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Senate Small Business Tax Bill Contains No Major New Initiatives

Tuesday, June 11, 1996

Deloitte & Touche OnLine

The Senate version of the small business tax incentive plan, which will be marked up by the Finance Committee Wednesday, will contain proposals to extend some tax provisions that have expired. But it will not contain -- as some had expected -- any major tax policy changes, such as a capital gains tax rate cut or an expansion of individual retirement accounts, according to a summary of the plan released today.

While the proposal circulated Monday by Senate Finance Committee Chairman William Roth, R-Del., does contain many provisions that are also in the House-passed version of the bill (HR 3448), it does not include others, most notably the repeal of Section 956A, which provides special rules for controlled foreign corporations that invest earnings in passive assets.

The Senate proposal also does not include a proposal to tax the offshore insurance income of certain tax-exempt organizations, which the House bill proposed.

To pay for the additional cost of his proposal, Roth proposed instead to expand the phase-out of the possessions tax credit (a credit for American companies that set up manufacturing facilities in U.S.-owned possessions, such as Puerto Rico), and to reinstate the expired airport and airway trust fund excise tax, according to the summary. Roth also proposed to eliminate the favorable tax treatment of the interest expense for certain nonfinancial corporations that have income from both American and foreign sources.

The package calls for the extension of the work opportunity credit (a tax credit for employers who offer jobs to members of certain groups, including high-risk youths, qualified veterans, and people who have been on AFDC or food stamps). This credit takes the place of the Targeted Jobs Tax Credit. It also extends a provision that keeps employer-provided tuition assistance from being included in employees’ taxable income. Both of these proposals were also in the House bill.

Extending the House's extensions

The Senate proposal goes further than the House bill, though, by seeking to extend:

• The research and experimentation tax credit through June 30, 1997.
• The orphan drug credit (a tax credit for companies that make drugs for rare diseases or conditions) through June 30, 1997.
• The tax deduction for contributions of appreciated stock to private foundations (also through June 30, 1997).
• The tax credit for companies that make nonconventional fuels, such as synthetic fuels from coal and gas from biomass.

Senate Finance Committee staff members told reporters after a briefing on the proposal that only a few members are expected to offer amendments to the package when the committee formally meets to work on the measure Wednesday. Republican staff cautioned that Senate Democrats may break ranks and offer more amendments than initially expected.

Beyond the committee action anticipated this week, the outlook for the small business bill is clouded by political wrangling in the Senate over it and several other tax and other initiatives. The Senate Finance Committee also plans to mark up its version of the adoption tax credit bill, HR 3286, Wednesday, which would be paid for by foreign trust tax compliance changes.

Seeking ties to higher minimum wage

House action on the small business bill was linked to a bill to gradually raise the federal minimum wage and a package of wage and hour law reforms.

Senate Democrats probably will seek a similar linkage of the small business bill to minimum wage law changes, which many moderate Republicans also support, and will move to block the wage and hour law changes, which are opposed by labor, but supported by many Republicans.

President Clinton and Senate Democratic Leader Tom Daschle, R-S.D., initially expressed support for the small business incentive package, largely as the price for the minimum wage increase. Daschle in recent days has been suggesting the initial warmth towards the package may cool if the minimum wage linkage is broken.

Action on the legislation is complicated further by the turnover in the Senate leadership ranks this week. Tuesday is Senate Majority Leader Robert Dole’s, R-Kan., last day in the Senate before leaving to devote full attention to his presidential campaign. Dole has been engaged in a last-gasp effort to revive the health insurance reform legislation, S1028, he’d like to pass as his final legislative accomplishment.

Democrats so far have stymied this effort in a dispute over medical savings accounts and Dole has been reluctant to back down.

Sen. Trent Lott, R-Miss., currently No. 2 in the GOP leadership team, is a shoe-in to take over as majority leader. It remains unknown how Lott, with his strong ties to House Republican leaders, will bridge the gulf between Senate Democrats and Republicans to negotiate successful legislative efforts where Dole and his formidable negotiating skills so far this year have failed.