United States: Tax Policy Update: January 28, 2014

Last Updated: February 3 2014
Article by Russell W. Sullivan and Danielle R. Dellerson

Number of the Week: 35 The percentage of Americans who watched last year's State of the Union address. The percentage may be slightly higher this year as scores of new drinking games have popped up based on how many times the president uses phrases like "inequality" or "let me be clear." More on that here.

LEGISLATIVE LANDSCAPE

Happy SOTU Day! President Obama will deliver his annual State of the Union address tonight at 9 p.m. EST, outlining his legislative priorities for 2014. Tax policy won't likely get top billing, but listen closely and you may hear the president call for the renewal of expired tax provisions, including the research and development credit, and other corporate tax reforms.

According to the Wall Street Journal, the president may also resurrect a proposal to do corporate-only tax reform -- lowering the rate and getting rid of some tax breaks -- in order to fund infrastructure projects.

The House: No Tax Breaks for Abortion. After hosting President Obama's State of the Union speech tonight, the House will turn its attention Wednesday morning to consideration of H.R. 7, the "No Taxpayer Funding for Abortion Act," which would prohibit the use of Obamacare tax credits for the purchase of healthcare plans that cover abortion services (most currently do). It would also disallow deductions for abortion-related medical expenses, except in cases of rape, incest or when the mother's life is endangered. The bill will pass in the House, but is dead on arrival in the Senate. The complete text of the bill can be viewed here.

Later on Wednesday, GOP House members will pack their bags and head to Maryland's Eastern Shore for their annual members' retreat. The focus is anticipated to be on the debit limit, attacks on Obamacare, immigration and NSA reforms, but count on House Ways & Means Chairman Dave Camp, R-Mich., to corral his colleagues into talking tax reform before all attention turns to the 2014 midterm elections.

The Senate: Repeal & Replace. Three Republican senators introduced a proposal Jan. 27 to repeal and replace Obamacare. Senators Tom Coburn, R-Okla., and Richard Burr, R-NC, joined Finance Committee ranking member Sen. Orrin Hatch, R-Utah, in unveiling a plan that would scrap the Affordable Care Act's individual and employer mandates, the minimum coverage requirements for healthcare plans and most of the law's taxes and fees.

The plan would retain the use of refundable tax credits for the purchase of health insurance, but only for those earning up to three times the federal poverty level and below ($34,470 in 2013). A 65 percent cap on the exclusion of employer-provided healthcare would be used to fund the law, meaning an average employee would be taxed on 35 percent of their currently untaxed health insurance benefits. The full text of the proposal is here.

Baucus Poised For Confirmation. Sen. Max Baucus, D-Mont., faced his Senate colleagues on the Foreign Relations Committee today on his nomination to become the next ambassador to China. Chances are good that he will be confirmed by the full Senate within the next two weeks, leaving Sen. Ron Wyden, D-Ore., to assume top tax-writing duties as the presumed new chairman of the Senate Finance Committee.

REGULATORY WORLD

R&D Rules Being Finalized. The Internal Revenue Service is finalizing new rules that would lift restrictions on the types of activities that qualify for tax breaks for business research and development -- which, according to a Washington Post report, could translate to "hundreds of millions of dollars in fresh savings" for large and small businesses. The R&D tax credit expired at the end of 2013, but is widely expected to be renewed retroactively with bipartisan support in both houses of Congress and the administration. Read the full article here.

Comments Abound. The Internal Revenue Service has received more than 19,000 comments so far on proposed rules governing the political activity of "social welfare groups" that claim tax-exempt status under Section 501(c)(4) of the Internal Revenue Code. The rules are an attempt to limit the kinds of political activity a group can engage in without jeopardizing its tax-exempt status, but opponents say the rules are an attack on free speech and will provoke court challenges if finalized as is. Comments must be received by Feb. 27. The proposed rules and comments are here.

COURTS & LEISURE

Severance Pay Subject to FICA Taxes? Last Tuesday, the U.S. Supreme Court heard oral arguments in a case between a bankrupt retail chain and the federal government over whether severance payments the chain paid to its terminated employees are taxable under the Federal Insurance Contributions Act (FICA), commonly referred to as "payroll taxes."

The justices appeared to side with the government in United States v. Quality Stores, Inc., and many court watchers expect the Court to reverse the 6th Circuit's ruling, which held that severance payments are not "wages" subject to FICA taxes.

A Bad Case of 'Jock Tax.' New Jersey is gearing up to host this year's Super Bowl ... and add a nice chunk of change to its state coffers. According to the Washington Post, "New Jersey is one of a handful of states that levies a so-called 'jock tax' -- a tax on any out-of-state athlete who plays a game in the Garden State. The tax hits every member of a professional sports team's roster, regardless of whether they actually take the field, as well as the broadcasters who call the games. Players will be taxed at a rate of 8.97 percent of the salaries they earn for each day in the state. Bonuses for winning championships are subject to taxes too." Read the full article here.

LOOKING AHEAD

The Debt Limit. Expect to see Washington's focus shift to the impending debt limit. House Republicans will use their retreat this week to build consensus on what they will seek from Democrats in return for a hike on the nation's borrowing limit. Possibilities include repeal of certain Obamacare provisions relating to insurance companies and green-lighting the Keystone XL pipeline.

Treasury Secretary Jack Lew recently told congressional leaders that they will need to pass a debt limit increase by late February in order to avoid a potential default on the nation's bills -- a few weeks earlier than was previously projected. Lew urged lawmakers to address the limit by Feb. 7 to avoid disruptions to the economy and financial markets. Another short-term extension is possible to allow further negotiations. Stay tuned.

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