A supposedly simple technical corrections bill to fix problems in trade subsidies becomes a Christmas tree.
by Rick Telberg
At Large
The American Jobs Creation Act of 2004, passed by Congress and headed for the President's desk for signing, began more than two years ago as an effort at ending illegal U.S. trade subsidies. It may have done that; but it has done so much more. In fact, the bill turned into a 633-page Christmas tree of corporate tax breaks (Watch Out for Election-Year Tax Issues).
Some items, of course, are needed and commendable. Bob Scharin, editor of the Thomson RIA Practical Tax Strategies, for instance, points out that the bill closes an oft-abused tax break for individuals donating used vehicles to charity. "Because the crackdown on donations of automobiles to charity will take effect in 2005," he advises, "taxpayers intending to make such donations should consider doing so before year end."
Sen. John McCain called the bill "a classic example of the special interests prevailing over the public's interests," and Sen. Ted Kennedy agreed: "Elite corporate interests are the winners at the expense of average Americans."
Mainly, the new corporate tax bill grants about $136 billion in supposedly revenue-neutral tax breaks over the next decade. The $10-billion buyout of tobacco farmers and tax breaks for big companies like GE, Caterpillar, Boeing and Microsoft have gotten the most news coverage, but true tax mavens looking at the bill page-by-page are finding all sorts of little gems.
"The basic plan to replace the exemption was simple, but the bill became more expansive, and pretty complex and convoluted in the legislative process," noted Mark Luscombe, JD, CPA, principal federal tax analyst for CCH. "To gain support for the bill, all sorts of things were tacked on to appeal to specific groups, such as farmers, the film industry, residents of states that don't have an income tax and so on."
For instance:
-- Ceiling Fans: Suspends a 4.7 percent duty on ceiling fans, which Home Depot is one of the main beneficiaries. This is for any ceiling fans purchased before December 31, 2006. Cost: $44 million.
-- Shopping Malls: $231 million in taxpayer funds to finance $2 billion in bonds for mall developments in Syracuse, NY; Shreveport, LA; Lakewood, CO and Atlanta, GA.
-- Dog and Horse Race Tracks: A $27 million provision included to lure more foreigners to gamble at U.S. horse and dog racing establishments.
-- Cruise Ships: A $28 million provision allows the cruise industry a delay in paying taxes on the airplane tickets, hotels, and other excursions it sells in the United States. The tax delay would save Carnival Corp $15 million and Royal Caribbean would save $8 million to $10 million.
-- Fishing Tackle Boxes: Reduces the excise tax on fishing tackle boxes to 3 percent from 10 percent. One of the biggest beneficiaries will be Plano Molding Co. of Illinois. The company has been making plastic fishing-tackle boxes for more than 55 years. Cost: $11 million.
-- NASCAR: A $101 million provision which allows track owners to write off the cost of grandstand facilities over seven years - the only such tax break for owners of a sports facility.
-- Trial Lawyers: This $327 million tax break establishes costs incurred as a result of attorney and court costs paid to prosecute a claim of unlawful discrimination as a tax deduction.
-- Hollywood: A $336 million break that allows studios to expense up to $15 million in the first year of production of small and independent films in the United States. Studios could expense an additional $5 million if a significant amount of production expenditures are incurred in low-income communities or in the Delta Regional Authority. The Delta Regional Authority includes counties in Alabama, Arkansas, Illinois, Kentucky, Louisiana, Mississippi, Missouri and Tennessee. Hollywood also benefits from the new manufacturing tax break.
The list goes on: $247 million break for manufacturers of corporate and private jets on top of a $995 million break for companies that lease planes; $501 million break for railroads and even a $9 million break for archery companies.
But, most troublesome for tax professionals may be the new, separate rates on manufacturing and service companies.
For the first time in memory, if not history, according to AICPA taxation vice president Tom Ochsenchlager (The New Tax Bill: Washington at Work), they will be taxed at different rates -- 35 percent for services and lowered to 32 percent for manufacturers.
Last week, I wrote wistfully wishing for real tax simplicity. This, of course, isn't it.
"Major tax overhaul may indeed be a pipe dream, depending on what you put in the pipe and whether or not you inhale," quipped reader Richard W. Blalock, a St. Charles, MO, CPA, in an e-mail. "But it's clear that the ever-growing volumes of tax legislation, tax code, tax regulations, letter rulings and on, and on, and on, are growing tiresome to even the most studious of the tax specialists in this country. I cringe every time I hear someone jump on his or her soapbox and preach tax simplification. But if by simplification they are talking about abolishment of the income, estate and payroll taxes in favor of let's say a national sales tax, well, you've got my attention and could well gain my support."
CPA Margaret E. McConn in Houston might agree. "The federal income tax is supposed to be a self-assessed tax," she said. "It is now so complicated that even the intelligent are best-served hiring a professional tax preparer. This will only get worse. I am one tax preparer who would love to see a tax law change to put me out of business, in the interest of fairness."
Some have suggested a VAT, CPA William Seth suggests instead a "FAT tax."
"Fat is killing the country. A slow agonizing death just as insidious as cigarettes and just as sure as the Red Sox not winning the series," he writes on his blog. "Here's a thought: Taxation based upon fat. The ultimate consumption tax, eh?"
Follow his thinking: The Federal budget is roughly $2 trillion. Divide that by a population of 350 million, and that equals about a $6,000 tax burden for every citizen. So, if you're 10% overweight, you owe an additional 10 percent or $600; 10 percent under, pay less.
Who knows? Seth's solution sounds about as reasonable as some of the items in the new tax bill.
1) Expect to see the acquisition of US companies by foreign companies to increase, since the devalued dollar makes cross-border acquisitions much less expensive.
