House Ways and Means Committee Chairman Charles Rangel (D-N.Y.) unveiled Jan. 15 a $275 billion package of tax cuts to be included in the economic stimulus legislation, including sweetened incentives for home buyers and several tax breaks for businesses.

The package would extend the work opportunity tax credit and small business expensing provisions from the 2008 stimulus bill and would allow companies to carry back net operating losses for five years, up from the two-year period in current law.

To satisfy critics of the way the banking industry has used federal aid to date, Fannie Mae, Freddie Mac, and any companies receiving money under the Treasury Department's Troubled Asset Relief Program would be excluded from taking advantage of the NOL provision.

The bill also would overrule Internal Revenue Service Notice 2008-83 allowing banks to claim tax deductions for the losses of other banks they acquire. Typically such deductions would be severely limited under tax code Section 382, but Treasury crafted the exception as part of its efforts to help manage the financial crisis and help the banking sector (190 DTR G-6, 10/1/08). The bill would not change the tax consequences for banks that have already merged and are taking advantage of the rule change.

Rangel said the stimulus legislation will be formally introduced “in the coming days, and is expected to receive consideration in the Ways and Means Committee” during the week of Jan. 19.

No AMT Patch in Package

One noticeably absent provision in the stimulus package was an alternative minimum tax “patch” for tax year 2009. Raising the AMT exemption levels in 2009 to keep more than 20 million taxpayers from facing the tax would cost an estimated $80 billion, according to the Congressional Budget Office.

Lawmakers in both houses have expressed concern that inserting the AMT patch into the stimulus bill would either crowd out other tax incentives deemed to have a far greater stimulative effect on the economy or could push the cost of the total stimulus bill above their unofficial limit of $1 trillion.

House Speaker Nancy Pelosi (D-Calif.) told reporters Jan. 15 that the immediate priorities for House Democrats are the investments in infrastructure and middle-class tax cuts in the package, not AMT.

Rangel echoed that view in comments to reporters, but said he expects senators to push harder for an AMT patch.

Low-Income Households Targeted

The House tax package features several of the tax credits that President-elect Obama's promised during his campaign, including an expanded earned income tax credit and his “Making Work Pay” credit.

The “Making Work Pay” credit would gradually give individuals an additional $500 per year ($1,000 for couples) through a reduction in withholding levels in workers' paychecks. Obama aides wanted to avoid issuing another round of lump sum payments through tax rebate checks because data suggest that much of the money is saved or used to pay down debt, rather than spent in a way that would give the economy a boost. By doling the money out in smaller increments through paychecks, the president-elect's advisers hope more money will make it into the economy.

The House proposal also increases the EITC for families with three or more children to 45 percent from 40 percent and increases the income phase-out levels. It also increases the child tax credit by removing current $8,500 floor on income before families can start claiming the credit. Families would receive a credit of 15 percent of income up to $1,000 per child from their first dollar of earned income.

Low- and middle-income individuals would also benefit from language in the tax package that removes a requirement for first-time home purchasers claiming a $7,500 home buyer tax credit must repay the money over a 15-year period. The credit, created in the Housing and Economic Recovery Act of 2008 (Pub. L. No. 110-289), was originally structured as a no-interest loan. The repayment requirement would only apply to homes purchased after 2008 and before the termination of the credit on June 30, 2009.

Expanding Education Credits

Middle-income households will get a boost under the package from a simplification of education tax credits and an increase on some higher-education credits. The bill would provide a $2,500 tax credit for each of the first four years of college and increase income limitations on the credit. Up to 40 percent of the credit would be made refundable, according to a Ways and Means Committee summary.

On the business side, in addition to the extension of the NOL carryback provision and the change to the notice on tax code Section 382, Ways and Means Committee Democrats proposed an extension of the bonus depreciation language from the 2008 stimulus bill allowing businesses to deduct up to 50 percent of the cost of new plants or equipment in the year they were purchased.

Another 2008 stimulus bill provision allowing small businesses to expense up to $250,000 of investments would also be extended for another year under the proposal.

Over $20 Billion in Energy Tax Breaks

One of the more contentious elements of the package was the effort to craft more than $20 billion in energy tax incentives for the production of renewable energy. While there is broad agreement that credits are needed for renewable energy investment, lawmakers have split over which technologies should benefit.

The House bill includes a long-term extension of the renewable energy production tax credit and a temporary election to claim the investment tax credit in lieu of the production tax credit.

Lawmakers would also provide tax incentives for energy efficiency and conservation under tax code Sections 25C, 25D, and 48, Ways and Means said. Tax credits will be provided for “smart energy” conservation, energy efficiency, and renewable energy research and development.