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May 28, 2010 Friday 4:44 PM EST
SECTION: PERSONAL FINANCE; Taxes
LENGTH: 1323 words
HEADLINE: House votes to extend jobless benefits, tax breaks
BYLINE: Ruth Mantell, MarketWatch mailto:email@example.com.
Ruth Mantell is a MarketWatch reporter based in Washington.
WASHINGTON (MarketWatch) — The House of Representatives voted Friday, 215 to 204, to extend unemployment insurance benefits through November as part of a wide-ranging bill that includes a tax hike on hedge-fund managers plus the renewal of a slew of expired middle-class tax perks.
The Senate won’t take up the bill until after its Memorial Day recess — that means approval, if it happens at all, won’t happen until Monday, June 7 at the earliest, though if a jobless-benefit extension is approved it would likely be retroactive.
More than 1 million unemployed Americans could be cut off from unemployment insurance in June as Congress comes down to the wire on debate over the far-reaching jobs and tax bill that would extend some federally-funded benefits.
A separate provision to continue subsidies to jobless workers to help them pay for their Cobra health-care payments has been stripped out of the same bill, though lawmakers could opt to address that provision separately.
Debate about the growing deficit delayed the House vote from taking place earlier in the week and led to a substantially smaller bill than was first introduced. The current version strips out funds to help states with Medicaid, and the extension of the Cobra-payment subsidy. That subsidy currently expires for workers terminated after May 31.
The package would increase the deficit by about $31 billion over 10 years. It increases direct spending by about $79 billion and raises about $48 billion in revenue, according to the nonpartisan Congressional Budget Office.
The House also approved an amendment to the bill that prevents cuts to Medicare physician payment rates, a provision that widens the deficit by $23 billion. Altogether, the bill increases the deficit by $54 billion.
A prior version would have widened the deficit by $84 billion, and that was pared down from a version that added $134 billion to the deficit, according to the CBO.
Another point of contention for lawmakers is a proposal to raise taxes on the carried interest income of some investment managers, including those at hedge funds and venture-capital firms.
The bill calls for taxing a sizable portion of carried interest as ordinary income. Currently the capital-gains rate of 15% applies to those earnings, according to CCH Inc., a Riverwoods, Ill., tax publisher and unit of Wolters Kluwer. The top individual marginal income tax rate is 35% and is scheduled to rise to 39.6% in 2011.
“The venture-capital firms are complaining that they promote U.S. competitiveness and innovation and, therefore, there should be a carve-out in the legislation for them,” said George Jones, senior tax analyst at Wolters Kluwer. “Put another way, [they say] they are not market speculators like hedge funds, but produce something of value.”
The American Federation of Labor and Congress of Industrial Organizations sees it differently. “It closes a tax loophole that allows rich Wall Street hedge-fund managers to pay lower tax rates on their income than ordinary wages earners,” the AFL-CIO said in a statement.
The union group also said the bill will begin to make Wall Street pay to restore the millions of jobs lost through risky financial practices.
Tax breaks and more
The bill contains dozens of individual, business, charitable, and energy extenders. It would extend a slew of tax breaks through the end of the year, support small businesses, and help state and local governments invest in infrastructure.
There are various retroactive one-year extensions of tax incentives for individuals through the end of this year. For instance, the bill would extend through 2010 the ability for itemizers to deduct state and local sales taxes in lieu of state and local income taxes. That provision would cost about $1.8 billion over 10 years, according to a congressional summary.
Also, the bill would extend the additional standard deduction for state and local property taxes at a cost of about $1.55 billion. And the above-the-line deduction for qualified education expenses would be extended. Also, the tax perk that lets people aged 70-1/2 and older pay up to $100,000 from their IRAs tax-free to a charity would continue through 2010.
The bill also calls for a business tax credit for research and development that would cost about $6.65 billion over 10 years, and there would be tax relief for businesses in economically-depressed areas.
The House also voted Friday, 245 to 171, to update Medicare physician payment rates that are otherwise scheduled to be reduced by more than 20% in June. Payments will increase 2.2% for the rest of 2010 and an additional 1% in 2011. A $24 billion provision to help states with Medicaid costs, responding to an increase in caseloads but a decrease in state revenues resulting from the recession, has been cut out of the bill.
The overall bill aims to generate revenue by closing some tax loopholes. In addition to the carried interest provision, almost $14.5 billion of foreign tax credit loopholes would be eliminated over 10 years.
A provision to support summer jobs for young people would cost about $1 billion.
The bill would also “expose hidden 401(k) fees that may be eating into Americans’ retirement savings,” according to a statement from Democratic Rep. George Miller of California, chairman of the House Education and Labor Committee.
“It is beyond time that Americans have basic, clear and timely information on the costs and choices contained in their 401(k) plans,” Miller said in the statement. “Guaranteeing complete and simple disclosure of fees will help give Americans a fighting chance to strengthen their retirement and increase our nation’s future economic security.”
Debate over jobless benefits
As many as 1.2 million jobless workers could be cut off from unemployment benefits in June, according to an estimate from the National Employment Law Project. Extending those benefits would cost about $40 billion.
The federal government has extended unemployment benefits for up to 99 weeks for workers in the hardest hit states who cannot find jobs. Regular state unemployment benefits typically run out after 26 weeks.
Some say extending unemployment insurance keeps the jobless rate high.
“While extending UI to 99 weeks eases the financial pain of job loss as individuals look for scarce jobs in the recession, many workers with extended UI stay unemployed longer than those without UI,” according to analysts at the conservative Heritage Foundation. “Congress can decide whether that is a worthwhile policy tradeoff. It is not, however, economic stimulus.”
An April estimate from the Federal Reserve Bank of San Francisco found that without extended benefits, the unemployment rate would have been lower by about four-tenths of a percentage point at the end of last year — 9.6% instead of 10%.
“Analysis of data on unemployed individuals decomposed by their reason for unemployment, which affects their eligibility for UI, suggests that extended UI benefits have had a relatively modest effect,” according to the report.
By replacing a portion of a worker’s income, unemployment insurance benefits can support consumer demand, propping up the economy, some economists say. Ross Eisenbrey, vice president of the liberal Economic Policy Institute, said many job seekers rely on unemployment insurance benefits for an extended time period due to intense competition for jobs.
“People who are trying to find a job, no matter how hard they try, most will not be able to find a job in the near future,” Eisenbrey said. “They have to have some income or they end up having their house foreclosed, or declaring bankruptcy.”
At the end of March there were about 2.7 million job openings, compared with about 15 million unemployed, adding up to more than five applicants for each opening, according to data from the U.S. Labor Department.
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