Countdown to the Elections – 2010 Promises to be a Shake-up Year
With just a few days to go before the 2010 midterm elections, the American political landscape looks drastically different than it did just two years ago. The 2008 elections brought significant change in the form of a new Democratic administration and increased Democratic majorities in both chambers of Congress. Exit polls clearly showed that voters had lost trust in the Bush Administration and Republicans in Congress. Fast forward to today and you see Republicans on the verge of taking back the House of Representatives and possibly the Senate.
What does this election mean and how will it change the legislative direction in Congress? Most pollsters are forecasting a 47-66 seat gain for Republicans in the House of Representatives, much higher than the 39 seats needed to take over the chamber. If this proves to be the case on Nov. 2, the control of the House will flip to Republicans. In doing so, all committee power will be shifted from Democrats to their GOP colleagues.
A look at the House leadership structure gives a sense of how things could change on Capitol Hill if Nov. 2 goes for the GOP. A Republican majority would mean John Boehner of Ohio would become the Speaker of the House, while Eric Cantor of Virginia would move to the Majority Leader’s office. Turnover at key committee posts would include:
Budget Committee: Paul Ryan of Wisconsin would likely become the Chairman of the committee responsible for the oversight of the House’s budget process. Considered a rising star in the House, Ryan made a name from himself by releasing his “Roadmap for America’s Future” which is one of the few plans from a member of Congress that outlines ways to tamp down spending. Specifically, the Roadmap calls for reforms to Social Security such as an increase in the retirement age and a reduction in benefits for the wealthy. One of the primary roles of the Budget Committee is the drafting chamber’s budget resolution. While the resolution is not legally binding, it often provides a clear view of the party’s legislative priorities and possible actions they may take.
Financial Services: Spencer Bachus of Alabama is on deck to take over the Financial Services Committee from Massachusetts’ Barney Frank. The committee responsible for bringing the business community the Dodd-Frank Act would now be controlled by the current Ranking Member who could attempt to roll back certain portions of the financial reform bill. Mr. Bachus has also been one of the leading critics of Fannie Mae and Freddie Mac and has voiced interest in overhauling the housing finance system.
Oversight and Government Reform: Darrell Issa of California is expected to take over the gavel of one of the most powerful and influential House committees. In the 1990’s, when the GOP controlled the House, this panel issued over 1,000 subpoenas during the Clinton Administration. Mr. Issa and the Oversight Committee could again find themselves on the front lines of probes scrutinizing the efficiency and effectiveness of the economic stimulus programs, health care reform and financial regulatory reform.
Ways and Means: Dave Camp of Michigan is next in line as Chairman of the chief tax-writing committee. Republicans are actively pushing a jobs agenda, and the Ways and Means Committee could look to stimulate the economy through the tax code. The panel also has jurisdiction over trade policy – another major GOP interest – and would like to play a major role in an attempt to repeal or replace the health care reform law.
The most recent polls also indicate GOP gains in the Senate; however, the likelihood of a Republican takeover of the upper chamber would surprise a number of political pundits. Regardless of the outcome, when the 112th Congress is sworn in, there will be a slate of newly elected leaders looking to push Congress in new direction. An endeavor that could prove challenging if partisan gridlock persists.
What We’re Doing
FEI meets regularly with key congressional offices to discuss issues that are of importance to our membership. As the 112th Congress is sworn in, FEI staff will begin to build off of the 200 plus meetings held last year with congressional members and staff and actively work to introduce new members of Congress to our organization, as well as strengthen existing relationships with the incoming chairmen of the various committees highlighted above.
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111th Congress’s Last Order of Business – Lame Duck
When Congress returns on Nov. 15, after the mid-term election break, leadership in the House and Senate will have a long list of tasks to tackle that touch a variety of policy areas. Experts and lawmakers alike have been speculating about what could happen if Republicans take back a majority in Congress. Currently, the safe money is on a number of temporary extensions of current policy being agreed upon in the waning days of the 111th Congress, thus pushing most of the “heavy lifting” to the 112th. This is primarily due to the pure magnitude and high price tags of the legislation, plus the normal acrimonious nature of lame duck members of Congress.
A top priority would be consideration of Bush-era tax rates and legislation aimed at avoiding a jump in estate tax rates to 55 percent. If these votes fail to take place before the end of the year, tax payers can expect to see rates revert back to Clinton-era levels on Dec. 31 – resulting in one of the largest tax increase in history.
The political minefields are abundant and one needs to look no further than the debate on the estate tax, where it is difficult to pinpoint what option receives majority support. The business community and FEI have long held the position to fully repeal the estate tax. However, in the face of massive deficits and current political reality, industry has begun to ask for a top estate tax rate of 35 percent and a $5 million exemption-level. On the other hand, there are many in Congress content on seeing rates go back to 55 percent. A safe bet is to assume that a temporary solution to individual and estate tax rates will be found, and that Congress will be facing the same questions next year.
What We’re Doing
FEI’s Committee on Private Company-Policy (CPC-P) and Committee on Taxation (COT) continue to remain engaged in the debate to extend expiring tax provisions and have sent a number of letters related to the issue. FEI’s advocacy committees will remain active in these debates if the process is punted to the 112th Congress. It is important that congressional members and their staff understand that the unpredictability surrounding the nation’s tax system disrupts business operations.
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Focus on Accounting
Progress has been made on several accounting and reporting related issues:
FASB and IASB
On Oct. 1, upon the retirement of former Chairman Robert Herz, Leslie Seidman became Acting Chairman of the Financial Accounting Standards Board. Also in October, the International Financial Reporting Standards Foundation announced the selection of Hans Hoogervorst to succeed Sir David Tweedie as Chairman.
The changing of the guard at both boards has raised questions from those in the industry as to whether the target of convergence by June, 2011 is in jeopardy. To that end, at his last board meeting, Herz announced that FASB was expected to release a discussion document seeking comment on implementation issues anticipated with the set of standards being completed under the FASB-IASB Memorandum of Understanding (MOU), such as effective date and transition.
Blue Ribbon Panel on Private Company Standard Setting
At their fourth meeting, held in October, a majority of members of the Blue-Ribbon Panel (BRP) on Private Company Standard-Setting indicated a preference for a need for a new standard-setting model that is based on GAAP.
They also voiced support for providing more exceptions for private companies in order to better meet the needs of users of private company financial statements.
The majority of the BRP noted that it envisions a separate private company standards board under the oversight of the Financial Accounting Foundation (FAF) and is expected to issue a report to the FAF in January 2011. Additional information on the Blue Ribbon Panel can be found here.
In past three months, FEI committees filed 24 comment letters related to accounting policy with the FASB, IASB, SEC and Public Company Accounting Oversight Board. These letters comment on issues such as disclosure of certain loss contingencies, participant loans and financial instruments, and represent the views of FEI members to advocate on behalf of FEI’s membership in the shaping of meaningful and practical accounting and regulatory policy. Comment letters can be found here.
In addition to comment letters, FEI committees, including our Committee on Corporate Reporting (CCR), our Committee on Private Company Standards (CPC-S), and FEI staff liaisons to those committees, hold formal meetings and provide additional information informally to assist the FASB, IASB, SEC and PCAOB boards and members of their staff as they consider rulemaking and standard-setting matters. If you have questions about these committees, please contact Cheryl Graziano.
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¨ Dodd-Frank Rulemaking: Federal agencies remain active in producing a steady stream of rules implementing the Dodd-Frank Act. Two weeks ago the SEC released rule proposals relating to asset-backed securities and swaps, and last week it released rules on executive compensation, “say on pay.” The Commodity Futures Trading Commission has also released two of the first rule proposals on over-the-counter derivatives. Congress, and in particular the House Financial Services Committee and Senate Banking Committee have jurisdiction over these regulatory processes, and we will likely see a wave of public hearings scheduled on these issues when Congress returns on Nov. 15. FEI’s advocacy committees, including the Committee on Corporate Treasury (CCT), will continue the work started last year to ensure that federal regulators and FEI members understand the full impact this law will have on businesses.
¨ 1099 Reporting Requirement: It is the position of FEI’s CPC-P that finding practical ways to reduce the tax gap and prevent fraud, waste and abuse is beneficial, not only to the government, but to the business community. However, CPC-P cautions that the new 1099 reporting requirements enacted could overburden the nation’s businesses, particularly smaller and privately held companies. CPC-P signed a letter to Congress in September along with over 2000 other organizations and companies urging repeal of the provision.
¨ Tax Policy: The nation’s negative fiscal position continues to drive economic policy considerations, including the debate around the much anticipated tax extenders package that has remained influx for over a year. President Obama recently announced a three-pronged economic plan, which includes expanding, simplifying, and making permanent the R&D tax credit. FEI’s COT sent a letter to House and Senate leadership voicing concerns with possible revenue offsets, which would increase taxes on businesses that compete internationally. As discussed in this IOU’s feature on Congress’ lame duck session, there is still a fluid debate on whether to extend current individual tax rates established under President George W. Bush. Several outcomes are possible and are closely related to Election Day results. Accordingly, numerous reports from Capitol Hill suggest a temporary extension of the Bush tax rates which points to the prolonged debate continuing into the 112th Congress.
¨ Carried Interest: With an increasingly difficult search for revenue to offset the cost of new legislation, Congress has begun to consider increasing the tax liability associated with carried interest. Supporters of this provision contend that private equity funds should pay taxes at the ordinary income rate rather than at the more preferred capital gains rates the funds currently enjoy. However, a further look at the provision as proposed proved it went beyond the investment fund industry and could negatively affect corporations who see no difference in rates between capital gains and ordinary income and who operate joint ventures. In a letter sent to congressional tax writing committees in August, FEI’s COT asserted that the provision was written in such a way that would force corporations to postpone awareness of operating losses related to partnerships and would suddenly require the recognition of taxable events that are normally not recognized. As Congress has proved by using this provision as a revenue raiser in bills to repeal the unpopular 1099 reporting requirement and to extend current tax policies, this is an issue that will persist and must be monitored.
¨ Small Business Jobs Act: On Sept. 27, President Barack Obama signed into law the Small Business Jobs Act. The Act is aimed at growing America’s small businesses and assisting in their ability to hire new workers as the nation continues to struggle with an unemployment rate hovering near 10 percent. The Act makes available $30 billion in loans and $12 billion in tax incentives. CPC-P pushed for some of the key provisions in this bill, including:
§ Extension of 50 percent bonus depreciation for equipment that goes into service in 2010 for all businesses.
§ Built-in gains (BIG) tax relief for S corporations– reduces the holding period of BIG assets to five years. The American Recovery and Reinvestment Act of 2009 had reduced the recognition period to 7 years in 2009 and 2010, which was down from the previous 10 year recognition period.
§ Increased and expanded Section 179 expensing through 2011. This provision increases the maximum amount that may be expensed under IRC Section 179 to $500,000 and increases the phase-out threshold amount to $2 million. Some businesses, particularly those that made real estate improvements, will be eligible for benefits for which they were not previously eligible. The Act temporarily expands the application of Section 179 to certain real property up to $250,000.
§ Five-year carryback of general business credit for eligible small businesses with less than $50 million in revenue. This provision provides businesses with a break on taxes for this year, as well as allowing the credits to offset the Alternative Minimum Tax.
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ON OUR RADAR
U.S. Trade Policy Hangs in the Balance
Headlines on international trade continue to hit newsstands, hinting that Congress may begin to take a more serious look at trade policy. Last summer, President Obama and Commerce Secretary Gary Locke announced the National Export Initiative (NEI), which aims at doubling exports within five years and creating over 2 million jobs. President Obama has been working closely with key trade officials since the summer to resolve contentious issues surrounding the outstanding Free Trade Agreements (FTAs) with Korea, Panama, and Colombia. With the goal of increasing U.S. exports, theses FTAs would be the most significant FTAs since the North American Free Trade Agreement. While there has been some chatter about visiting trade issues during Congress’ lame ducks session, the ever-growing list of “must-pass” legislation would suggest otherwise. Nevertheless, key Republicans have said the ratification of these FTAs will be a focus if they are to ascend to the majority in the 112th Congress.
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President’s Fiscal Commission to Release Report in Coming Months
In response to the nation’s mounting fiscal problems, President Obama created the National Commission on Fiscal Responsibility and Reform in February of this year. The group was tasked to come up with proposals to balance the budget by Dec. 1 – including reevaluating entitlements and the Pentagon’s budget. The Commission includes 18 members and is headed by former Clinton White House Chief of Staff Erskine Bowles and former Republican Senator Alan Simpson. The Beltway rumor mill suggests that even if the Commission is able to achieve the mandate that requires agreement among 14 Commissioners to move a recommendation to Congress for a vote, it is unlikely that such a vote will take place during the lame duck session. However, it is certain that the Commission’s work will be referenced in the policy initiatives championed in the coming years.
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PERAB Report Offers Look at Possible Tax Code Changes
With his approval rating above 60 percent, President Obama established the President’s Economic Recovery Advisory Board (PERAB) in February of 2009. The President asked PERAB to analyze, advise, and implement plans for a sustainable recovery. The Board consists of 17 members, and is led by former Federal Reserve Chairman Paul Volcker with Obama’s economic adviser, Austan Goolsbee, serving as staff director. In late August, PERAB submitted a report that outlines a spectrum of options related to tax transparency in existing tax laws, simplifying taxation, and reforming the corporate tax system. Among the options listed in the report is expanding the tax base by limiting the interest expense deduction and eliminating or reducing accelerated depreciation. The report also offered suggestions that would move the country to a territorial tax system, limiting or eliminating deferral and reducing the corporate tax rate. Much like the President’s Fiscal Commission’s much anticipated report; policymakers may look at PERAB’s work when contemplating changes to the country’s tax code during the 112th Congress.
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FEI’s advocacy efforts include the activities of our national technical committees as well as those of our government relations staff located at 1825 K Street in Washington, DC. The Advocacy and Accounting Policy department staff in NJ and Washington DC are involved in information gathering and dissemination on a range of public policy issues affecting financial executives such as: corporate taxation, accounting and financial reporting, pensions and healthcare; government contracting, the federal budget and international trade. For more information you may contact our staff.