Tax-Cut Deal Headed for a Vote

President Barack Obama’s tax-cut compromise easily cleared a procedural hurdle in the Senate today, clearing the way for a vote on the $858 billion bill tomorrow or Wednesday.

But the House reserves the right to muck up the deal by increasing the bill’s estate tax rate.

As of 5:30 p.m., the vote to proceed with the bill was 79-11 in favor. The vote was held open for hours so that senators could make their way back to Washington through snowstorms to vote. Only 60 votes were needed to move the legislation forward.

Obama said the vote “proves that both parties can work together.” The bill will protect middle-class families from a tax hike January 1 and provide businesses with the certainty they need to grow the economy, he said.

“I urge the House of Representatives to act quickly on this important matter,” Obama said.

The legislation extends all of the Bush-era income tax cuts for another two years, provides workers with a one-year payroll tax reduction and extends unemployment benefits to the long-term unemployed for another 13 months. The bill also extends tax breaks for the working poor, college students and parents with children.

For businesses, the bill includes an incentive to invest in new equipment next year. In 2011, businesses would be allowed to expense 100 percent of their capital expenditures, instead of depreciating them over time. The bill also delays an increase in capital gains tax rates, and extends the research and development tax credit. In addition, the legislation includes tax breaks benefiting industries ranging from renewable energy to stock car racing.

The most controversial provision is reinstatement of the estate tax at a rate of 35 percent and a $5 million exemption ($10 million for couples). Many Democrats think that is too generous, particularly since the legislation also extends income tax cuts for high-income Americans. The House may amend the estate tax provision, said House Majority Leader Steny Hoyer, a Democrat from Maryland.

There is “much consternation in the House about the estate tax,” Hoyer said.

Democrats support a 45 percent estate-tax rate with a $3.5 million exemption—the level that was in effect in 2009. Under the Bush-era tax-cut legislation, the estate tax, which is levied on inherited assets, was repealed for this year but is scheduled to come back January 1 at a top rate of 55 percent with an exemption of only $1 million.

Changing the estate tax provision could jeopardize Republican support for the bill, however, since the lower estate tax rate was part of the deal they negotiated with Obama. Most business groups contend that high estate rates and low exemptions hurt family-owned businesses.

The estate tax is “a huge issue” for many manufacturers, said Dorothy Coleman, vice president of tax policy for the National Association of Manufacturers.

Both NAM and the U.S. Chamber of Commerce sent letters to senators urging them to vote for the bill.

If the House amends the legislation, it would have to go back to the Senate for another vote. That means final passage of the legislation could slip into next week.

Businesses have been waiting for Congress to decide what their tax liability will be next year. If Congress does nothing, tax rates for all taxpayers will increase January 1.

“Despite delays in reaching an agreement in Congress, businesses are expecting an outcome that will allow them to better forecast cash flow related to taxes and thus make decisions about further investment and hiring,” said Matt Becker, tax partner at BDO accounting and consulting firm.

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Kent Hoover is the Washington bureau chief for bizjournals.