Democrats Go After Tax Loopholes for Yachts, Vacation Homes

A picture taken on September 19, 2012 shows a general view in Monaco with yachts moored at Port Hercules during the 22th edition of the International Monaco Yacht Show. The Monaco Yacht Show is considered the most prestigious pleasure boat show in the world with the exhibition of 500 major companies in the luxury yachting and a hundred super and megayachts afloat. The event runs until September 22. AFP PHOTO / VALERY HACHE (Photo credit should read VALERY HACHE/AFP/GettyImages)
National Journal
Billy House
Nov. 8, 2013, 9:23 a.m.

Demo­crat­ic mem­bers of the con­fer­ence com­mit­tee try­ing to work out a budget agree­ment have draf­ted a memo list­ing “egre­gious tax loop­holes” that they plan to raise pub­licly as early as next week if Re­pub­lic­ans con­tin­ue to balk at con­sid­er­ing some new tax rev­en­ue to help soften se­quester cuts.

The items con­tained on the list range from such well-tread sug­ges­tions as end­ing spe­cial de­duc­tions for cor­por­ate jet own­ers, to stop­ping sub­sidies for yachts or va­ca­tion homes, to “clos­ing a loop­hole that lets hedge fund man­agers pay lower tax rates on their in­come than teach­ers and fire­fight­ers.” The in­jec­tion of such pop­u­lism is sure to ex­acer­bate the par­tis­an ten­sions in the budget talks.

The memo, a copy of which was ob­tained Fri­day by Na­tion­al Journ­al, is already caus­ing a stir on K Street. Most of that re­flects worry that it rep­res­ents a Demo­crat­ic “hit list” that might be an early glimpse of some of what will be con­tained in a Sen­ate ver­sion of a tax-code over­haul plan — re­write work now be­ing done in both cham­bers.

Adding to those per­cep­tions is that, al­most sim­ul­tan­eously to this memo’s cir­cu­la­tion, Sen­ate Fin­ance Com­mit­tee Chair­man Max Baucus, D-Mont., on Thursday night sent out a no­tice to com­mit­tee mem­bers that they will have a “Sen­at­ors Only” meet­ing next Thursday “to dis­cuss tax re­form.”

But Demo­crat­ic sources say the budget com­mit­tee strategy and the Baucus meet­ing are un­re­lated, and this is purely a co­in­cid­ence.

“This is in no way a draft of the up­com­ing tax-re­form pro­pos­al — or a ‘hit list’ — com­pletely false,” in­sisted one Demo­crat­ic aide, speak­ing of the memo. But the aide said Demo­crat­ic budget con­fer­ees are pre­pared to raise these items as early as next week as ex­amples of how se­quester and oth­er cuts could and should be re­placed or softened by end­ing tax breaks for spe­cial in­terests.

The budget con­fer­ence com­mit­tee meets for a second pub­lic ses­sion on Wed­nes­day. Its 29 mem­bers must make re­com­mend­a­tions by Dec. 13 on how to keep gov­ern­ment fun­ded bey­ond Jan. 15, and per­haps soften or re­place a new round of se­quester spend­ing cuts at the start of next year. An­oth­er $91 bil­lion in auto­mat­ic se­quester cuts are set to go in­to ef­fect in Janu­ary.

Mo­mentum is clearly start­ing to pick up: Con­gres­sion­al Budget Of­fice Dir­ect­or Doug El­men­d­orf will join next week’s budget-con­fer­ence meet­ing. Be­fore the con­fer­ees’ dis­cus­sion, El­men­d­orf will brief the con­fer­ees on CBO’s budget and eco­nom­ic out­look, and an­swer ques­tions.

The Demo­crat­ic move on tax loop­holes comes as a re­sponse to the quick warn­ing from con­fer­ence com­mit­tee co­chair and House Budget Com­mit­tee Chair­man Paul Ry­an, R-Wis., last week in the pan­el’s open­ing meet­ing that the con­fer­ees’ work should not turn in­to an ar­gu­ment about rais­ing taxes.

The in­dic­a­tion from Ry­an was that the bi­par­tis­an, bicam­er­al pan­el should in­stead find non-tax rev­en­ue and user fees to go along with oth­er spend­ing cuts if the in­ten­tion is to re­place or soften the se­quester.

As part of its work, however, the con­fer­ence com­mit­tee has been giv­en the op­tion of of­fer­ing in­struc­tions to House Ways and Means Com­mit­tee Chair­man Dave Camp, R-Mich., and Baucus on how to pro­ceed with their tax-code over­haul ef­forts, and could even provide dir­ec­tions to ex­ped­ite that work. Some pub­lic un­veil­ing of those ef­forts in either one or both cham­bers had been ex­pec­ted be­fore Thanks­giv­ing, but that ap­pears now to be in doubt.

Demo­crats ar­gue in their new tax-loop­hole memo that the budget con­fer­ence com­mit­tee’s ne­go­ti­ation presents both parties with an op­por­tun­ity and an im­me­di­ate need to dis­cuss and per­haps act on some tax is­sues now.

“The ques­tion is no longer wheth­er we should re­place se­quest­ra­tion, but how,” the memo states. “Demo­crats be­lieve that, in ad­di­tion to re­spons­ible spend­ing cuts, we should also re­place se­quest­ra­tion by clos­ing waste­ful cor­por­ate loop­holes and end­ing spe­cial-in­terest sub­sidies in our bloated tax sys­tem.

Here, ac­cord­ing to the memo, are “just a few of the many egre­gious loop­holes that Re­pub­lic­ans should either bring to the ne­go­ti­at­ing table or ex­plain to the Amer­ic­an people why they can’t find a single loop­hole to close to get a bi­par­tis­an deal.” The 12 loop­holes, quoted dir­ectly from the memo, are:

1. End Tax De­duc­tions for Ship­ping Jobs Over­seas — The last thing we need to do is give com­pan­ies an in­cent­ive for shut­ting down busi­ness op­er­a­tions here in the U.S. and off­shor­ing those jobs over­seas. But right now, the tax code al­lows busi­nesses to de­duct their ex­penses when they move a plant over­seas. Clos­ing this loop­hole would save about $200 mil­lion over ten years.

2. Close the Cor­por­ate Jet Loop­hole — Cor­por­ate jet own­ers can de­duct their in­vest­ments over five years, while com­mer­cial air­craft must be de­pre­ci­ated over a longer peri­od. Clos­ing this un­fair loop­hole would save tax­pay­ers al­most $4 bil­lion over ten years.

3. Close the Car­ried In­terest Tax Break — With the “car­ried in­terest” loop­hole, hedge fund man­agers and private equity ad­visers face a 20 per­cent tax rate on their com­pens­a­tion, while all oth­er tax­pay­ers pay or­din­ary rates of up to 39.6 per­cent. End­ing this loop­hole would save more than $17 bil­lion over ten years.

4. End the John Ed­wards/Newt Gin­grich Loop­hole — Some wealthy busi­ness own­ers know­ingly mis­char­ac­ter­ize their in­come as busi­ness profits in­stead of salary to avoid Medi­care and So­cial Se­cur­ity payroll taxes. End­ing this loop­hole would save about $12 bil­lion over the next ten years.

5. Stop Tax Sub­sidies for Yachts and Va­ca­tion Homes — The wealth­i­est Amer­ic­ans of­ten are able to de­duct in­terest on loans that fin­ance their va­ca­tion homes and yachts. Clos­ing this loop­hole could save tax­pay­ers as much as $15 bil­lion over ten years.

6. Close the “Check-the-Box” Loop­hole — Many U.S. mul­tina­tion­al cor­por­a­tions use this loop­hole in the tax code to make cer­tain for­eign sub­si­di­ar­ies dis­ap­pear on pa­per, simply by check­ing a box on an IRS form. This al­lows these com­pan­ies to avoid massive amounts of U.S. and even for­eign taxes. End­ing these so-called “Check the Box” schemes would save as much as $80 bil­lion over ten years.

7. Treat Com­pan­ies Man­aged and Con­trolled in the U.S. as U.S. Com­pan­ies — Com­pan­ies that are man­aged and con­trolled right here in the U.S. can avoid taxes by in­cor­por­at­ing and set­ting up a P.O. Box in a tax haven over­seas. In fact, 18,000 com­pan­ies claim their headquar­ters is loc­ated in­side a single five-story build­ing in the Cay­man Is­lands. End­ing this loop­hole would save tax­pay­ers al­most $7 bil­lion over ten years.

8. Tax Risky De­riv­at­ive Con­tracts on a “Mark-to-Mar­ket” Basis — Ex­cess­ive and risky bets on de­riv­at­ive con­tracts were a primary cause of the fin­an­cial crisis. But the cur­rent tax sys­tem ac­tu­ally en­cour­ages these risky bets with com­plex and in­con­sist­ent rules, al­low­ing Wall Street bankers to game the sys­tem. Stream­lin­ing the tax rules for spec­u­lat­ive de­riv­at­ive con­tracts ““ by tax­ing them on a “mark-to-mar­ket” basis ““ would save at least $16 bil­lion over ten years.

9. Lim­it Cor­por­ate De­duc­tions for Ex­cess­ive Ex­ec­ut­ive Stock Op­tions — Right now, big cor­por­a­tions claim enorm­ous de­duc­tions by com­pens­at­ing their ex­ec­ut­ives in stock op­tions in­stead of reg­u­lar paychecks, thereby skirt­ing ex­ist­ing rules that lim­it de­duct­ible cash com­pens­a­tion to cer­tain em­ploy­ees to $1 mil­lion per year. This loop­hole en­cour­ages the same type of reck­less, short-term profit fo­cus that con­trib­uted to the fin­an­cial crisis. Clos­ing this loop­hole would save as much as $50 bil­lion over ten years.

10. Stop Wealthy In­di­vidu­als from Play­ing Tax Games with their Re­tire­ment Ac­counts — Wealthy in­di­vidu­als should not be able to use their tax-de­ferred In­di­vidu­al Re­tire­ment Ac­counts (IR­As) as es­tate plan­ning tools. But right now, that is ex­actly what is hap­pen­ing. Tight­en­ing these rules to pre­vent in­di­vidu­als from ac­cu­mu­lat­ing mil­lions and mil­lions of tax-de­ferred dol­lars in IR­As, as well as con­tinu­ing to de­fer tax on these amounts un­til dec­ades after they die, would save about $10 bil­lion over ten years.

11. De­fer In­terest De­duc­tions Re­lated to For­eign In­come — Cur­rent tax rules al­low U.S. mul­tina­tion­al cor­por­a­tions to fin­ance ex­pan­ded over­seas op­er­a­tions with debt, and then de­duct the in­terest on that debt be­fore they re­port any for­eign in­come to the IRS. This un­fair tax break shifts tax bur­dens onto Amer­ic­ans and U.S. busi­nesses without for­eign op­er­a­tions. End­ing this loop­hole would save more than $50 bil­lion over ten years.

12. Close Es­tate Tax Loop­holes for the Wealth­i­est Amer­ic­ans — Mil­lion­aires and their heirs can skirt the es­tate tax through a form-over-sub­stance scheme that in­volves set­ting up a two-year grant­or re­tained an­nu­ity trust (GRAT). If the grant­or out­lives the trust term of two years, the trust as­sets avoid es­tate tax­a­tion. Clos­ing this loop­hole, by re­quir­ing a ten-year min­im­um term for grant­or trusts, would save more than $3 bil­lion over ten years.

Sur­pris­ingly, the memo makes no men­tion of re­peal­ing a host of tax breaks that the oil and nat­ur­al gas in­dustry has been re­ceiv­ing for al­most a cen­tury. Con­gres­sion­al Demo­crats and Pres­id­ent Obama have tra­di­tion­ally tar­geted these tax breaks as part of budget talks but have nev­er suc­ceeded in re­du­cing or elim­in­at­ing them.

In the past year, the Amer­ic­an Pet­ro­leum In­sti­tute and oth­er trade groups and com­pan­ies in the oil and gas in­dustry have made tax re­form — and spe­cific­ally pre­serving their cur­rent tax treat­ment — their top pri­or­ity.

Amy Harder contributed to this article.
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