The first vote was on the budget proposed by House Budget Committee Chair Paul Ryan (R-WI). This budget focused on spending cuts and included approximately $4 trillion in spending reductions over a decade. It received 47 votes.
A second budget was proposed by Sen. Pat Toomey (R-PA). This budget received 42 votes. It included both spending cuts and reductions in corporate and individual tax rates.
A third budget was offered by Sen. Rand Paul (R-KY). It balanced the budgets through major spending cuts in just five years. This budget received only seven votes.
The fourth budget was the proposal by President Barack Obama. There were zero votes in support of that option.
Republicans noted that Democrats in the Senate had failed to produce their own budget. Senate Minority Leader Mitch McConnell (R-KY) encouraged them to move forward with a budget resolution and suggested that it was a "basic responsibility" of the Democratic leadership.
Senate Budget Committee Chair Kent Conrad (D-ND) has been conducting budget discussions with the Senate Democratic Leadership. His proposed budget is believed to include approximately 50% spending reductions and 50% tax increases. However, this budget has not been presented to the Senate.
Sen. Conrad indicated that he will wait for the result of the negotiations under the leadership of Vice President Joe Biden. Those negotiations include leaders of both parties from the House and the Senate.
Speaker of the House John Boehner (R-OH) initially proposed that Biden's group match a $2 trillion increase in the debt limit with $2 trillion in spending reductions. That negotiation is still underway.
Sen. Orin Hatch (R-UT) noted that the failure of the Senate to produce a budget to date indicates "that absent a Balanced Budget Amendment, Congress will never adopt the spending restraint necessary to restore constitutional limits on the federal government and the nation's fiscal integrity."
Editor's Note: Two sets of negotiations continue. With the departure of Sen. Tom Coburn (R-OK), the "Gang of Five" senators continue to prepare a bipartisan compromise to present to the Senate. While the group, chaired by Vice President Biden, has not released public information, it is believed that there are negotiations discussing substantial expenditure reductions. Because Secretary of the Treasury Timothy Geithner has stated that the deadline is August 2 for resolution of the budget problem, it is probable these negotiations will continue during June and July.
Recovery Act Contractors Owe $750 Million in Taxes
Under the American Recovery and Reinvestment Act of 2009 (ARRA), approximately 80,000 contractors have been selected to build various projects throughout the nation. On May 24, the Government Accountability Office (GAO) indicated that it has audited a number of these contractors. It appears that many contractors have not paid income taxes on payments from federal contracts.
Sen. Carl Levin (D-MI) is the Chair of the Senate Homeland Security and Government Affairs Permanent Sub-Committee on Investigations. He and Ranking Member Tom Coburn (R-OK) conducted a hearing on the unpaid taxes.
Sen. Levin stated, "5% is about half the percentage of DOD contractors that an earlier report found had unpaid taxes, but it is nonetheless troubling. According to a report the sub-committee is releasing today, that 5% translates into about 3,700 contractors and grant recipients out of a total of about 63,000 that received over $24 billion in stimulus dollars, while owing unpaid federal taxes of more than $750 million."
Sen. Coburn continued, "It's one thing for us to have a hearing. It's totally another for us to say this has got to stop. What we need to do is empower the OMB and administration to put this to a dead stop."
The hearing focused on 15 specific contractors with particularly offensive tax records. One contractor owed $700,000 in back taxes and had an expenditure of hundreds of thousands of dollars at a casino. A second contractor owed $2 million in back taxes and also had spent hundreds of thousands of dollars in casinos.
As a result of past failures of contractors to pay taxes, a contract requirement was passed in 2008. If a federal contract is to pay over $150,000, the contractor must certify whether he or she has received an IRS notice for delinquent taxes of $3,000 or more during the past three years.
Charitable Giving Tax Proposals
The ongoing budget negotiations by Vice President Biden or other bipartisan groups have focused primarily on spending. However, the President's Fiscal Commission in 2010 proposed a solution that was approximately one-fourth tax increases and three-fourths spending reductions.
While the latest indication from House Majority Leader Eric Canter (R-VA) is that the current negotiations facilitated by Vice President Biden are focused on spending cuts and not tax increases, it is quite probable that there will eventually be tax changes as part of the deficit reduction process. If there are tax changes, they may affect medical deductions, retirement plans, mortgages and charitable giving.
On May 23, House Democratic Leader Steny Hoyer (D-MD) spoke to the Bipartisan Policy Center in Washington. He discussed the ongoing negotiations and shared his perspective on potential tax changes.
Rep. Hoyer stated, "First, we should broaden the tax base and reduce tax rates by closing tax loopholes and limiting other tax expenditures. And we should use part of the resulting savings to reduce the deficit. A simpler, more efficient income tax code would help more Americans make economic decisions based on what's best for their families and businesses, rather than on maximizing their tax write-offs."
Following the presentation by Rep. Hoyer, the Government Accounting Office (GAO) published a report on potential charitable deduction changes. The GAO report also includes an estimate of the change in total charitable giving if any of these provisions are enacted.
There were four principal changes that could be part of a future plan. These include the following.
1. Deduction with Floor – Itemized deductions would be permitted, but there would be a non-deductible floor. The floor could be $500 single/$1,000 married or 2% of adjusted gross income. Gifts in excess of the floor would be deductible for itemizers.
2. Above the Line Deduction – The same plan for deductions with a floor could be created and all Americans would be permitted to use the deduction. It would not be necessary to itemize deductions, but deductions would reduce adjusted gross income in a manner similar to some types of retirement plan contributions.
3. Non-Refundable Credit – The charitable deduction would be replaced with a 25% credit for charitable gifts. This plan is likely to also include a floor on gift amounts.
4. Non-Refundable Credit of 15% – The same credit plan with floor could be created with a lower credit amount.
Editor's Note: The different budget plans have generally selected a target of $4 trillion. Some plans favor spending reductions and others prefer tax increases. The majority of budget plans do not include an increase in the tax rates. The only way to hold rates level or reduce rates and maintain the tax base is to cut back substantially on various types of deductions. Because there is strong support for medical, retirement, mortgage and charitable deductions, this will be an interesting political process.
Applicable Federal Rate of 2.8% for June – Rev. Rul. 2011-13; 2011-23 IRB 1 (18 May 2011)
The IRS has announced the Applicable Federal Rate (AFR) for June of 2011. The AFR under Section 7520 for the month of June will be 2.8%. The rates for May of 3.0% or April of 3.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2011, pooled income funds in existence less than three tax years must use a 2.8% deemed rate of return. Federal rates are available by clicking here.