On June 11, 2009, the Joint Committee on Taxation (JCT) released its estimate of the budget effect of the Obama tax proposals (JCX-28-09). The most notable item is the revenue scoring for the Obama proposal to prohibit the election of “disregarded” status for certain foreign entities for U.S. tax purposes (the CTB Proposal). For the 10-year budget window, the JCT has estimated revenue of $31 billion as compared to the Treasury estimate of $86.5 billion. No explanation has been offered for the significant difference in the two estimates. Since the CTB Proposal has been positioned by the Obama Administration as a “corporate anti-abuse proposal,” there is a significant anticipation that the CTB Proposal will be enacted by year-end.
While Rep. Rangel has expressed a “moderate” view that any major corporate tax legislation should be considered in the context of overall corporate tax reform, there is growing concern that the CTB Proposal could be picked up as a revenue raiser prior to the consideration of overall reform. If the CTB Proposal were tagged as a standalone revenue raiser in 2009, it will likely be enacted in its original form so as to enhance the revenue effect. Alternatively, if such proposal were considered as part of a larger package for corporate and international tax reform, there is an expectation that such proposal would be more narrowly targeted to specific abuses.
Last week, legislative pundits were relieved that the controversial CTB Proposal was not included (at least initially) in the Health Care Bill as odds were high that it would be included in a bill fashioned solely by the Democratic leadership. However, any reprieve may be short-lived. Funding of the Health Care Bill (right now, principally funded by the individual surtax provision) is very controversial and alternative revenue raisers, such as a tax on employer-provided health care benefits, are equally unpopular among members of Congress. Thus, if a bipartisan agreement cannot be reached, there is speculation that the CTB Proposal would be a likely revenue replacement (or addition).
So what are the odds that the CTB Proposal will be passed in 2009? Even if corporations dodge the bullet in the Health Care Bill, other 2009 legislation could tap the CTB Proposal as a revenue raiser such as the Tax Extenders Bill. Moreover, given the unfortunate label of the CTB Proposal as an anti-abuse provision and the tremendous pressure on mounting deficits, it may not be politically feasible to push back attempts to enact such provision. In the meantime, more needs to be done to convince Congress that the CTB Proposal is premature prior to the full consideration of corporate tax reform and of the true impact of any such provision.