Extenders
Hose Democrats have unveiled a $620 billion tax bill (HR 7060) that would extend dozens of expiring tax cuts, including renewable energy tax incentives. The bill is fully offset, and if put to a vote will likely pass has been approved by the House, 257-166. The bill contains $14.2 billion in expiring renewable energy tax cuts, $46 billion in other expiring tax cuts, including a provision to lower the income threshold at which filers can claim the child tax credit, and is fully offset.

The Senate, however, despite having approved the House bill's offsets in one form or another on various bills remains allergic to fiscal responsibility. The bill has also drawn a veto threat from President Bush, not so much because of the bill's contents, but because it doesn't come with a bunch of other stuff included in Senate-passed HR 6049.

• JCT score of HR 7060

AMT Patch
The House has passed a bill (HR 7005) that would patch the AMT and is not fully offset, but that's just not good enough for the Senate: It's their way or the highway. Senate Republicans apparently are only interested in passing one bill and one bill only -- HR 6049, the partially offset package approved by the Senate earlier this week. And fearing the minority party or hoping to spare Bush the political pain of vetoing a bill that would effective lower taxes for 22 million families, Democrat and chairman of the Senate Finance Committee Sen. Max Baucus (RD-MT) has decided to run away and hide in the bushes wishing it would all just go away wimpering, "Republicans won't do it. They [the House] need to just take up the Senate package."

Image by Flickr user Brooks Elliott used under a Creative Commons license

When Congress is not figuring out the best way to give Treasury Secretary Henry Paulson's golfing buddies $700 billion, their attention is focused on tax legislation. Specifically, the House and the Senate are working on coming to agreement on several tax code areas: a patch for the AMT, (renewable) energy tax extenders, non-energy tax extenders, and tax relief for disaster victims. The two chambers are at odds over several issues, but the biggest is if these tax cuts should be paid for. Here's the lay of the land as of Thursday morning:

AMT Patch

• Senate: On Tuesday, passed 93-2, a $120 billion tax package (HR 6049) includes a $61.8 billion non-offset AMT patch
• House: Approved Wednesday (393-30) a standalone bill (HR 7005) that would patch the AMT without offsets

Energy Extenders

• Senate: Included a fully offset $17 billion set of tax cuts in the package passed on Tuesday
• House: Will offer a fully offset package today, the Renewable Energy and Job Creation Tax Act of 2008

Non-Energy Extenders

• Senate: Also passed in the bill passed Tuesday, offset by $25 billion in revenue raisers, a $59 billion package of non-energy related tax cuts
• House: Will offer a fully offset package today, the Renewable Energy and Job Creation Tax Act of 2008

Disaster Relief

• Senate: Included in HR 6049 (passed Tuesday), almost $9 billion for victims of the Midwestern flooding and of Hurricane Ike
• House: Passed Wednesday, by 419-4, HR 7006 that would provide about $9 billion in tax relief for victims all federally-declared disasters

Quick update following up on my earlier post about Congress' progress during this final potentially final week of the session. The House has passed the CR/Omnibus/Emergency gigantic package of spending items this afternoon, 370-58.

The House is currently working on voting on some of the tax bills I jumped into earlier, most of which will have to be sent back to the Senate either because of changes in offsets or due to minor differences. More to come tomorrow.

As the clock winds down on the 110th Congress, legislators are working at a furious pace this week, vetting financial bailout proposals, passing tax and spending legislation, holding oversight hearings, etc. All the things that Congress is supposed to do on a regular basis. It's just quite shocking to see them actually doing it.

So, here's a quick rundown on where things stand.

Senate
Yesterday the Senate took three votes on tax cut proposals (see details in this Watcher article), passing two of them. The first was compiled by both Senate Finance Committee Chairman Max Baucus (D-MT) and his counterpart on the committee Sen. Chuck Grassley (R-IA) and is a $68.1 billion package to extend tax cuts and provide an Alternative Minimum Tax patch. This proposal also included $25.2 billion in revenue raising offsets. This bill passed 93-2. The second proposal was $18.3 billion in energy tax incentives that was full paid for by increasing taxes on the oil and gas industry. This also passed 93-2. These bill were both sent to the House today. While it originally looked as though the House would break apart the first proposal and pass AMT relief seperately, House Ways and Means Chairman Charles Rangel (D-NY) announced this afternoon he would postpone consideration of the tax bills to attempt to make some changes that will "take more time than just today."

House
The House finished off their work yesterday by passing a reconciled version of the FY 2009 Defense Authorization bill that passed the Senate last week. House and Senate leaders dropped provisions in the bill that drew a veto threat from President Bush, including restrictions on using private contractors for security functions in combat zones and allowing contract employees to participate in detainee interrogations. The bill will now be sent back to the Senate for final approval, which is expected.

While the House was voting on the authorization bill on the floor, appropriators were busy drawing up the details of a massive appropriations bill that combines three bills (Defense, Homeland Security, and Military Construction-VA) into one bill, includes a continuing resolution funding the rest of the government through March 6, 2009, and also includes $22.9 billion in emergency funding for disaster relief. The House Rules Committee approved the bill for consideration Tuesday night by a vote of 9-4. The total pricetag for this bill is $600.6 billion, almost 60 percent of the entire discretionary budget outlined in this year's budget resolution. The proposal includes limited additional items, but does appropriate $5.1 billion for the Low-Income Home Energy Assistance Program and $7.5 billion to support a $25 billion loan program to U.S. automakers.

Given the current status of this jumbling of legislation and the pending action needed on some kind of fiscal bailout, I can't see any way at all that Congress will adjourn on Friday (the 26th) as they have planned to hit the campaign trail. I've seen snippets of rumors that the House and Senate are thinking about hanging around for the weekend, but they really need more time than that. Now that McCain is suspending his campaign outside of Washington so he can come to Washington and continue to campaign, don't you think members of Congress could stick around at least one more week?

Budget afficionado Stan Collender says that a $700 billion Wall Street bailout will define the budget and, ultimately, the next president's spending priorities for several years.

That would increase the deficit to $1 trillion or more. (My apologies for the italics, but it's hard not to use them in this situation.) If what's left of the $700 billion is spent in 2010 and activities in Iraq and Afghanistan continue that year, the deficit for two consecutive years could be close to that level.

[...]

But it's also hard to see how the 2001 and 2003 tax cuts, which expire at the end of 2010, get extended as easily or completely as they might have before. In fact, nothing else that might be considered in the next few years has the potential to reduce the dramatically increased deficit by as much as quickly as scaling back on these cuts or letting them expire.

Some provisions, like marriage penalty relief and the $1,000-per-child tax credit, might still be a slam dunk. But others, like the top marginal tax rate, capital gains, dividends, estate and gift taxes, and small business expensing, are clearly in jeopardy now.

I don't know, Stan. One should never underestimate the appetite Republicans have for tax cuts. In their world, there's never a bad time for a tax cut. From a BNA email:

A group of House Republicans proposed Sept. 23 temporarily suspending the capital gains tax as a way to coax capital back into sluggish lending markets and offset the cost of a proposed government bailout of the U.S. financial system.

"We have a liquidity crisis and this would bring as much as a trillion dollars in capital sitting on the sidelines, we believe, back into the market," Rep. Jeb Hensarling (R-Texas), chairman of the Republican Study Committee, told reporters at a press conference.

At least Hensarling just skipped the "tax custs pay for themselves" nonsense and went straight for a bold new baseless assertion.

It strains the imagination to believe that investors are "sitting on the sidelines" because the capital gains tax rate is too high. They didn't seem to mind it in the late 90s when capital gains rates were nearly twice what they are today and the stock market saw a 34% increase from 1997 to 2000. It is my understanding, however, that the stock market has been declining the past year, which means the average investor has been paying nothing in capital gains taxes. In fact, because investors can claim capital losses as an income tax deduction, they have an incentive to gamble on the market as their actual losses will be reduced by the amount their income taxes are reduced. Cutting the cap gains rate to zero might induce even more people to wait until market conditions improve, because the average investor would see his tax bill increase.

Update: Oops. Capital losses are offset gains, and in the event of net capital losses, they are deducted from income. So, the capital gains tax rate does not affect net capital losses, just gains.

Image by Flickr user sea_bass used under a Creative Commons license

With all the news of the massive Wall Street bailout, I've heard really nothing about how this $700 billion gamble is supposed to be paid for (other than more borrowing, which is to say paid for by later). And what I have read, makes me real nervous. In a "dear colleague" letter, former chair of the Republican Study Committe Rep. Mike Pense (R-IN) pleads with colleagues (MS Word doc) to avoid raising revenue or the national debt.

If Congress decides to spend nearly 1 trillion dollars on a corporate bailout, it must find budget savings to prevent that cost from being passed along to the American people.

[...]

[Republicans] should demand consideration of free market alternatives to massive government spending and we should fight to pay for the solution through budget cuts and reform instead of more debt or taxes.

Surely Rep. Pense knows that the entire FY 2009 discretionary budget is $1.01 trillion. Of that, $350 billion funds non-defense, domestic discretionary programs. I don't know what Pense has in mind, but there simply isn't $700 billion to be found in "budget savings" that would prevent an increase in the national debt.

Just a little perspective on the size of this bailout.

Image by Flickr user dharma communications used under a Creative Commons license.

House Democratic leaders have announced some details of a potential continuing resolution (CR) that would keep the federal government operating for half a year from the start of the FY 2009 fiscal year on October 1 through March of 2009. With none of the appropriations bills enacted into law and only eight days before the start of the fiscal year, passage of a CR is almost guaranteed. CongressDaily reported this afternoon some of the details of the plan:

According to a draft version of the CR, House Democrats would fund most federal government programs at FY08 levels until March 6 unless Congress acts before that. The draft also includes $5.1 billion for the Low Income Home Energy Assistance Program. House Democratic leaders had previously discussed including the funding in an economic stimulus package valued at about $50 billion. The package also includes $25 billion in loan guarantees for the U.S. auto industry that was authorized in legislation enacted last year.

You can read a discussion draft of the proposed continuing resolution.

Update: 9.23.08, 4:00 pm
CongressDaily is reporting ($) this afternoon that the House will take up the proposed CR legislation on Wednesday this week. More details to come tomorrow.

The Center on Budget and Policy Priorities has updated their analysis of the proposed expansion of the Child Tax Credit (CTC) that is currently being debated in Congress. The CTC expansion is included as part of the "tax extenders" package of tax cuts that is scheduled to be debated this week. Looks like the expansion would help some pretty hard working folks:

A proposed Child Tax Credit expansion before the House and Senate would benefit 13 million children - 2.9 million who would become newly eligible for the benefit and 10.1 million who would see their credit increased due to this provision, according to the Tax Policy Center. These 13 million children come from families with parents who work in such jobs as nursing home aides, cook, pre-school teachers, and construction workers.

The CBPP analysis has great breakouts by state of the number of children who would be newly eligible for the credit as well as children who would receive a larger credit.

CHILD TAX CREDIT EXPANSION BEFORE CONGRESS WOULD HELP 13 MILLION CHILDREN:

As Wall Street collapses under the weight of its greed, bad luck, and basic stupidity, the Free Market^TM crusaders of the Bush White House have come out of the pro-regulation, big-government closet. This morning, Treasury Secretary Henry Paulson said that the federal government will ride to the rescue of the investors in distress. And everyone seems to agree: Wall Street must be given a handout hand up.

Matthew Yglesias notices the asymmetry of concern:

It'd be absurd for the government to be moving hundreds of billions of dollars around amidst an economic crisis while doing nothing for, say, janitors who get laid off from Lehman Brothers. The problems to worry about here are in the "real" economy. Propping up the financial sector can help accomplish that, but we also need to prop up normal people trying to pay the bills and weather the storm.

And Isaiah J. Poole at Campaign for America's Future reminds us that providing aid to working or out-of-work families benefits more than just those families.

This stimulus effort was resisted by the White House and by congressional conservatives, one of whom—House Minority Whip Roy Blunt, R-Mo.—groused that "bailing out the states on their Medicaid problems or providing $25 billion worth of infrastructure spending are not stimulative and everyone knows that."

"Everyone knows that?" No. What "everyone knows" is that when ordinary people have good jobs—whether they are created by private investment or public investment—they are able to buy the houses, cars and other goods and services that help keep the economy afloat. In particular, a program of spending public dollars on a range of job-producing activities—from fixing roads and bridges to "greening" our public buildings with renewable energy and conservation—would go a long way toward stabilizing the faltering middle class of this country. What "everyone knows," or ought to realize, is that doing nothing to interrupt the falling dominoes of spending cutbacks at the federal, state and local levels is a recipe for continued economic erosion.

Image by Flickr user oblivion9999 used under a Creative Commons license

Federal News Radio posted a short report from earlier this week about efforts at the Internal Revenue Service (IRS) to collect over $3.5 billion in back taxes from federal employees.

The Internal Revenue Service is trying to collect billions of dollars in unpaid taxes from nearly half a million federal employees. According to IRS records, 171,549 current federal workers did not voluntarily pay their federal income taxes in 2007. The same is true for 37,752 active duty military and nearly 200,000 retired civilian and military personnel.

Documents obtained by WTOP through the Freedom of Information Act show 449,531 federal employees and retirees did not pay their taxes for a total of $3,586,784,725 in taxes owed last year.

Best of all is that Federal News Radio made the data set they obtained under FOIA available to everyone else. You can download the excel file from their site. Nice work Federal News Radio!

(h/t Tax Foundation)

If anything, the meltdown on Wall Street has shown that executive compensation and performance are hardly related. After spending the past year further running their firm into the ground and onto the auction block, Merrill Lynch CEO John Thain and two of its executives could walk away with almost $200 million in compensation as they exit the building. Thain's predecessor, Stan O'Neal who started Merrill Lynch on the road to serfdom took his personal belongings from his office and $160 million when left the firm. Richard Fuld, who steered Lehman Brothers into bankruptcy this week will see a $22 million retirement package.

Defenders of obscene executive pay have told us time and time again that that all that money is necessary attract the top talent necessary to run these massive corporations. But never mind all that, the Free Market_TM crusaders of the Bush White House have come out of the pro-regulation, big-government closet with a plan to rescue Wall Street from itself. And with the bailout, economist Dean Baker sees an opportunity.

While we don't want a chain reaction of banking collapses on Wall Street, the public should get something in exchange for Bernanke's generosity. Specifically, he can demand a cap on executive compensation (all compensation) of $2 million a year, in exchange for getting bailed out. For any bank that is not on board, Bernanke could make an explicit promise to their creditors — if the bank goes under, you will get zero from the Fed.

[...]

The explosion of the financial sector over the last three decades has led to a proliferation of complex financial instruments, many of which are not even understood by the companies who sell them, as we have painfully discovered.

The best way to bring the sector into line is with a modest financial transactions tax. Such taxes have long existed in other countries. For example, the United Kingdom charges a tax of 0.25 percent on the purchase or sale of share of stock. This is not a big deal to someone who holds their shares for ten years, but it could be a considerable cost for the folks who buy stocks in the morning that they sell in the afternoon.

These are certainly interesting ideas that could prove useful in putting Wall Street to work for Main Street instead of enriching just the investor class. While these specific ideas may have their own problems, Baker is making a very important point: we should use this opportunity to bring Wall Street back into the social contract of economic and social institutions working hand-in-hand.

Image by Flickr user Bobcatnorth used under a Creative Commons license

It looks like the end of the current congressional session is in sight, maybe. While legislators had an insurmountable work load to complete in the three weeks of work in September, Senate Majority Leader Harry Reid (D-NV) still hopes to adjourn the Senate a week from tomorrow (Sept. 26). Reid is hoping the Senate can still finish quite a lot in the next 6 days, including energy legislation, a tax cut extension bill (with an Alternative Minimum Tax patch), a new economic stimulus package, and some number of appropriations bills and a continuing resolution. The Senate might begin consideration of a compromise tax package as early as this afternoon.

The Senate did successfully pass the Defense Authorization bill last night by a 88-8 vote. The authorization bill has been delayed for months, mostly due to a conflict over earmarks being listed in the committee report language for the bill, but not the legislative text of the bill. Sen. Jim DeMint (R-SC) attempted to offer an amendment to effectively strike the $5 billion worth of earmarks in the committee report, but his amendment was not considered. Sen. John Warner (R-VA) attempted to strike a compromise between DeMint and Armed Service Committee Chairman Carl Levin (D-MI) by offering an amendment that would require the final bill produced by a House-Senate conference committee list the earmarks in the legislative text of the bill. Neither DeMint's or Warner's amendments were considered, along with almost 100 other amendments that were introduced.

The authorization bill also contains some contracting reform provisions that OMB Watch been following throughout 2008, including a contractor misconduct database first proposed by Rep. Carolyn Maloney (D-NY) and Sen. Claire McCaskill (D-MO). While the database is structured to be publicly available in the House version of the authorization bill, the Senate has restricted access to the database just to government personnel.

The House and Senate will need to quickly find compromises to various differences in the two versions as congressional leaders hope to send a final bill to the President before the target adjournment date of Sept. 26. We'll post additional information about the contracting reforms and the earmarking conflict as they become available during the House-Senate conference.

The Senate is getting serious about approving an AMT patch, the tax extenders package, energy-related tax cuts, and a package of tax cuts intended to provide relief for the Midwest flood victims. Although the $17 billion energy section of the bill is fully offset, the AMT/extenders section is only partially offset. On Wednesday, Senate Majority Leader Harry Reid (D-NV) filed for cloture for the bill, setting up a vote on the measure as early as Thursday. The $124 billion bill breaks down like this:

On the other side of the capital, the House approved (236-189) on Tuesday a fully-offset $18 billion energy package. The bill (HR 6899)includes tax cuts to provide incentives to produce alternative energy sources and would lift a moratorium on offshore drilling.

Joint Committee on Taxation Scores:

• House energy bill, HR 6899
• Senate energy tax provisions
• Senate AMT/tax extenders provisions

This past weekend, the Federal Reserve Bank decided to suspend a rule intended to prevent the poor decisions of investment banks from affecting your savings account (and ultimately all taxpayers). The worrisome move will allow depository institutions (retail banks like those at which people have savings and checking accounts) to lend money to investment banks (banks like the now defunct Lehman Brothers that are in the business of providing capital to other investors) owned by the same company. The upshot is that the federally insured funds in your savings and checking accounts may now be used to bail out investment banks now scrambling to avoid bankruptcy. Or, as investment commentator Nate Weisshaar puts it: "...the money in my Bank of America savings account can now be used to shore up liquidity for some dodgy real estate portfolio that helped pull Merrill under."

Funds in depository institutions are insured by the Federal Deposit Insurance Corporation (FDIC), which means that the money you have in your checking account cannot be lost should your bank go bankrupt. Should your bank fail, a FDIC-managed fund is used to ensure that you lose no money. This fund is financed by FDIC-member banks, so when a bank fails there is no loss of federal funds. However, when multiple banks fail at the same time, the fund may not have enough money to cover all of its guarantees, forcing Congress has to step in and appropriate funds to make up the difference. This is what happened in the late 1990s with the savings and loan crisis, which ultimately cost taxpayers about $163 billion (in 2008 dollars). The Fed's move over the weekend has increased the probability that Congress will have to step in to shore up the finances of the FDIC.

And thanks to a slew of bank failures this year, the FDIC fund is now running a dangerously low levels.

Additional failures of large banks or savings and loans companies seem likely, and that could overwhelm the FDIC's insurance fund, said Brian Bethune, U.S. economist at consulting firm Global Insight.

"We've got a ... retail bank run forming in this country," said Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics.

[...]

But fear is growing on Main Street as well as Wall Street about the likelihood of multiple bank failures and the strain that would put on the FDIC.

The fund...is at $45.2 billion — the lowest level since 2003. At the same time, the number of troubled banks is at a five-year high.

FDIC Chairman Sheila Bair has not ruled out the possibility of going to the Treasury for a short-term loan at some point. But she has said she does not expect the FDIC to take the more drastic action of using a separate $30 billion credit line with Treasury — something that has never been done.

The FDIC's fund is currently below the minimum set by Congress in a 2006 law. The failure of IndyMac Bank in July cost $8.9 billion.

Just as the FDIC is becoming strapped for cash and as the nation's largest thrift (Washington Mutual) teeters on the brink of insolvency, the Fed has made it easier for the financial system cancer to spread to the federal budget deficit.

Image by Flickr user Andrew Stawarz used under a Creative Commons license.

We'll be shutting down the BudgetBrigade a bit early today to head off to OMB Watch's 25th Anniversary celebration. Yup, that's right. OMBW is 25 years young this year and we're primed and ready for our quarter life crisis! We're taking some time to celebrate tonight with friends and supporters and remember 25 years of fighting for a more transparent and accountable federal government.

While we are looking back over some of our accomplishments of the last quarter century (and honoring the unsung work of some of our public sector colleagues), we are also looking forward to the challenges we'll face over the next 25 years and beyond.

You will be a key part of overcoming those future challenges, just as you've been crucial to our past accomplishments. Your involvement, along with hundreds of thousands of people just like you has helped to make us the success we are today. So thank you for your commitment to the open and accountable ideals that have helped guide OMBW over the past 25 years.

And if you want to help make sure those ideals continue to be realized, consider making a small donation to OMB Watch in honor of our 25th birthday. Your contribution will join with hundreds of others who want to ensure we are able to continue our mission and the important work we do everyday.

Via TaxProf Blog, we read a commentary in TaxAnalysts by tax guru David Cay Johnston pointing out a few facts the revenue haters would prefer be kept under wraps.

In this country of 9 million people, there are as many as 1.3 million pleasure boats, meaning that on their own or through extended family, the vast majority of citizens have access to the water by motor or sail. That is a boat ownership rate at least twice that of the United States...

How can this be? According to American political dogma, high taxes destroy economies. How can the Swedes afford second homes and boats, not to mention nice cars, after paying all those taxes? Sweden is the epitome of high taxes. It is one of only two modern countries where taxes account for more than half of the GDP (the other is Denmark).

The tax take in Sweden and Denmark, as a share of the economy, is 85 percent greater than in the United States, according to the OECD. Surely, then, America must be prospering while Sweden and Denmark sink into a pit of economic despair.

Image by Flicker user Squirmelia used under a Creative Commons license

The House and Senate are working each working a number of pieces of tax legislation. Below is a brief summary of which bills might contain which provisions in each house. This is all subject to change by the hour, but hopefully it'll disambiguate what's up for consideration.

House Action:

• Putting together a package that includes both energy policy (outer continental shelf drilling) and energy tax provisions.
• Has already passed a fully offset AMT patch in June and "tax extenders" in May

House Energy Tax Bill -- energy provisions only; combined with energy policy:

• $19 billion (over 10 years)
• Fully offset, mostly by repeal of oil and gas manufacturing deduction
• Includes credits for wind and solar energy production; carbon dioxide capturing; building energy efficiency; and plug-in hybrid vehicles
• Vote expected by end of weekd

Senate Action:

• Combining energy tax policy with non-energy tax policy.
• Non-energy tax policy includes "tax extenders" and AMT patch
• Moving energy policy (OCS drilling) separately; to be voted on after tax bill

Senate Tax Bill -- energy and non-energy combined; excludes energy policy:

• Composed of two amendments: one for energy-related tax policy and one for non-energy related provisions
• First amendment: $18 billion in energy tax provisions, fully offset. This is a scaled back version of the bill proposed by Sens. Baucus and Grassley on Friday.
• Second amendment: roughly $54 billion in tax extenders and $62 billion AMT patch
• Tax extenders are partially offset, while AMT patch is not offset at all

CQ Politics: Coastal Drilling Debate Is Headed to House Floor

Image by Flickr user Thomas Hawk used under a Creative Commons license

There has been some pretty eye opening stuff going on over at the Department of the Interior's Mineral Management Service (MMS). The Department of the Interior Inspector General released the results of three separate investigations into allegations of misconduct among dozens of employees and managers at the MMS. And the pretty shocking results would even make Lurita Doan blush (or maybe take out her pen and pad and take notes?). The IG report described the MMS as having a "culture of ethical failure" and details some ridiculously arrogant and decrepit behavior.

I came across more good news from the IRS today (well, Friday actually) and I'm not really sure what to do with myself. BNA reported late on Friday afternoon that Lisa McCaughey, a senior tax analyst with the Small Business/Self-Employed Division reported that the IRS is reducing the staggering number of audits they conduct each year of taxpayers who claim the earned income tax credit (EITC). Woohoo!

In a speech during a low-income taxpayer clinic workshop of the American Bar Association Section of Taxation, McCaughey said "We are currently reducing the number of EITC audits we do overall. You might see it shift [downward] again next year."

This is very good news indeed. It would be difficult for the IRS to conduct more EITC audits than they have in the recent past. We have highlighted the near obsession the IRS has with low-income folks who claim the EITC. In fact, IRS data shows that upwards of 40 percent of all audits they conduct are of EITC filers even though EITC errors only account for about 3 percent of the tax gap.

What is going on over at the IRS? First they decide not to renew a contract for services that should be handled by IRS personnel anyway, and now they decide to reduce the number of EITC audits they conduct to focus on more efficient ways to close the tax gap. It's almost as if the influence of the current administration is waning a bit and the IRS is free to do things that are...you know...logical.

Great news reported today by Joe Davidson at the Washington Post (Joe has taken over the Federal Diary column from Stephen Barr, who retired earlier this year). Davidson reports that the Internal Revenue Service (IRS) has decided to discontinue contracting out the management of tax return files at seven regional IRS centers. More details from the Federal Diary column:

For most of the past two years, that work has been done by IAP Worldwide Services.

The switch takes effect Oct. 1. In the coming months, the IRS says, it plans to hire 700 employees at processing centers in Andover, Mass.; Atlanta; Austin; Covington, Ky.; Fresno, Calif.; Kansas City, Mo.; and Ogden, Utah.

This is a great development, although I'm not sure this contract was as controversial as others the IRS has conducted. Colleen Kelley, president of the National Treasury Employees Union did say its members complained about not being able to get information and files they needed in a timely manner and also that the Office of Management and Budget often overstated potential savings from the contract. NTEU has been skepitcal of this contract from the beginning and has cited multiple delays and problems with IAP over the last few years (see this NTEU timeline of problems with the IAP contract).

What is clear is that IAP Worldwide Services no longer wanted to provide these services and the IRS rightly decided this was a task better handled by government employees. Let's hope the trend continues at the IRS and they cancel other wasteful, inefficient, dangerous contracts like the private tax collection program.

There have been lots of stories today I was thinking about throwing up on the blog (DCAA shenangians, Interior Department MMS shenangians), but I settled on an article you might have overlooked in the Wall Street Journal about the continuing investigations Sen. Carl Levin (D-MI) and the Senate Permanent Subcommittee on Investigations (PSI) have been conducting on offshore tax evasion.

I've posted a few times (see here and here too) over the last few weeks about corporate tax evasion. One blog in particular detailed another investigation of the PSI that found that foreign banks were recruiting wealthy American citizens to buy into their U.S. tax evasion schemes.

Well, the latest from the PSI is a report about how U.S. banks (namely Morgan Stanley, Lehman Brothers Holdings Inc., Citigroup Inc. and Merrill Lynch ∓ Co.) are recruiting foreign hedge-fund investors to sell them abusive tax-avoidance transations (see the PSI press release). From the Wall Street Journal:

The yearlong probe, which relied in part on internal bank documents and emails, concludes that Wall Street firms actively competed with one another in dreaming up complex transactions that allowed hedge funds to avoid withholding taxes imposed on dividends paid by U.S. companies.

Is it me, or does this feel like a "if you scratch my tax evasion plan, I'll scratch yours?" First foreign banks are helping Americans avoid U.S. taxes. Now it turns out American banks are helping foreign individuals avoid U.S. taxes. No wonder we've got hundreds of billions of dollars in taxes that go uncollected every year - Uncle Sam is getting screwed from both sides of the ocean.

The PSI report also took the time to rightly criticize both the Internal Revenue Service (IRS) and the Treasury Department:

The Department of Treasury and the IRS have failed to take effective action to stop dividend tax abuse. They have failed to publish for ten years final regulations to address abusive stock loans, failed to clarify existing regulations related to abusive equity swaps, and failed to take enforcement actions against participating financial institutions or their clients. The silence and inaction of the Treasury Department and the IRS in the face of a growing problem have encouraged the spread of offshore dividend tax abuse.

OMB Watch has certainly been very critical of IRS enforcement practices and it looks like we haven't even scratched the surface. Everyone is helping everyone else cheat to get a discount on their taxes and our tax enforcement agency has done nothing. Why am I still paying full price?

From CQ Politics:

The measure includes tax incentives for carbon sequestration, plug-in hybrid vehicles, conservation, wind energy, solar energy, nuclear energy and biofuels. It would extend expiring provisions and create some new breaks as well, with the costs offset largely by higher taxes on the oil and gas industry.

[Senate Finance Committee Chair Max] Baucus and [Senate Finance Committee ranking member Chuck] Grassley want to inject their proposal into an upcoming Senate debate on energy policy, and it could get added to a bill that would expand offshore drilling.

[...]

Like the new Baucus-Grassley approach, previous versions have relied on revenue increases affecting the oil and gas industry. Grassley, who usually opposes offsets being used to extend existing tax policy, said this issue is different. "What we have done is used production incentives in one area of energy and move them to another area of energy," said Grassley.

Baucus has attempted to pass similar energy tax measures in the Senate, but Big Oil supporters mounted (just barely) successful filibusters, blocking reductions of tax cuts for oil and gas companies. The new twist here is that with Grassley onboard, 60 votes may be in the offing.

For those with subscriptions, CongressDaily ($) has a more detailed write up.

Image by Flicker user anh quan used under a Creative Commons license

In perusing CBO's latest budget forecast, I am once again taken by the magnitude of the 2001-2003 tax cuts (AKA the Bush tax cuts). But I nearly choked on my Atomic FireBall spicy cinnamon hard candy while reading Table 1-8, "The Budgetary Effects of Selected Policy Alternatives Not Included in CBO's Baseline," because I had forgotten how much more expensive the Bush tax cuts make fixing the Alternative Minimum Tax (AMT).

If the Bust tax cuts expire, it will cost $875 billion (including debt service) to index the AMT for inflation. But, the Bush tax cuts were designed such that the AMT would affect more families and bring in a lot more revenue than it otherwise would. The upshot is that if Congress extends the Bush tax cuts, it will cost $1.6 trillion to and index the AMT for inflation.

CongressDaily and CQ are both reporting that Congressional Democratic leadership are signaling that they will attempt to move a second stimulus package before they adjourn for the year.

"The state of the economy is very desperate," Reid said on the floor as he discussed the agenda for the rest of the month before the Senate is expected to adjourn -- possibly for the year. "Since we left here for a recess ...we have only more bad news, which means we should look forward ... during this work period to see if we can do an economic stimulus bill."

Reid cited increasing unemployment and the stubbornly shaky housing market as other reasons for another stimulus.

"And the news of the day -- the federal intervention on Fannie and Freddie -- is but the latest evidence that our economy is in serious trouble," Reid said.

"I don't think rebates will be part of the package,'' he said Tuesday, while stressing what he called a need for more infrastructure spending and assistance to unemployed and low-income Americans.

Hoyer said infrastructure spending will be a major element of any package. He also listed home heating assistance, expanded unemployment benefits to deal with the nation's rising jobless rate and expanded federal help to the states for Medicaid programs.

Hoyer's suggestion, thankfully, has quite a bit in common with the common-sense list of suggestions put forth by the Coalition on Human Needs and the Emergency Campaign for America's Priorities in their Towards Shared Recovery proposal.

Image by Flickr user respres used under a Creative Commons license.

Last month I blogged about a July GAO report that studied the percentage of companies that reported little or no tax liability from 1998 through 2005. While I think the report itself is very telling, I also chastised Sens. Byron Dorgan (D-ND) and Carl Levin (D-MI) a bit (well, really just Levin) for jumping to the conclusion that companies were intentionally cheating on their taxes.

Now I wasn't trying to defend corporations (I think most of them cheat bend the rules at just about every opportunity they get) and the work Sen. Levin has done in this area has been critical. He's been a leader on international tax issues that most citizens, much less public officials, could care less about. But the GAO report didn't show that companies were intentionally cheating.

Never fear Sen. Levin - GAO has come to the rescue. They released another report in August on corporate taxation in which they studied the average effective tax rates that U.S.-based companies pay on their income earned inside and outside the United States, as well as trends in where these companies' business activity is located. From the summary:

The average U.S. effective tax rate on the domestic income of large corporations with positive domestic income in 2004 was an estimated 25.2 percent. There was considerable variation in tax rates across these taxpayers. The average U.S. effective tax rate on the foreign-source income of these large corporations was around 4 percent, reflecting the effects of both the foreign tax credit and tax deferral on this type of income.

Nothing necessarily shady going on here yet, but it shows a huge incentive, on average, for corporations to classify income as "foreign" rather than domestic. But I think further down are the results that Sen. Levin was looking for back in August. From the new GAO report:

Reporting of the geographic sources of income is susceptible to manipulation for tax planning purposes and appears to be influenced by differences in tax rates across countries. Most of the countries studied with relatively low effective tax rates have income shares significantly larger than their shares of the business measures least likely to be affected by income shifting practices: physical assets, compensation, and employment. The opposite relationship holds for most of the high tax countries studied.

What this means is that companies move income to jurisdictions where they will pay the least taxes on that income, even when those jurisdictions have a disproportionately small amount of business activity from that company in comparison to its income. Sen. Max Baucus (D-MT) and Charles Grassley (R-IA), the chairman and ranking member of the Senate Finance Committee, released a statement about this new report, where Baucus in particular criticized companies who manipulate the tax code to avoid paying their fair share. I wonder if Sen. Levin got that press release? I think he might be interested in it.

One-Page Summary of GAO Report
Full Report: U.S. Multinational Corporations: Effective Tax Rates Are Correlated with Where Income Is Reported

The Congressional Budget Office (CBO) released their Monthly Budget Review on Friday last week, showing lots of red ink for the federal government in FY 2008.

CBO estimates that the federal budget deficit was $486 billion in the first 11 months of the fiscal year, $212 billion more than the shortfall recorded over the same period last year. CBO anticipates that the government will realize a surplus in September, stemming from quarterly payments of estimated income taxes. The result will be a deficit in the vicinity of $400 billion for the fiscal year.

CBO will release a new estimate of the 2008 deficit and updated baseline projections for fiscal years 2009—2018 on September 9 and we'll be sure to post that release on the BudgetBlog.

CBO: Monthly Budget Review

The Center on Budget and Policy Priorities released an analysis this past Friday afternoon examining the impact of tax cuts for high-income households. In particular, the analysis attempts to understand the impact those tax cuts would (or would not) have on small businesses.