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Tracking tax moves: Congress hunts for ways to boost federal revenues.

Taxes, taxes and more taxes. We find ourselves watching every significant piece of legislation for tax implications. There was a time when we paid particularly close attention to tax bills; now we watch everything. Why?

One word--offsets, those tax increases inserted into legislation to pay for high-visibility tax breaks and/or new federal benefit programs. The issue of offsets is a major stumbling block in getting legislation passed. Democrats insist that new taxes and benefit programs be paid for with tax increases elsewhere. Republicans argue that extensions of existing or expiring tax breaks are not new and do not need offsets.

The alternative minimum tax (AMT) is particularly vexing. Repealing it would eliminate a large chunk of revenue, but Republicans argue that it was never intended to be as far-reaching as it is, that it is income the government should not have collected in the first place and taxpayers should not have to replace that income.

So far, most of the proposed offsets have been changes in the tax law--closing loopholes is the way Congress describes it--that have not directly affected independent hardware/home center retailers. That's changing. Significant pieces of recent legislation involving tax relief contained two offsets that would have a direct impact on retailers--a surtax on higher-income Americans and information reporting on credit and debit card sales.

Surtax on High-Income Taxpayers

The surtax popped up in a massive tax reform bill introduced late last year. It included a repeal of the AMT and creation of the surtax. That bill would have imposed a 5 percent surtax on incomes above $150,000. No one expected serious consideration of the bill and there was none. It was designed to set the stage for 2009 and beyond.

The surtax idea returned this summer when Congress wanted to--and eventually did--increase education benefits for veterans. This time it was a 0.47 percent surtax on incomes above $500,000. It was removed from the bill in final negotiations.

The surtax was designed to affect high-income individuals, but it would very likely have affected businesses such as sole proprietorships, partnerships and subchapter S corporations whose owners report business income on personal returns and pay at individual rates.

Credit/Debit Card Reporting

Requiring banks to report to the Internal Revenue Service (IRS) credit and debit card payments to merchants was an idea hatched by the White House and included in at least two federal budget proposals as a way to close the tax gap. Based on the theory that reported income produces more tax revenue and on the belief that retailers do not report all their sales for tax purposes, the administration suggested having banks and other financial institutions report dollar amounts paid to merchants for credit/debit card sales so that the IRS could match those reports to tax returns.

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That particular offset showed up in the House's Alternative Minimum Tax Relief Act, which would raise AMT exemptions for 2008 and in the Senate's Foreclosure Prevention Act that would provide tax relief for homeowners with mortgage problems.

It is very likely this offset will become reality, but it can only be used once. Of major concern to retailers is the potential paperwork burden required to reconcile their own sales records with the amounts reported to the IRS and a worry about what the IRS will do with the new information.

As of this writing, neither of these bills had passed both houses. The House had passed the AMT relief bill and sent it to the Senate, where its fate was questionable. AMT relief is tied to extending a large number of tax provisions that expired at the end of 2007 or will expire this year. The Senate had passed part of the Foreclosure Prevention Act, but the tax section, which contained the credit/debit card reporting provision, had not been passed.

All of this is considered must-pass legislation. Congress' challenge is to find compromises that will, at least to some degree, satisfy Democrats and Republicans, the House and the Senate and the administration.
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Title Annotation:Capitol Retail Report
Publication:Hardware Retailing
Date:Aug 1, 2008
Words:672
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