H.R. 4849: Small Business and Infrastructure Jobs Tax Act of 2010

H.R. 4849

Small Business and Infrastructure Jobs Tax Act of 2010

Sponsor
Rep. Sander M. Levin

Date
March 23, 2010 (111th Congress, 1st Session)

Staff Contact
Communications

Floor Situation

The House is scheduled to begin consideration of H.R. 4849, the Small Business and Infrastructure Jobs Tax Act of 2010, on Tuesday, March 23, 2010, subject to a rule closed rule. Under the rule, an amendment in the nature of a substitute will be considered as adopted. This Legislative Digest reflects the changes made by the substitute amendment. The legislation was introduced on March 16, 2010, by Rep. Sander Levin (D-MI) and referred to the Ways and Means Committee, which reported the bill by voice vote the following day. On March 19, 2010, the committee released House Report 111-447, including dissenting views signed by Ranking Member Dave Camp (R-MI), and 14 other committee Republicans.

Bill Summary

H.R. 4849, the Small Business and Infrastructure Jobs Tax Act of 2010, would spend $16.7 billion, primarily for the temporary extension of federally subsidized tax-credits for local infrastructure programs and temporary tax incentives for investments in small businesses.  In addition, the bill includes $2.5 billion in new welfare spending. The cost of the bill is offset with a number of permanent tax increases, including a $7.7 billion tax hike on U.S.-based subsidiaries of foreign companies that provide employment in the U.S.  Specifically, over the next ten years the bill provides $2.5 billion in welfare spending, $3.58 billion in small business tax incentives, $13.16 billion in state and local infrastructure subsidies, and raises taxes by approximately $19 billion.  A summary of the bill's provisions follows below.

Small Business Provisions

Temporary Exclusion of Small Business Gains:  H.R. 4849 would temporarily suspend capital gains taxes on investments in small businesses between March 15, 2010, and January 1, 2012.  Under current law, a "small business" would be defined for purposes of this provision as a corporation with less than $50 million in gross assets when the stock is issued.  According to JCT, this provision would reduce revenues by $1.9 billion over ten years.

Limitations and Reporting on Certain Penalties:  The bill would reduce penalties for failures to provide information on certain "reportable actions" under section 6707A of the IRS code that may be related to taxable business transactions.  Under the legislation, failure to report such a transaction after 2006 would be subject to a penalty of 75 percent of any tax reduction achieved from the failure to report (rather than the current flat penalties of $100,000 and $200,000).  The bill would also set maximum amounts on the penalties of $50,000 and $200,000, based on the type of transaction.  According to JCT, this provision would reduce revenue by $176 million over ten years.

SBA Loan Treatment:  The bill would include funds borrowed by a Small Business Investment Company (SBIC) and guaranteed by the Small Business Administration (SBA) as amounts "at-risk" for tax purposes.  Under current law, losses with respect to "nonrecourse debt," that is, debt for which there is no personal liability, is generally not deductible.  According to JCT, this provision would reduce revenues by $942 million over ten years.

Start-Up Expenditures:  The bill would increase the amount a taxpayer may deduct for business start-up expenditures from $5,000 to $20,000 and the phase-out trigger from $50,000 to $75,000 in 2010 and 2011.  According to JCT, this provision will reduce revenues by $508 million over ten years.

Infrastructure Provisions

Build America Bonds:  The bill expands Build America Bonds (BABs), which were created in the Democrats "stimulus" bill to give government subsidies for purchasing bonds from state and local governments or qualified private entities by excluding portions of the interest payments from gross income for tax purposes or making a direct payment to the issuer.  H.R. 4849 would extend both kinds of BABs (tax-credit bonds and direct-payment bonds) through December 31, 2013.  In addition, the bill would incrementally lower the percentage of a direct-payment BAB subsidy between 2010 and 2013, from 35 percent to 30 percent.  According to JCT, this would increase revenues by $31.5 billion and increase direct spending by $38.9 billion over ten years.  Thus, the provision would increase spending by $7.4 billion.

Tax-Exempt Bonds for Certain Services:  The bill would remove volume caps on private activity bonds that are used to finance the use of privately owned water or sewage facilities.  Generally, interest on private activity bonds is excluded from a bondholder's gross income, but states are subject to volume capped allocations for these bonds.  According to JCT, this provision would reduce revenues by $354 million over ten years.

Tribal Tax-Exempt Bonds for Certain Services:  H.R. 4849 would allow Indian Tribes to issue tax-exempt bonds to fund private activities relating to sewage and water supply facilities.  According to JCT, this provision would reduce revenues $18 million over ten years.

AMT Tax Treatment for Certain Bonds:  The bill extends provisions of the Democrats' stimulus bill which ensure that certain tax-exempt bonds are not subject to the alternative minimum tax (AMT) through December 31, 2011.  According to JCT, this provision would reduce revenue by $224 million over ten years.

Payments in Lieu of Tax Credits for Low Income Housing:  The bill would allow recipients of low-income housing tax credits for certain tax-exempt bond financed buildings placed in service between the date in enactment and December 31, 2010, to receive direct payments rather than tax credits.  The direct payment amount would be equal to 85 percent of the total credit.  According to JCT, this provision would reduce revenues by $2.37 billion over ten years.

Recovery Zone Bonds:  The bill increases the allowance to issue Recovery Zone Bonds, which are tax credit bonds created in the Democrats' stimulus bill to subsidize investment in recovery zones designated by state and local governments.  Recovery zones must be areas with significant poverty, unemployment, or rate of foreclosure.  Investment in these areas may include using the bonds to fund job training, education, and economic development.  H.R. 4849 would extend authority to issue Recovery Zone Bonds for one year, though December 31, 2011, and provide $10 billion in Recovery Zone economic development bond authority, and $15 billion in Recovery Zone facility bond authority.  According to JCT, this provision would cost $2.38 billion over ten years.

Exempt New Market Tax Credits from AMT:  H.R. 4849 would allow New Market Tax Credits for investments made between March 15, 2010, and January 1, 2012, to be taken against the AMT, rather than just the investor's regular income taxes.  New market tax credits are provided to businesses that invest in community development entities.  According to JCT, this provision would reduce revenues by $349 million over ten years.

Additional Welfare Spending Provisions

Welfare Emergency Fund Expansion:  The substitute amendment to the bill includes a $2.5 billion expansion to the welfare "emergency contingency fund" which was first established in the Democrats' stimulus bill and appropriated $5 billion.  The welfare fund was established to provide additional funding to states with increased welfare caseloads and will expire on September 31, 2010, under current law.  To date, only $1.8 billion of the $5 billion provided for the fund by the stimulus has been spent.  H.R. 4849 would extend the program through FY 2011 and expand the fund by $2.5 billion.  The state share of the share of the $2.5 billion would be capped at 30 percent of the state's annual TANF welfare block grants.  According to the Ways and Means Committee, this welfare expansion is expected to cost $2.5 billion, and would be offset by unrelated tax hikes.

Tax Increase Provisions

Limitation on Treaty Benefits:  H.R. 4849 would increase taxes on U.S.-based subsidiaries of foreign companies that provide employment in the U.S. by limiting tax treaty benefits with respect to U.S. taxes imposed on deductible related-party payments.  Specifically, the bill would state that the amount of tax withholding could not be reduced under a tax treaty unless the withholding would be reduced if the payment were made directly to a foreign parent company rather than to a related entity in that is a member of the same foreign-controlled group of entities but in a different country (and under a different treaty) than the parent company.  The provision would increase taxes by denying these lower, negotiated treaty rates on payments made by U.S. subsidiaries of foreign companies to affiliates in other countries if the ultimate parent of the foreign company is based in a non-treaty country.  The bill would also lower the threshold for defining a foreign controlled group of entities, from a group of corporations connected through a stock ownership of 80 percent of a company's voting power to a group owning "more than 50 percent."  The lower threshold would result in more companies being subject to the limited tax treaty benefits.  According to the JCT, this provision would increase taxes on foreign-owned subsidiaries in the U.S. by $7.7 billion over ten years.

Securities Exchanged for Assets:  The bill would change the rules for treatment of securities transferred from a controlled-corporation for assets during reorganization.  Under current law, shareholders and corporations are generally allowed to defer tax on gains relating to some corporate reorganizations such as certain mergers and spin-offs, provided the reorganization meets numerous requirements in the Code and regulations.  Under the bill, no loss would be recognized if a corporation transfers assets for stock during reorganization.  However, the sum of gains transferred and not distributed in the reorganization would be immediately recognized for tax purposes.  According to JCT, this provision would increase taxes by $260 million over ten years.

Repeal of 80/20 Rules:  H.R. 4849 would repeal current rules that treat foreign interest payments by a resident alien or corporation as foreign business income if it satisfies an 80 percent active foreign business income requirement.  Under current law, interest payments paid by resident aliens and corporations satisfying the 80 percent active foreign business test are exempt from a 30 percent withholding tax.  By repealing this provision beginning after December 31, 2010, JCT estimates that the bill will increase taxes by $950 million.

Rental Property Reporting:  The bill would alter current law to treat individuals who receive income from rental property as persons "engaged in a trade or business" for the purpose of tax reporting requirements.  This provision would require a recipient of more than $600 in rental income in a given year to meet reporting requirements, and return reporting forms on their income such as Form 1099-MISC, to the IRS or face penalties.  The provision would be effective beginning on December 31, 2010.  According to JCT, this provision would increase revenue by $2.5 billion over ten years.

Apply Levy to Vendor's Real Property:  The bill would allow the IRS to levy or seize real property to recover up to 100 percent of any payment owed by a federal vendor because of an unpaid federal tax liability.  Under current law, the IRS may only levy "goods or services" and not actual property from a federal vendor.  According to JCT, this provision will increase revenue by $147 million over ten years.

Authorize Post-Levy Due Process:  H.R. 4849 would authorize the IRS to issue levies prior to a collections due process hearing for all federal tax liabilities of federal contractors.  Under the bill, the IRS would be authorized to levy a disbursement to a federal contractor before the completion of a collections due process notice hearing because, according to the Committee Report, the committee believes that current due process procedures "may deprive the Federal government of the opportunity to levy payments."  As originally reported, this provision would only have applied to employment tax liabilities of federal contractors identified as owing taxes.  As amended at the Rules Committee, however, this provision would apply to all federal tax liabilities of federal contractors identified.  According to JCT, this provision would increase revenue by $395 million over ten years.

Grantor Retained Annuity Trusts:  The bill would require a minimum ten year term for any grantor retained annuity trust (GRAT) wherein donors place property into trust and then receive an annuity payment for a fixed period of time.  According to the Majority's Committee Report, GRATs are used to transfer property to family members while the donor is still alive in order to avoid double taxation in the form of the gift tax or the death tax.  This provision would make the use of a GRAT less appealing. According to the Committee Report, "The provision is designed to introduce additional downside risk to the use of GRATS by imposing a requirement that GRATs have a minimum term of 10 years."  According to JCT, this provision will have the effect of increasing taxes by $4.5 billion over ten years.

Increase in Information Return Penalties:  The bill would increase penalties for failure to comply with information reporting requirements as follows:

  • Increases the first-tier penalty from $15 to $30 and increases the calendar-year maximum from $75,000 to $250,000;
  • Increases the second-tier penalty from $30 to $60 and increases the calendar-year maximum from $150,000 to $500,000;
  • Increases the third-tier penalty to $100 from $50, and increases the calendar-year maximum $250,000 to $1.5 million;
  • For small business tax filers, the calendar year maximum penalty would be increased from $25,000 to $75,000 for the first-tier; from $50,000 to $200,000, for the second tier; and from $100,000 to $500,000 for the third tier.

Cellulosic Biofuel Producer Credit and Black LiquorThe bill would exclude crude tall oil (CTO) from receiving the current $1.01/gallon, non-refundable cellulosic biofuel producer credit for the production of certain cellulosic-based alternative fuels.   CTO is a is often produced by paper companies using black liquor soap, byproduct of the paper-making process, and acid to induce a reaction that results in CTO, which is then sold to chemical companies for manufacturing.  According to the Ways and Means Committee, it has been alleged, however, that instead of selling it, some paper companies may begin using CTO as a fuel  (thus potentially qualifying for the cellulosic biofuel producer credit) since the $1.01/gallon tax credit is worth more than the profits the paper companies could make from selling the CTO to chemical companies.  The provision would exclude CTO from eligibility for this credit.  According to the Ways and Means Committee, this provision would increase revenue by $1.8 billion over 11 years.

Corporate estimated tax timing shifts.  The bill, as modified at the Rules Committee, would include 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 a "wash" 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.  A similar PAYGO gimmick was used to offset a portion of the cost of H.R. 2847, the Hiring Incentives to Restore Employment Act.

Background

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.  Many of the provisions in the underlying legislation are extensions of programs created by the failed stimulus bill.

Since then, the House and Senate have passed a number of spending bills with the stated goal of trying to spur job creation through government spending, but to no avail.  Most recently, the president signed H.R. 2847, the Hiring Incentives to Restore Employment Act, which spent $17.6 billion on a number of provisions, including a $1,000 tax credit for retaining employees, resembling the failed Jimmy Carter jobs tax credit of the late 1970.

Not only have the Democrats failed to pass legislation that would create economic growth, the Democrat health care takeover includes $569 billion in job killing taxes on every person and small business in the U.S.  The health care bill included 12 new tax increases that violate President Obama's pledge that, "Under my plan, no family making less than $250,000 a year will see any form of tax increase."  In addition, 46 percent of those paying the individual mandate tax would be families making less than $66,150.  While Democrats continue to tax and spend billions, the American people suffer with high unemployment and a stagnant economy.

Like the health care takeover bill, H.R. 4849 attempts to offset the cost of billions in new government spending with tax increases.  In fact, the bill increases taxes by $19.4 billion over the next ten years and, even with billions in spending and subsidies, the net result of the bill is a tax increase.  The largest tax increase in the bill is a $7.7 billion hike on U.S.-based subsidiaries of foreign corporations which create jobs in the U.S.  As Ranking Member Camp (R-MI) and 14 other Republican Members wrote in their dissenting views, "taxing these employers and these jobs would be dangerous for our already struggling economy, could encourage these companies to move U.S. jobs overseas or to curtail future job-creating investments in America, and could invite retaliation by other countries."

Some Members may be concerned that H.R. 4849 would spend $19.2 billion when our nation's deficit is projected to reach $1.5 trillion and just two days after Congress passed a $1.2 trillion health care takeover.  Members may also be concerned that spending in the bill would primarily go to extending and expanding government subsidies that were created in the Democrats' failed stimulus bill.  In fact, only $3.5 billion of the $19.2 billion in spending would be used to provide incentives to help small businesses.  Finally, Members may be concerned that the bill would increase taxes by $19.4 billion at a time when our nation faces unemployment hovering around ten percent and just two days after we passed $570 billion in new taxes to pay for some of the cost of the health care takeover.

Cost

According to JCT and the Ways and Means Committee, H.R. 4849 would increase spending by $19.2 billion over ten years and raise taxes by $19.4 billion over the same period.