Congress gets a lot of (well-deserved) criticism, so it's notable that legislators were able to take decisive action in late December and pass a two-year extension of the Bush-era tax cuts — just two weeks before they were set to expire.
The move removes short-term cost uncertainty that had many manufacturers hesitant to move forward on projects and investments since the economy crashed two years ago.
The $858 billion tax-cut bill, passed just before midnight Dec. 16, keeps in place existing personal income tax rates and existing rates for taxes on capital gains. It also extends seamlessly through 2011 the research and development credit that had expired at the end of 2009, and contains a provision that will allow businesses to completely write off any capital equipment investments made between Sept. 9, 2010, and Dec. 31, 2011.
Had the tax cuts not been extended, the tax bills of S corporations and partnerships in the manufacturing sector would have increased by an average of 14 percent, estimated the Manufacturers Alliance/MAPI, a public policy and economic research organization in Arlington, Va.
During the debate, the Society of the Plastics Industry Inc. had called passage of the tax-cut bill “crucial to ensure continued economic growth in 2011 and beyond.”
“Without passage of this legislation, tax rates on many of our industry's small and midsize companies would have risen nearly 5 percent in 2011” because many of them pay taxes based on individual tax rates, said SPI President and CEO Bill Carteaux.
“In addition, the new law permits full, 100 percent first-year expensing of qualified [capital equipment and machinery] purchases for 2011 — and even those retroactive to September 2010 — as well as 50 percent first-year expensing for 2012,” he said in a Dec. 17 statement. “This dramatically shortens the time period in which companies can recover the cost of capital equipment and machinery purchases, allowing them to write off their investments fully before the end of next year or by half on purchases made in 2012.”
Carteaux added that the new tax bill “provides consumer spending incentives” because it lowers taxes for most people. He said the bill also “adds a needed jolt to the economic recovery by including measures that spur plastics innovation and strengthen the viability of many of our industry's small and midsize companies.”
Without the extension of the Bush-era tax cuts, the top capital gains rate for long-term investments would have risen from 15 percent to 20 percent, and dividend income — currently taxed at a top rate of 15 percent — would have been taxed as ordinary income, potentially pushing that tax rate as high as 39.6 percent.
The compromise on taxes — set in motion when the Republicans gained control of the House and narrowed the Democratic majority in the Senate in November — sets the stage for another debate over taxes during the 2012 presidential election, unless the federal tax system is changed in the next 18 months.
Based on previous experience, we can expect Washington to wait until the very last minute to deal with that issue.
Like a college student pulling an all-nighter to write an important term paper, Congress seems to believe that it does its best work on deadline. The truth, however, is that it seems to need these deadlines to get off the dime and get to work on important issues.