions: The bill requires shareholders of passive foreign investment companies to file an annual report with information as required by the Treasury Department.
Provisions Related to Foreign Trusts: H.R. 2847 establishes reporting requirements on U.S. owners of foreign trusts similar to those for U.S. holders of foreign assets. A U.S. taxpayer failing to report a foreign owned trust would pay the greater of $10,000 or 35 percent of the amount of the trust.
Some Members may be concerned that the provisions to address offshore tax evasion never received full Committee consideration and could have effects that reach far beyond the scope of closing offshore loopholes. According to the Republican Ways and Means Committee staff, an earlier version of this legislation was the subject of only one subcommittee hearing. In addition, the Committee reported that "several witnesses who appeared at the hearing, and numerous other interested parties who subsequently submitted comments for the formal hearing record, did raise serious questions about whether various provisions.... were effective and workable ideas." While Members may support closing offshore loopholes, they may also be concerned that this legislation could have adverse unintended consequences such as divestment of U.S. assets by foreign banks.
According to JCT, this provision will increase revenue by $8.7 billion.
Delay of Worldwide Interest Allocation: The bill delays the application of worldwide interest allocation provisions, first enacted into law but never implemented in 2004. The bill would delay the application of worldwide interest (which was supposed to occur in 2008 but has already been delayed multiple times for the purpose of PAYGO compliance) from December 31, 2017, to December 31, 2019.
Worldwide interest allocations, if not delayed, would allow certain U.S.-based multinational firms with interest expenses to change the way such expenses were allocated between domestic and foreign source income. The modified allocation would allow multinational companies to compute their foreign tax credit to more accurately reflect how firms account for interest expenses. Delaying the change would require theses firms to continue to pay higher U.S. taxes. Some Members may be concerned that, in addition to increasing taxes on businesses during a recession, further delay would create undue uncertainty for many firms in an uncertain enough economic climate. This implementation date was already delayed by two years in 2008, and again by seven years in 2009.
According to JCT, this bill will increase revenue by $9.9 billion.
Corporate estimated tax timing shifts: H.R. 2847 includes three separate timing shifts for the payment of corporate estimated taxes by companies with assets of $1 billion or more. These provisions would increase covered corporations' estimated tax payments that are currently due in the fourth quarter of particular years by a certain percentage, while decreasing those corporations' payments by a corresponding amount in the first quarter of the following years. While scoring as neutral over the entire 11-year budget window, these timing shifts enable the Majority to satisfy the letter of their PAYGO rules over certain other budget windows (i.e., 2010-2014, 2010-2015, 2010-2019, and 2010-2020) by artificially moving revenue from the first quarter of one year to the fourth quarter of the year before.
According to JCT, this provision will have no effect on revenue over the 2010 through 2020 period.
Government Job Creation Programs: On February 13, 2009, the House passed H.R. 1, the American Recovery and Reinvestment Act of 2009, also known as the Democrats' "stimulus" bill. According to CBO's re-estimate, the bill contained $862 billion in new spending and tax provisions and required the U.S. to increase its interest payments on borrowed money by $347 billion over ten years, raising the bill's total cost to $1.1 trillion. Democrats' said the stimulus would create between three and four million new jobs. In January, 2009, the Obama Administration claimed that unemployment would not surpass 8 percent if the stimulus was passed. However, the stimulus bill failed to meet its objective and unemployment is now 9.7 percent and the unemployment level has increased by more than 3 million jobs since February.
Some Members may be concerned that the $1,000 tax credit for hiring and retaining employees resembles the Jimmy Carter tax credit of the late 1970's, which did little to curb long-term unemployment. In 1977, the Carter Administration signed the New Jobs Tax Credit (NJTC), one of four programs of the 1977 economic stimulus package, into law. The NJCT provided federal wage subsidies for two years, from 1977-1978, to companies that hired new workers. During the two years of the program, one-in-three new jobs received the tax credit at an estimated cost of $4 billion annually. Despite the high number of credit recipients, the actual impact of the NJCT has been the topic of contentious debate. During that period the unemployment rate dropped by 1.5 percent. However, the decline in unemployment was short-lived and the NJTC ultimately failed to curb unemployment in the long run. Two years later, in 1979, the unemployment rate began to increase rapidly (perhaps as a result of the loss of federally subsidized jobs). Emil Sunley, the Deputy Assistant Secretary for Tax Analysis at the Carter Administration's Treasury Department said in 1980 that, "The impact of the credit on jobs was slight." Likewise, Howard Gleckman of the Urban-Brookings Tax Policy Center said of a similar subsidy proposed last year, "tax credits for hiring new workers promise to be an administrative nightmare and won't create many new jobs."
A number of concerns have been raised with the proposal, including:
Who Qualifies?: There are administrative questions as to how to measure who receives the tax credit (i.e., what constitutes new or incremental employment) and how it is distributed. Some have suggested that businesses could easily game the system to receive a benefit without actually increasing employment. For instance, without proper guidelines and oversight, an employer could fire and hire the small employee as a new worker or split one position into two. And the program would be administered by the same Administration that has had abandoned its confusing and misleading stimulus methodology of jobs "saved or created."
Not Long-Term, Pro-Growth: Unlike many of the proposals in the Republican "stimulus" alternative, this sort of jobs tax credit is a temporary wage subsidy and not a true drop in the federal tax burden. Many Members may believe that long-term tax relief (such as lowering tax rates) is a more effective way to spur long-term economic growth and across-the-board employment.
According to JCT's analysis of H.R. 2847, provisions in the bill, including the payroll tax holiday and the section 179 expensing expansion, and Build America Bond expansion would increase deficits by $17.6 billion over ten years. JCT also estimates that tax increases in the bill would raise revenues by $18.6 billion. The total effect of these provisions, according to JCT, would be a deficit reduction of $991 million over ten years. However, this estimate does not include the $19.5 billion transfer from the general fund to the HTF or the $142.4 billion in new authorizations for surface transportation programs over the next ten years.