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Breakdown of Rep. Camp’s Tax Reform Proposal

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February 26, 2014

TCS analysis and commentary on the draft tax reform proposal released by Rep. Dave Camp this week.

(March 11, 2014) 10:10 AM

Treatment of Qualified Domestic Manufacturing Income (QDMI)

 The proposal appears to be aimed at providing QDMI with a top rate of 25 percent for both individual and corporate tax purposes.  Manufacturing conducted thorough a corporate organization will bear a combined tax burden of 43.6 percent when both the corporate tax and the shareholder level tax on capital gains or dividends is considered. (Compared to current taxation only once at an individual rate of 35 percent.)

 The proposal phases out the current section 199 deduction by 2017.

 The proposal creates a new QDMI incentive available only to individual taxpayer with Modified Adjusted Gross Income (MAGI) in excess of $300,000 ($250,000 single). No QDMI incentive is provided for corporations or for taxpayers earning less than $300,000 ($250,000 single). Taxpayer with MAGI above $300,000 ($250,000 single) are subject to an additional 5 percent tax until the benefit they received from the 10-percent bracket is eliminated.  Taxpayers with MAGI in excess of $450,000 ($400,000 single) are taxed at 35 percent on the excess.   MAGI does not include QDMI, which means these additional taxes do not apply to QDMI.

 For a taxpayer who does not materially participate in the entity generating the QDMI (as would be the case with a limited partner), all of the earnings are excluded from MAGI.  The result is the same as would occur if they had been granted a 28.6 percent section 199 deduction.  If a taxpayer materially participates in the QDM activity, then the taxpayer’s net earnings from self-employment are part of MAGI and subject to the 35 percent tax.   
 


(February 27, 2014) 1:10 PM

Proposes an Increase in the excise tax on fuel used in commercial cargo vessels on inland or intra-coastal waterways from 20 to 26 cents per gallon, which would increase revenues by $200 million over 2014-2023. See our factsheet on the The Inland Waterways Trust Fund:

"Inland waterways users must begin shouldering more of the costs for constructing and operating the inland waterways systems that make their business possible. Currently, inland waterways users pay less than 10 percent of the total costs of operating the system. Congress must oppose efforts to further weaken the inland waterways industry’s cost‐share requirement, take steps to increase revenue for the IWTF, and create a system of project prioritization based on national interest."

Also see our "Riverboat Ripoff" Golden Fleece Award to Congressman Ed Whitfield (R-KY) for his bill, titled the Waterways Are Vital for the Economy, Energy, Efficiency, and Environment Act of 2012 (WAVE4 Act), to bail out commercial barge operators from paying most of their share to construct the locks and dams that make navigation possible on much of the nation’s waterways.
 


(February 27, 2014) 12:20 PM

For more on the repeal of credit for electricity produced from certain renewable resources, including closed-loop biomass, open-loop biomass, and municipal solid waste, see our factsheet on Taxpayer Supports for Biomass in Federal Farm Bill.

"Biomass subsidies are not only allocated through USDA programs, but also through the federal tax code and various DOE programs. A federal tax credit for open-loop biomass production is expected to cost taxpayers $2.2 billion over the next decade... It’s time that the biomass industry stood on its own two feet without taxpayer support. With their numerous unintended consequences and failure to achieve stated goals, biomass subsidies scattered throughout the federal tax code, DOE, and the farm bill energy and rural development titles should be eliminated once and for all. Not only will several downstream costs and long-term liabilities be reduced, but taxpayers will bear less unnecessary risks and save billions of dollars."
 


(February 27, 2014) 12:10 AM

Proposes the repeal of the carbon dioxide sequestration credit, effective for credits determined for tax years beginning after 2014. See our primer on CCS:

Carbon capture and storage (CCS), also referred to as carbon capture and sequestration, is the process of separating carbon dioxide (CO2) from fossil fuels, pumping it deep inside the earth, and leaving it stored in underground geologic formations such as exhausted oil and gas fields. The technology is predominantly designed to be used with coal, coal-to-liquid, or natural gas plants to decrease their overall carbon emissions.

While the coal industry touts CCS technology as an efficient way to reduce carbon emissions, carbon capture and storage is not the cure-all solution that industry officials claim. The coal industry is already asking for subsidies to support this expensive and unproven technology. With billions of federal dollars already subsidizing the coal industry itself, taxpayers should not be giving the industry even more money for an expensive, unproven, and not commercially viable technology.

Also see our factsheet on the Taxpayer-Backed Loan Guarantees for Liquid Coal: Medicine Bow, Wyoming.
 


(February 27, 2014) 11:59 AM

Repeals the special rule allowing an immediate deduction of qualifying film and television production costs commencing after 2013. This was included in our Top 10 Fiscal Cliff Tax Fails from January 2013:

In an effort to keep film and television production in the United States, filmmakers can immediately deduct significant costs for most film and television productions. Producers can elect to expense in the current year the first $15 million of production costs incurred in the U.S. ($20 million if the costs are incurred in economically depressed areas in the U.S.). This can be used if at least 75 percent of the costs are for services performed in the U.S., and is available for both blockbusters and those that go “directly to video cassette or any other format.”

 


(February 27, 2014) 11:30 AM

Professional sports leagues would no longer be eligible for tax-exempt status as a trade or professional association under Code section 501(c)(6), effective for tax years beginning after 2014. 

From  our Super Subsidy Bowl wastebasket:

"In context, the exemption for professional football in the tax code is almost ironic. In particular, the NFL seems to obviously violate what’s called the “prohibition against private inurement” for 501(c)6 nonprofits. The Joint Committee on Taxation (JCT) explains that no tax-exempt organization in the same category as the NFL can use its “assets for the benefit of a person or entity with a close relationship to the organization.” What about those multi-billion dollar NFL franchises? What about their billionaire owners? Shouldn’t they count?"
 


(February 27, 2014) 10:50 AM

Fails to repeal the expensing of IDCs.  This seems to be at odds with the overall bill thematically.

Intangible drilling costs (IDC) allows qualified natural resource developers to deduct all of these costs immediately. These include the costs of designing and fabricating drilling platforms as well as direct “wages, fuel, repairs, hauling, and supplies related to drilling wells and preparing them for production,” and can represent 60 to 80 percent of the costs of drilling a well. The oil industry characterizes the IDC deduction as the equivalent of the “research and experimental” (R&E) cost deduction and other business cost deductions that apply to all industries. In fact, the IDC deduction is not the same, or designed with the same purpose, as the R&E deduction available to other industries. In the case of oil and gas wells, the principal uncertainty that exists is only whether oil and gas are present in commercial quantities. Indeed, producers repeatedly use the same or substantially similar equipment and processes on well after well. Little or no new information regarding development, improvement, or design occurs when this happens, but developers can still immediately deduct the costs of designing and fabricating these drilling platforms.



(February 27, 2014) 10:47 AM

Would end some of the unnecessary preferential tax treatment of the oil and gas industry, repealing the Special Percentage Depletion Allowance and the deduction for enhanced oil recovery: 

Special Percentage Depletion Allowance is nominally designed to allow the oil and gas industry to deduct the cost of purchasing rights to oil and gas resources, the percentage depletion deduction bears no actual relationship to the cost of acquisition. It has been severed completely from the concept of recovering the capital cost of the resource; it effectively makes a certain portion of gross income tax-free without regard to capital costs. It allows independent producers a flat deduction of a percentage of gross income from each well. The special percentage depletion allowance enables producers to claim tax deductions in excess of their investment. At the 2012 average wellhead price of $94.52 a barrel, 1,000 barrels a day would produce an annual deduction of more than $5 million on proceeds of over $34 million. No other taxpayer has such a benefit.

 “Tertiary recovery,” sometimes called “enhanced oil recovery,” includes a variety of methods to increase the productivity of an oil and gas reservoir. The oil and gas industry has suggested that the deduction for tertiary injectants is simply a standard cost recovery provision. If tertiary injectants were useful only in the year when they were injected, they could be deducted as an expense under other ordinary business provisions of the tax code. But the industry’s argument ignores the fact that tertiary injectants may support production from a well for a period of time, and not simply in the year that they are used. 
 


(February 26, 2014) 4:52 PM

Camp Calls for Common Sense Cuts

In his tax reform package, Rep. Camp proposes getting rid of some tax credits that have been on the TCS cut list for years.

Here are some sections cutting selective energy tax credits that we endorse:

Sec. 1305. Repeal of credit for qualified electric vehicles. (p.14)
Sec. 1306. Repeal of alternative motor vehicle credit. (p.15)
Sec. 1307. Repeal of alternative fuel vehicle refueling property credit. (p.15)
Sec. 1308. Repeal of credit for new qualified plug-in electric drive motor vehicles. (p.15)
Sec. 3201. Repeal of credit for alcohol, etc., used as fuel. (p. 72)
Sec. 3202. Repeal of credit for biodiesel and renewable diesel used as fuel. (p. 72)
Sec. 3206. Phaseout and repeal of credit for electricity produced from certain renewable resources. (p. 78)

And we further agree with:

Sec. 3116. Repeal of special treatment of certain qualified film and television productions. (p. 59)

 

Here are some other tax breaks that Rep. Camp put on the chopping block:

Other Tax Credits For Energy -

  • Sec. 1303. Repeal of credit for nonbusiness energy property. (p. 14)
  • Sec. 1304. Repeal of credit for residential energy efficient property. (p. 14)

For Agriculture - 

  • Sec. 3109. Repeal of deductions for soil and water conservation expenditures and endangered species recovery expenditures. (p.55)
  • Sec. 3115. Repeal of deduction for expenditures by farmers for fertilizer, etc. (p.59)

 


(February 26, 2014) 4:30 PM

Bouncing Some Big Tax Breaks

Chairman Camp's proposal repeals a number of wasteful tax expenditures worth billions in forgone revenue, including:

Last-in, first-out (LIFO) an accounting method for estimating the value of a company’s inventory against the value of goods sold in a given year. LIFO is not a general business tax credit because it is only available to taxpayers that maintain physical inventories. Repealing LIFO will increase revenues by $79.1 billion over 2014-2023.

Credit for electricity produced from certain renewable resources is eligible for production of electricity from certain energy resources, including closed-loop biomass, open-loop biomass, and municipal solid waste. The biofuels industry has received government support for over thirty years. Repealing this credit would increase revenues by $9.6 billion over 2014-2023.

 


(February 26, 2014) 4:15 PM

Headline Grabbers

Rep. Camp’s proposal, like Sen. Baucus’ discussion drafts, addresses the perverse incentive in current law for U.S. companies to keep foreign earnings permanently reinvested abroad. As much as $2 trillion has not been distributed domestically by foreign subsidiaries of U.S. companies.

Under current law, the deduction for mortgage interest will cost $379 billion from 2013-2017 according to the JCT. Despite the claims of supporters of this policy, it has not promoted homeownership in the U.S. – homeownership rates have remained relatively constant over the last 50 years.

 


(February 26, 2014) 4:00 PM

Taxes for Trust Funds

The excise tax currently imposed on crude oil for the oil spill liability trust fund would be expanded to include energy sources like oil shale and natural gas. This is a welcome change as the spill fund is inadequate to the task of covering the costs of large oil spills. This change would increase revenues by $1.2 billion over 2014-2023.

Increasing the excise tax on fuel used in commercial cargo vessels on inland or intra-coastal waterways from 20 to 26 cents per gallon will similarly help inland waterways trust fund remain solvent. This would increase revenues by $200 million over 2014-2023.

Filed under: Cut Subsidies, Eliminate Corporate Welfare

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