Transportation Funding: Current Taxes, Fees Not Paying for Highways

Transportation funding is a topic that is getting more traction (tire pun completely intended), and we recently explored the Chamber’s position on this blog, which includes comments from our own VP Cam Carter.

In fact, one of the Indiana Chamber’s legislative priorities for 2014 is development of a vehicle miles traveled pilot program. The need for such initiatives is illustrated in a new Tax Foundation study that finds just over half of state and local expenses on roads in 2011 came from highway user taxes and fees. Indiana falls below the national average.

Despite being dedicated to fund transportation projects, revenues from gas taxes and tolls pay for only about half of state and local spending on roads, according to the nonpartisan Tax Foundation. Alaska and South Dakota come last in transportation funding derived from gas taxes and tolls—10.5 percent and 21.5 percent, respectively—while Delaware and Hawaii rank the highest—78.6 percent and 77.3 percent, respectively.

State and local governments spent $153.0 billion on highway, road, and street expenses, but raised only $77.1 billion in user fees and user taxes ($12.7 billion in tolls and user fees, $41.2 billion in fuel taxes, and $23.2 billion in vehicle license taxes). The rest was funded by $30 billion in general state and local revenues and $46 billion in federal aid.

“The lion’s share of transportation funding should be coming from user taxes and fees, such as tolls, gasoline taxes, and other user-related charges,” said Tax Foundation Tax Foundation Vice President of State Projects Joseph Henchman. “When road funding comes from a mix of tolls and gasoline taxes, the people that use the roads bear a sizeable portion of the cost. By contrast, funding transportation out of general revenue makes roads “free,” and consequently, overused or congested—often the precise problem transportation spending programs are meant to solve.”

The story is much the same even when adding other transportation options to the mix. In 2011, state and local governments spent $58.7 billion on mass transit, $22.7 billion on air transportation facilities, $1.6 billion on parking facilities, and $5.2 billion in ports and water transportation, in turn raising $13.2 billion in mass transit fares, $18.8 billion in air transportation fees, $2.2 billion in parking fees and fines, and $4.2 billion in water transportation taxes and fees. Altogether, states raised about 48 percent of their transportation spending from user taxes, fees, and other charges.

Expanding tolls and indexing gasoline taxes for inflation may not be politically popular even though transportation facilities and services are highly popular. Given that transportation spending exists, states should aim to fund as much of it as possible from user fees and user taxes. Subsidizing road spending from general revenues creates pressure to increase income or sales taxes, which can be unfair to non-users and undermine economic growth for the state as a whole.

Chamber’s Top Legislative Priorities in 2014

Eliminating business personal property tax, allowing employers to screen prospective hires for tobacco use and establishing a work share program are among the top legislative priorities for the Indiana Chamber of Commerce in 2014.

“In many categories of commercial and industrial property tax, Indiana is among the very highest states in the country. That’s largely due to our taxing of machinery and equipment. It’s a remaining black mark on our tax climate – an area where we simply can’t compete,” declares Indiana Chamber President and CEO Kevin Brinegar.

“All of our surrounding states have done away with the tax except for Kentucky, which taxes personal property at a lower rate than Indiana. It’s past time to remove this burden that can greatly hinder business expansion and innovation.”

On the health care front, the Indiana Chamber is seeking to repeal what is termed the smokers’ bill of rights for prospective employees.

“This is an intrusion into the rights of employers in making hiring decisions. Holding smoking up to the same standards as we hold discrimination based upon race, gender, religion and ethnicity seems arbitrary and without justification,” Brinegar offers.

“There are other behaviors (such as substance abuse and having a criminal record) which are also personal choice and over which employers do have discretion in hiring decisions; this reinforces that the state’s protection for smokers is unnecessary and not well founded.”

One policy the Indiana Chamber believes would benefit employers, employees and the state is a work sharing initiative that would allow employers to maintain skilled, stable workforces during temporary economic downturns.

“Employers would be able to reduce hours without layoffs and provide unemployment compensation to partially compensate workers for their lost hours. Then when circumstances improve, employees could return to full-time work status for the company,” Brinegar explains.

“What’s more, a federal grant is available for three years to pay for the cost of the program. It’s a positive scenario for all parties.”

When it comes to K-12 education, Brinegar says the Indiana Chamber will continue to push for the absolute best academic standards for the state.

“That’s the bottom line. We need to improve student learning, meet the essential college- and career-ready requirement and have an appropriate student assessment system. Those elements all currently exist within the Common Core State Standards program, which we continue to fully support.”

Below are the Indiana Chamber’s top legislative priorities. The complete list is also available on the Indiana Chamber web site (www.indianachamber.com).

CIVIL JUSTICE
Support regulating the practice of lawsuit lending, in which a third party provides a plaintiff a cash advance loan while the legal case is pending. In turn, a plaintiff agrees to repay the advance (which is usually at a high interest rate) from the lawsuit proceeds. This practice complicates the legal process by forcing more cases to go to trial because the plaintiffs can’t afford to settle due to their repayment agreement with the lender. In turn, this causes more and more Indiana businesses to pay expensive legal fees. This lending practice is legal in most states, but regulation and transparency do not exist in Indiana.

ECONOMIC DEVELOPMENT
Support a voluntary vehicles miles travelled (VMT) pilot program as a potential replacement for existing fuel taxes. With Indiana’s already insufficient fuel tax revenues for roads/transportation trending down and more fuel efficient and electric/hybrid vehicles on the roads, a new funding mechanism for road maintenance needs to be found. Owners of alternative-fuel vehicles, including electrical vehicles, should pay for the roads they use just like other drivers. Voluntary VMT pilots in other states are currently taking place and Indiana cannot afford to ignore this potential road funding alternative.

Support expanding the patent-derived income tax exemption to the pre-patent phase. This incentive change would allow innovative, high-tech businesses that typically pay high wages to qualify during the earlier patent-pending phase of the (often long) patent application process, thus carrying forward any credit. Many emerging businesses would find this helpful in capitalizing their start-ups and expanding hiring. (Current law states you must have had a patent issued by the federal government before you can apply for the exemption.)

EDUCATION
Support maintaining high-achieving academic standards, such as the Common Core, and allowing the State Board of Education (SBOE) to determine student assessments. Indiana needs standards that improve student learning and meet the college- and career-ready requirement. The testing component of the standards can best be determined by the SBOE.
Support a framework for the future development of publicly-funded preschool initiatives for low-income families. There is critical need for improved preschool opportunities, especially for low-income children whose families may not have the means to provide a high-quality preschool experience or to provide needed learning opportunities in the home. The Indiana Chamber supports publicly-funded preschool programs that are: focused on those families in greatest need, limited to initiatives that maintain parental choice, focused on concrete learning outcomes and integrated with reforms at the elementary school level that will maintain and build upon the gains.

ENERGY/ENVIRONMENT
Support a water policy to stabilize our economic future and effectively compete with other states. A policy/plan is needed in order for the state to effectively manage its significant water resources, as well as to ensure delivery of an adequate, reliable and affordable supply of water.

HEALTH CARE
Support repealing the smokers’ bill of rights for prospective employees from the Indiana Code. The Indiana Chamber believes that all employers should have the right to choose whether or not to screen and/or hire prospective employees who use tobacco products. Since employers are footing most of the bill for health care costs for their employees, they should be able to have some discretion in determining whether new employees use tobacco products or not.

Support reinstating the wellness tax credit. The Indiana Chamber supports this incentive to start a wellness program, which can increase attendance, boost morale and productivity, as well as positively impact health care coverage costs.

LABOR RELATIONS
Support a work sharing program that will allow employers to maintain a skilled stable workforce during temporary downturns. Employers then could reduce hours without layoffs, enabling workers to keep their jobs – which hopefully could be returned to full-time status once economic circumstances improve. Also part of the equation: Unemployment compensation to partially compensate workers for their lost hours.

LOCAL GOVERNMENT    
Support common sense simplification and reforms to local government structures and practices. Creating the option for counties to have a single county commissioner and county councils with legislative and fiscal responsibilities is one that several Indiana counties desire. There should be incentives to reward local government efficiencies and performance in the delivery of services to taxpayers.

TAXATION
Support legislation to reduce the dependence on the taxation of business machinery and equipment. This tax discourages capital investment, places a disproportionate property tax burden on businesses and puts Indiana at a competitive disadvantage with surrounding states that have eliminated it or are moving to do so.

State Revenues Under Projections, but Nothing to Worry About Yet

It’s true: The tax collections for the first two months of the new fiscal year and new state budget have fallen slightly below the forecasted target. Specifically, general fund revenues for July and August combined are $65 million short of the projections. That is 3.2% under the combined forecasts for those two months. But to worry about $65 million at this point is not warranted. First, $65 million is only a blip when you consider that we are talking about a $30 billion budget. Secondly, as in surveys and polls, a variance of less than 5% in revenue forecasting is statistically insignificant.

And lastly, there are 22 more months in the biennium. There will inevitably be fluctuations in the revenue numbers throughout the balance of this fiscal year and next fiscal year. The variance could double or it could disappear in the next couple months. The point is – until we experience a full quarter of shortfalls that total more than 5% – concern is premature.

This is not to say that the numbers are meaningless or that they should be ignored. Keeping a close watch on the revenues and reacting accordingly has been a key to Indiana maintaining its strong fiscal status over the last several years. Discrepancies between the forecast and the actual collections can result from many things, as can be noted in the budget agency commentary that often accompanies release of the hard numbers each month. Changes in the law, special transfers and timing issues can all explain monthly anomalies.

However, closer looks at the individual sources, plus year-over-year and month-to-month comparisons can evidence significant trends. Sales tax revenues are by far the largest single source, making even small differences between the actual year-over-year growth and the projected annual growth something to pay close attention to. While corporate income tax collections are not as critical to the bottom line, they are a major source of revenue and have been very strong (46.7% above the target through the first two months). Another positive aspect of the short-term numbers is the modest uptick of gaming revenues (7.2% above target).

So keep in mind that the numbers will fluctuate and most probably balance out over time – if not, adjustments can and will be made to assure that Indiana maintains its prudent fiscal posture.

Waltz: Marketplace Fairness Act a Useful Measure

Bill Waltz, the Indiana Chamber's VP of taxation and public finance, penned the following column, which ran in The Journal-Gazette of Fort Wayne.

States have the right to tax activities that take place within their borders. States do not have the right to burden interstate commerce – unless Congress approves.

The Marketplace Fairness Act of 2013 involves both principles.

The act would require online sellers who have no physical presence in a state to collect sales tax from that state’s residents. It recognizes that Internet purchases take place within the buyer’s state but that compelling the seller to collect the sales tax affects interstate commerce.

The 69 U.S. senators who voted for the Marketplace Fairness Act concluded that states should be allowed to require remote sellers to collect the sales tax. But passage in the House is uncertain as opponents raise questions. The legislation should be evaluated on an objective basis.

Here are some of the statements and claims being made about the Marketplace Fairness Act :

•The Internet tax moratorium should not be lifted

•This is a “new” tax

•This will hurt small Internet businesses

•State tax administrators will abuse their power to tax out-of-state businesses

•It will be impossible for sellers to comply with the laws of 8,000 jurisdictions

•Internet businesses will move out of the United States

•Jobs will be lost

First, this has nothing to do with the 1998 federal moratorium prohibiting taxing Internet access or imposing a new tax on the conduct of business over the Internet. This is about applying existing state laws on the taxation of retail merchant transactions.

This is not a new tax. States’ sales tax is due on Internet purchases today and purchasers are legally obligated to pay. The problem is few people do so by self-reporting, shifting the burden to all those self-reporting taxpayers who do meet their legal obligations.

As for hurting small businesses, the act has a small seller exception for any business having less than $1 million in annual sales (and this threshold could be raised).

Many of the abuse objections are refuted by the text of the bill. It expressly prevents states from subjecting a seller to “any other type of taxes, other than sales and use taxes.” It further specifies that “This Act shall not be construed to create any nexus between a person and a state or locality.”

The text also addresses administrative compliance. It contains provisions on “minimum simplification requirements” to assure some uniformity in how each state identifies what is to be taxed and at what level. It calls for a single filing and single audits within any given state. The states are required to provide free software to calculate the tax. Additionally, remote sellers are shielded from liability for inadvertent noncompliance.

There will be complications with any major change in procedure, but the act is very friendly to remote sellers. Also, it is in the states’ interest to keep things as simple as possible in order to collect the tax.

As for businesses and jobs moving overseas, Internet businesses are not likely to relocate unless the costs of production motivate them to do so. Internet businesses will continue to grow and thrive in the U.S. – and create jobs – whether or not they must collect sales taxes.

The jobs focus should be on those lost today as in-state brick-and-mortar retailers have cut back due to the unfair price advantage enjoyed by online sellers.

Opponents can suggest problems where there are none, foster doubt and cater to viewpoints that have no basis in reality. But once these questions are answered fairly and objectively, there is no good reason not to support the Marketplace Fairness Act.

New Tax Guide a Valuable Asset for Indiana Businesses

We take great pride in helping to educate our members and customers through our many publications. The latest example is the newest edition of the Indiana Taxation Handbook, a valuable resource for those who deal with Indiana tax issues.

As a result of changes in tax law and policy over the last two legislative sessions, new and revised sections of the Indiana Tax Handbook: 2013-14 Edition include:

  • Elimination of the Indiana Inheritance Tax
  • Reduction in the Indiana Corporate Income Tax
  • New consolidated filing options for Indiana businesses
  • Overview of the new rolling reassessments for real property in Indiana
  • Adjustments to the property tax appeals process, and new obstacles that must be overcome in appealing property tax assessments
  • Impact of the automatic taxpayer refunds, and where Indiana taxpayers will receive savings

This informative publication is authored by attorneys at Ice Miller, LLP and is available for $111.75 for Indiana Chamber members and $149 for non-members. Order your copy today by calling (800) 824-6885 or through our web site.

Check Out the Chamber’s Issue Pages

Do you have a topic you're passionate about, and would like to know what the Indiana Chamber is working on in that area? We've developed some web pages highlighting key issues that will show you what we're focused on and offer some background on our public policies. See the pages below, and more information will be added weekly to these as the session progresses.

http://www.indianachamber.com/education
http://www.indianachamber.com/tax
http://www.indianachamber.com/healthcare
http://www.indianachamber.com/econdev
http://www.indianachamber.com/labor
http://www.indianachamber.com/environment
http://www.indianachamber.com/localgov
http://www.indianachamber.com/federal

Our 2013 Top Legislative Priorities and Legislative Business Issues documents are also available to view.

American Paychecks to Shrink, to Chagrin of Employers and Employees

Get ready for a heaping dose of bummersauce: They say the only certainties are death and taxes — but you can also count on your 2013 checks being smaller because of those taxes. CNN Money has the bad news:

Payroll taxes are key for financing Social Security, and the break of the past two years has forced the government to replenish the funds with borrowed money. The tax break was always meant to be temporary.

Workers earning the national average salary of $41,000 will receive $32 less on every biweekly paycheck. The higher the salary (up to $113,700), the bigger the bite, but business owners say their lower wage employees will feel it most.

Deborah Koenigsberger, who owns the Noir et Blanc fashion store in Manhattan, has yet to have the talk with her only part-time employee, a college student.

"It's going to hurt me to tell her this. She can't afford a decrease," Koenigsberger said. What unnerves her is the feeling that she's lost control as a business owner watching out for her employees.

Keval Mehta, CEO of In-R-Food, a smartphone app developer in Durham, N.C., worried the tax increase will threaten morale. "They don't get paid enough for what they do," Mehta said.

The 1-year-old company has yet to make a profit, having just launched software that scans grocery products and lists ingredients and nutritional values. His four employees could make upwards of $80,000 a year elsewhere, but three of them earn less than half that. They put in long hours, must work from laptops while on vacation, and no, there isn't a health insurance plan.

All that made it even more difficult to warn them during the holidays about the oncoming pay cut. Mehta promised them he'd make up the lost pay if the company's finances improve next year.

"Currently, they're working on passion. But that can only drive you so much," Mehta said. "I don't like that I don't have control over this. It wasn't a decision I made. But as a CEO, you take responsibility for everything. You're automatically at fault, because you're the captain of the ship."

Chamber and Rep. Young Release Business Tax Survey Results

As President Obama calls for a “balanced approach” and shared burden to end the current federal fiscal crisis, the Indiana business community is showing willingness to make such a sacrifice, provided there is real reduction in federal spending and substantive reform to simplify the tax code. That’s the overriding message from a recent survey conducted by the Indiana Chamber of Commerce in partnership with Congressman Todd Young (R-9th District), who is a new appointee to the U.S. House Ways and Means Committee.

The electronic survey of Indiana Chamber members and the business community at-large focused on the fiscal cliff, federal tax code, tax reductions, corporate tax system and the U.S. tax structure in general. A total of 188 respondents took part, representing both larger companies (27%) and small businesses (73%).

“Raising tax rates isn’t the right way to go to raise revenue. It may be good politics, but it is lousy economics. Reforming and simplifying the tax code, which will stimulate job creation and economic growth, is the preferred and needed path for Indiana businesses and their employees,” explains Indiana Chamber President Kevin Brinegar.

“We also need to reject Washington’s usual accounting gimmicks and cut actual spending, not just cut the rate of spending growth. We must reform federal entitlement programs – Medicare, Medicaid and Social Security – to address fiscal and demographic realities.”

Survey respondents clearly determined the fiscal crisis was more a spending problem (67%) than a revenue one (less than 1%). Additionally, 33% felt both spending and revenue were the culprits.

When asked to rate the most important principles which should guide tax reform, the top four answers respondents selected were: 1) emphasize shared sacrifice; 2) emphasize global competitiveness; 3) refrain from picking winners and losers; and 4) simplify the tax code.

Many businesses and individuals find the complexity of the tax code too much of a burden, resulting in 60% of individual taxpayers and 71% of unincorporated businesses hiring out their tax compliance. In the survey, nearly 30% said tax code simplification was even more important than rate reduction; 62% labeled simplification important, but not as important as rate reduction. To that end, some 71% of businesses surveyed indicated a willingness to give up some of their favorable tax credits and/or deductions for lower individual and corporate tax rates.

Brinegar and Young both acknowledge that, despite what needs to happen, a short-term measure – extension of credits, etc. for six months, for example – to buy more time for substantive and comprehensive reform is likely the most positive outcome that can be expected this month. 

In addition to the survey of businesses, Young’s office also electronically surveyed constituents in his district with similar questions. The results from the more than 2,700 individual respondents largely echoed the findings on the business survey.

“It’s clear to me there is a real appetite right now for comprehensive tax reform,” said Young.  “As negotiations continue on the so-called ‘fiscal cliff’, tax reform paired with spending cuts isn’t just my desired approach, it’s also the approach favored by individual Hoosiers and Indiana businesses. As a new member of the Ways and Means Committee, I look forward to representing those wishes as we move forward on this front.”

A plurality of individuals said the fiscal crisis was more of a spending problem (46%) than a revenue problem (11%), while 40% said both are to blame. 

Additionally, 54% (compared to 26% opposed) of individuals support a model of tax reform similar to the House Republican proposal of eliminating deductions in order to simplify the tax code. But regardless of what approach is taken, 85.5% of individuals said they support extending most or all of the current tax rates while Congress works through the issue.

Congressman Young is using the information gathered in the survey and via constituent research to help inform his approach to these fiscal issues. Likewise, the Indiana Chamber’s lobbying efforts on federal tax reform are relying heavily on the survey findings.

Charts detailing the results of the tax surveys of business owners and Congressman Young’s individual constituents can be found online at www.indianachamber.com/federal.

What You Should Know About ‘The Cliff’

Much has been written and said about the fiscal cliff. This summary and analysis from the Tax Foundation notes that the current situation "is the culmination of a decade of ‘temporary’ tax and budget bills that have postponed resolution of key policy differences." It looks ahead to the next steps. An example:

Estate Tax Increase
The estate of an individual who dies on December 31, 2012 will pay a federal estate tax (or death tax) of 35 percent on anything above $5.12 million. If the decedent instead passes away the next day, and Congress has not yet acted to change the law, the estate will instead owe a 55 percent tax on anything above $1 million. Even President Obama, no defender of estate tax repeal, considers this level too high: he has urged a compromise proposal of a 45 percent tax on estates over $3.5 million. Republicans generally support complete repeal of the tax.

There are few taxes that are as polarizing as the estate tax. A 2009 poll by the Tax Foundation found that the estate tax is viewed by taxpayers as the most "unfair" of all federal taxes but at the same time the estate tax seems to be a rallying point for those that agitate for redistribution through the tax code.[3] (In 2009, the estate tax raised about $20 billion, from a very small number of estates.) Opponents argue that the estate tax can break down family businesses while creating large compliance costs which are a drag on the economy.

Despite this seeming rift, there is a large and growing body of research by economists that generally lean left-of-center pointing toward repeal of the estate tax.[4] Nobel laureate economist Joseph Stiglitz, who served as chairman on Bill Clinton’s Council of Economic Advisors, authored a paper which argued that the estate tax actually increases inequality by reducing savings and driving up returns on capital (which largely benefit wealthy holders of capital).[5] Economist Larry Summers, former Treasury Secretary under President Clinton, co-authored a paper in 1981 that showed that the estate tax has severe impacts on the accumulation of privately held capital. Using Summers’ methodology, a July 2012 study by the Joint Economic Committee Republicans showed that since its inception, the estate tax has reduced the capital stock by approximately $1.1 trillion.[6]

The estate tax also encourages firms to structure as corporations instead of as family businesses, because corporations do not pay estate taxes when the person at the helm changes. Family businesses, however, can be subject to rates of over half the value of the estate when a deceased owner transfers the business to their heirs. This observation should be disconcerting to left-leaning voters, who recognize that smaller family businesses have ties to their communities. It should also concern right-leaning voters, who should see this as a distortion of the market process.

Perhaps the worst aspect of the estate tax is how uneven its impact is in practice. By utilizing careful estate planning, many wealthy taxpayers are able to shield much of their income from taxation upon their death. The people that tend to get hit the hardest are those that die unexpectedly, or, like farmers, have their assets tied up in illiquid holdings.[7] The estate planning industry has grown in size over the years as estate law becomes more complex. Three studies have even found that the compliance costs associated with the collection of the estate tax are actually higher than the amount of revenue the tax brings in.[8] Almost the entire estate planning industry can be thought of as economic waste, because it would not exist without the estate tax, and the high-skilled labor and capital utilized in that industry would be applied to other, more productive economic endeavors if the estate tax were repealed.

2011 and 2012 marked the first time in a decade that the estate tax rate and exemption level have been the same for more than one year. For 2010, the president and Congress (unintentionally) allowed the estate tax to expire completely, an outcome unexpected by most observers. While a repeat in 2013 may be desirable, exactly what happens remains to be seen.

Fiscal Cliff: How Steep Are We Talking?

The Bush tax cuts, set to expire after this year, represent only the tip of the fiscal iceberg before Congress. Unfortunately, considerable political attention is being focused on only the highest individual tax rate bracket. What’s actually at stake is of much, much more fiscal significance and can be divided into two parts.

"Taxmageddon," a nearly $500 billion per year increase in taxes starting day one of the New Year and federal spending cuts totaling more than $100 billion.

The list below outlines the variety of tax and fiscal matters that will require congressional action before the end of 2012.

To illustrate the scope of the potential dilemma: The so-called Buffet Rule to tax millionaires at a minimum effective rate of 30 percent would generate a relatively minuscule $5 billion annually. That number pales in comparison to the dollars involved with any one of the issues outlined. Examples: The payroll tax holiday costs $117 billion, the sequestration is $110 billion and another Alternative Minimum Tax (AMT) patch is $92 billion, while the extenders account for $78 billion. Or compare that potential $5 billion in new revenue to the amount of tax that simply goes uncollected each year – estimated by the U.S. Treasury to be $450 billion a year.

Many economists fear Taxmageddon alone would plunge the nation into another recession. Yet politicians continue to fight over philosophy, thus ignoring the big (dollar) picture that could have so much impact. The issues are many, the dollars are huge and the time is short. Little is likely to get done before the election. This leaves only a limited number of weeks in November and December for a lame duck Congress to resolve a collection of massive fiscal issues that have been stymied by the Washington gridlock for over two years. On the positive side, these are not new problems. They have been debated many times and a lot has been hashed out previously.

On the negative side, persistent disagreements remain. These are all politically sensitive matters, with middle grounds elusive and few details considered minor. It will entail much debate, necessarily involve negotiation and maybe even require some (dare I use the word) compromise. Can some kind of "grand bargain" be struck, or will they drive us off the fiscal cliff?

Although there are differences in viewpoint, philosophy and principle, there is a bipartisan recognition that these items must be addressed. And there is even some level of consensus on many of them. Sadly, the most probable result is that Washington policy leaders will take the approach that has been applied too many times already and choose to kick the can down the road by passing more temporary measures. But in this case that would still be far better than their other favorite practice – doing nothing. Perhaps by buying some time this go-around, policy makers can set the stage for making broad, comprehensive reforms next year. Eventually, they must take that step if they hope to avoid an even more treacherous and bigger fiscal cliff that looms somewhere on the horizon.

FISCAL ISSUES CONGRESS NEEDS TO ADDRESS

The Bush Tax Cuts
Expire, revert back to higher rates at year’s end
Current rates of 10, 15, 25, 28, 33 and 35% go back up to 15, 28, 31, 36 and 39.6 percent

Alternative Minimum Tax (AMT)
No patch in place for this tax year (2012)
Some 30 million taxpayers will pay more unless exemption amount is adjusted for inflation

Capital Gains
Revert back to higher rate at year’s end
Current rate of 15 percent goes back up to 20 percent

Qualified Dividends
Special rate expires
Current rate of 15 percent goes away, will be taxed at ordinary income rates

Estate, Gift Taxes
Revert back to higher rates and lower exclusion
Current maximum rate of 35 percent with $5M exclusion goes back up to 55 percent with only $1M exclusion

Extenders/Numerous Other Tax Provisions
Some 80 changes to deductions, credits and exclusions expire
Business examples: research and experimentation credit, $179 enhancement of the deduction for equipment. Individual examples: marriage penalty relief, child care, earned income credit

The “Doc Fix”
No extension in place
Medicare reimbursements to physicians will drop 27 percent

Federal Budget
No 2013 budget or appropriations bills have passed
Poses the threat of government shutdowns

Sequestration
The Budget Control Act of 2011 goes into effect
Will cause indiscriminant 10 percent cuts to defense and 8 percent for other non-discretionary spending

Payroll Tax Cut/Holiday
Terminates at year’s end
Rates will go back up by 2 percent

Unemployment Insurance
Extended benefits end 1/1/13
Long-term benefits scaled back when temporary benefits end

Debt Ceiling Limit
Will have to be raised by year’s end (or very early next year)
Jeopardizes credit rating and unnerves stock market

Affordable Health Care Act Taxes
Go into effect next year
Imposes 0.9 percent Medicare tax on high income individuals and a 3.8 percent Medicare contribution tax on unearned income; also a substantial new tax on medical device manufacturers