The Co-chairs of the Supercommittee are Rep. Jeb Hensarling (R-TX) and Sen. Patty Murray (D-WA). They issued a joint statement and noted, "Despite our inability to bridge the committee's significant differences, we end this process united in our belief that the nation's fiscal crisis must be addressed and that we cannot leave it for the next generation to solve. We remain hopeful that Congress can build on this committee's work and can find a way to tackle this issue in a way that works for the American people and our economy."
Several moderate members of Congress also urged continued deficit reduction efforts. Senate Budget Committee Chair Kent Conrad (D-ND) indicated he was disappointed but that "The fiscal challenge remains and has to be dealt with. A balanced and fair package has to include both entitlement and tax reforms that lower spending and raise revenue."
A group of conservative Democrats in the House known as the Blue Dogs also expressed concern. Rep. Heath Shuler (D-NC) noted that there was "broad bicameral, bipartisan support the Supercommittee had from nearly 150 members of Congress to 'go big' and come up with a comprehensive, $4 trillion deficit reduction plan that puts our country on a long-term fiscally sustainable path." The Blue Dogs have on numerous occasions discussed the importance of a major solution to the deficit challenges.
Editor's Note: Congress will again face the need to find a comprehensive deficit solution next year. The Bowles-Simpson fiscal committee and the Blue Dogs both agree that a solution should be approximately $4 trillion. This debate on the balance of tax increases and spending cuts to address the budget deficit solution will continue during 2012.
President Proposes 2012 Payroll Tax Cut
President Obama traveled to Manchester, New Hampshire to speak at a high school. He proposed a new payroll tax cut in the American Jobs Act of 2011. In the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, the employee contribution for Social Security was reduced from 6.2% to 4.2% for 2011. This reduction reduced employee taxes and resulted in lower contributions to the Social Security fund for 2011.
President Obama proposed a reduction again for 2012. The American Jobs Act reduces the employee contribution from 6.2% to 3.1% for the year. In addition, there also would be a 3.1% reduction in the employer's share for the first $5 million in payroll contributions.
House Speaker John Boehner (R-OH) suggested that he was willing to work with the President on this proposal. He stated, "We told the President in September that we stand ready to have an honest and fruitful discussion with him regarding the payroll tax extension."
Proposed Cap on Charitable Deductions
On November 17 the Council on Foundations conducted a panel discussion with several economists and Foundation representatives. The topic of the conference was the proposal by the White House to cap charitable deduction tax savings at the 28% bracket. Under the White House proposal, individuals in the 33% and 35% bracket would save taxes only at the 28% rate. Loss of part of their potential tax benefit may affect gifts by major donors.
Patrick Rooney, Executive Director of the Center on Philanthropy at Indiana University, reported on a recent survey on the proposed cap. The study determined that the 28% cap would have a significant impact on charitable giving for individuals with higher incomes. The giving loss would be estimated at 0.7% for the year 2010. However, the White House proposal for increased marginal rates would lead to an additional 0.9% reduction in charitable giving. If both changes were enacted, there would be a 1.3% total decline or $2.43 billion based on 2010 statistics. In future years, this reduction in charitable giving could increase.
Rooney observed that the loss in giving comes at a time when needs are great. He stated, "One of the things that happens during a recession and during a soft recovery is that more people are unemployed, more people are homeless, more people are hungry." As the need for relief services increases, any loss of charitable giving will have significant impact. Because of cutbacks in both federal and state budgets, many of the programs assisting those in serious need have been reduced.
Eugene Steuerle is the Richard B. Fisher Chair at the Urban Institute. He suggested that it may be logical to limit some itemized deductions, but that charitable giving should be supported. He noted, "One of the major goals of the charitable deduction is to provide an incentive so there is more giving. You don't want to cap it."
Editor's Note: While there is a need to increase tax revenue, Steuerle is correct that it makes much greater sense to use selective caps on specific itemized deductions. Charities already have a limit of 50% of adjusted gross income for cash gifts and 30% for appreciated property gifts. In addition, there is no deduction for gifts of ordinary income assets. A more prudent way to proceed would be to enact specific limits on other types of itemized deductions. The challenge for Washington is that there will be great political heat if Congress and the White House decide to cap deductions for state and local taxes, mortgage interest or medical care.
Applicable Federal Rate of 1.6% for December -- Rev. Rul. 2011-31; 2011-49 IRB 1 (17 Nov. 2011)
The IRS has announced the Applicable Federal Rate (AFR) for December of 2011. The AFR under Sec. 7520 for the month of December will be 1.6%. The rates for November of 1.4% or October of 1.4% 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.