As the week comes to a close, Senate Democrats scramble to finalize legislation pushed for by President Obama earlier this month, most notably the extension of the soon-to-expire Bush tax cuts for all taxpayers earning less than $250,000 ($200,000 for single.) The bill is still being tweaked, but it appears that not all the President’s proposals are being incorporated, with the most notable deviation the capping of the tax rate on dividends at 23.8%.
Proposed Legislation Mirroring Previous Obama Proposals:
- Top ordinary rates from those earning in excess of $250,000 would increase from 33 and 35% to 36 and 39.6%.
- For those earning less than these thresholds, the top rate would remain 31%.
- The top long-term capital gains rate would rise from 15% to 23.8%.
Proposed Legislation Differing from Obama Proposals:
- The President had proposed returning the estate tax to its 2009 parameters: a 45% rate and $3,500,000 exemption. The Senate bill is expected to drop that change, allowing the fate of the estate tax to be handled in future legislation. Should nothing happen between now and year-end, however, the estate tax is set to sunset to a 55% rate and a paltry $1,000,000 exemption.
- President Obama has pushed for dividends to once again be taxed as ordinary income, meaning for those earning in excess of $250,000, dividend rates would climb from 15% to 43.4%, after factoring in the additional 3.8% tax on investment income. The bill, however, splits from that proposal, calling for a top rate on dividends of 23.8%.
- The AMT would continue in 2012 with a one-year exemption patch. The President has long pushed to replace the AMT with a “Buffett Rule” that would impose a minimum effective tax rate of 30% on those earning in excess of $1,000,000.
The Democratic-controlled Senate needs 60 votes to move the bill along, which is precisely why the estate tax language was recently removed. There has been dissent among Democrats as to the right parameters for a future estate tax regime — with some supporting Obama’s decision to raise the rate to 45% and lower the exemption to $3.5 million, while others prefer to keep the current standards of a 35% rate and $5.2 million exemption — raising concern that the inclusion of any estate tax language would prevent the legislation from receiving the required support.
The hope is that the bill will be ready for vote next week. From a posturing perspective, Democrats are obviously extremely hopeful the legislation will pass the Senate, so that if the bill hits a roadblock in the Republican-led House, the finger can be squarely pointed at the Republican party for failing to embrace “middle class tax relief.”