Advocacy Update: October 25, 2007

Update: Major Tax Reforn Bill Unveiled

For More Information

As reported earlier today, this morning House Ways & Means Committee Chairman Rep. Charles Rangel (D-NY) briefed fellow members of Congress and the news media and on the contents of his "mother of all tax bills" which has been introduced as H.R. 3970. (The bill has been dubbed the “mother of all tax bills” or “mother” for short, because it amounts to the biggest proposed re-write of the tax code since 1986.) Attached is a copy of the bill as well as a summary. The statutory language has not been completely digested so the description that follows comes from the summary. If the legislative language results in a different outcome from that described here, further updates will be forthcoming.

Of specific-insurance-related interest are the following provisions:

1. Nonqualified deferred compensation: The bill will contain provisions that restrict nonqualified deferred compensation for hedge fund managers who use offshore tax haven corporations. The summary suggests that no compensation can be deferred by a hedge fund manager using an offshore tax haven corporation or other tax structure. According to the summary, this provision--which raises $22.64 billion over 10 years--affects only hedge fund managers, and applies only when the business that will pay the compensation deferred is not giving up a deduction for the compensation to be paid later. Thus, it would appear not to resemble the deferred compensation cut back authored by the U.S.Senate last winter which would have severely restricted the use of deferred compensation in all business settings. However, given the amount of revenue it raises, it is possible that the legislative language will work in a way that affects more taxpayers than the summary suggests, so legislative language is still necessary to resolve doubt.

2. Basis Reporting: The bill will require mandatory cost basis reporting by brokers on all transactions involving publicly traded securities. This provision is scored as a $4.27 billion revenue raiser.

3. Charitable gifts from IRAs: The bill will extend for one year the current law rule that allows tax-free distributions of up to $100,000 per year from an IRA when those distributions are charitable donations. (There is a $452 million (over 10 years) revenue cost to this "extender" provision.

4. Extends for one year the $100/day excise tax on group health insurance plans that limit mental health benefits differently from medical and surgical benefits (mental health parity).

The portion of the bill that is likely to be considered in the next week and beyond also includes a "carried interest" provision. This provision raises $25.66 billion over 10 years, and generally requires "carried interest" (amounts paid to venture capitalists and hedge fund managers) to be characterized (and taxed) as ordinary income, rather than as capital contributions taxable as capital gains. This is a "hot topic" in the tax world currently, and is the issue that triggered the nonqualified deferred compensation restrictions.

The above described provisions are all expected to be part of the smaller "extenders package" that Ways & Means plans to move, possibly as early as next week. The rest of the "Mother Bill"--described below--will likely not receive Congressional attention until next year. The extenders package will include a one-year "patch" of the alternative minimum tax (AMT)--generally keeping the trigger point for the AMT at this year's level.

The Mother Bill itself (likely to be considered in 2008) lists the following highlights:

1. Permanent repeal of the AMT: The bill will permanently repeal the individual (but not the corporate) AMT. It will impose a "replacement tax" on adjusted gross income in excess of $200,000 (married/filing jointly). (Actually, the replacement tax will be imposed on the greater of $200,000, or the level of income (AGI) earned by the top 10% of people otherwise subject to the AMT). The replacement tax would be 4% of AGI. At $500,000 of AGI (married), the replacement tax rises to 4.6% of the amount above $500,000 (married).

2. The bill will recreate what are called in tax jargon the PEP and Pease provisions. PEP and Pease phase out of the personal exemption, and limit on the value of deductions to the 15% rate. PEP and Pease limitations were first enacted in the Tax Reform Act of 1986, and were repealed, as of 2006, by EGTRRA. The "mother bill" will reinstate these limitations. The phase-out of the personal exemption (PEP) and the phase-out of the value of deductions above the 15% rate (Pease, named after its Congressional sponsor) will apply to AGI of $250,000 for individuals; $500,000 for married couples.

3. Corporate tax reform: The bill will drop the corporate tax rate from 35% to 30.5%. This $363.84 billion rate cut will be paid for by a variety of corporate tax rule changes (mostly international rules), none of which are directly related to insurance.

4. Limitation on deduction for miscellaneous expenses: Current law limits the deduction for miscellaneous expenses to amounts in excess of 2% of AGI. The "mother bill" will add a further limitation to those who are subject to the replacement tax (of 4% or 4.6%). The further limitation will be that miscellaneous expense deductions will be available only to the extent that their total exceeds both 2% of AGI and 5% of the amount in excess of the income level at which the replacement tax is triggered, generally $200,000 in Adjusted Gross Income.

We will report further developments as needed or in the next issue of NAIFA Frontline.