Corporate tax cuts amounting to $145 billion, approved this week by the Senate and headed for President's Bush signature, will be paid for in part by reduced tax breaks that were popular with individuals, such as charity car donations and the $100,000 write off of SUVs for business owners.
And for the first time ever, the Internal Revenue Service plans to hire private debt collectors to recover money from reluctant taxpayers.
The tax package, dubbed American Jobs Creation Act of 2004, also adds tax breaks for residents in states with low or no income taxes. States with no income tax are Alaska, Nevada, South Dakota, Washington, Wyoming, Texas and Florida. Meanwhile, Pennsylvania, Illinois and Indiana are considered low income-tax states, and New Hampshire and Tennessee tax only dividends and interest income.
Among these states, six are considered swing states in the presidential election: Florida, Nevada, New Hampshire, Pennsylvania, Tennessee and Washington.
Two years in the making, the tax package began as a more modest effort to end punitive tariffs by the European Union on certain U.S. manufactured goods. It is now widely viewed as an old-fashioned example of pre-election, pork-barrel politics.
If signed by President Bush as expected, the legislation would be the single largest tax bill passed since 1997. Some 650 pages long, it has tax breaks for a variety of special interests, according to CCH, Inc., a leading tax publisher. Tax incentives were piled on to increase support for the bill.
Among those reaping its benefits would be tobacco farmers, NASCAR track owners, farmers, independent film and video producers, makers of bows and arrows, and manufacturers of tackle boxes and sonar fish finders. "It's one of those Christmas-tree bills," said CPA Mark Luscombe, principal federal tax analyst for CCH. "A little present for everybody."
Sen. John McCain (R., Ariz.) called it "the worst example of the influence of special interests that I have ever seen."
On Monday, when the Senate passed the act after working all weekend, Bush was on the campaign trail, promising to seek tax simplification if re-elected. He is expected to sign the bill sometime after the final presidential debate on Wednesday -- even though it might not play well three weeks before the election.
"It wasn't really clear he wanted this tax bill," said Luscombe.
The act is intended to contain enough revenue enhancing measures, including reductions of $33 billion in tax shelters and $6 billion in charitable donations, to ensure it does not add to federal deficits.
Here's how it would affect individual taxpayers:
Sharply reduced incentives for charity car donations.
Last year the IRS warned that many taxpayers who donated older vehicles to charity and received a tax deduction were overvaluing them and that middlemen, not charities, reaped most of the benefit. A General Accounting Office report found that the 733,000 tax returns filed in 2000 with vehicle donation deductions cost $654 million in tax dollars.
Donors have been allowed to set their own "fair market value" when filing their tax returns. Under the new law, if the charity sells the vehicle without using or improving it significantly, the deduction cannot exceed the gross proceeds from the sale. The charity will be required to contact the donor with the sale information.
Charities say that donated cars are often sold at wholesale auctions for less than their fair market values. The reduced tax valuation and the increased record keeping is going to force many of the 4,300 charities nationwide that rely on vehicle donation programs to cut their services, said Paula Skuratowicz, executive director of the Polly Klaas Foundation.
Luscombe said the IRS believes donors were taking advantage of the programs: "Some people were taking a pretty liberal view of fair market value."
Tightens the loophole on Sports Utility Vehicles.
In its 2003 tax act, Congress created a tax loophole big enough to drive a Humvee through, and many taxpayers have. It sharply expanded the write-offs that businesses could take for large vehicles, weighing more than 6,000 pounds, to $100,000 in the first year of use.
Because of the sudden popularity of SUVs, not only could a farmer take a big write-off for a Ford pickup, but a small business owner such as an attorney, doctor or real estate agent was entitled to deduct the entire cost of a $60,000 Cadillac Escalade or almost all the $111,000 cost of the Hummer H1 in the purchase year.
The 2004 act caps the deduction for SUVs at $25,000 for vehicles placed in service after the date the law is signed by the president, through 2007, leaving at least several days for prospective buyers who want the larger deduction.
"There may be a stampede to dealers of heavyweight SUVs, like the Humvee and the Cadillac Escalade," said Paul Gada, JD, CCH senior small business tax analyst. "But even with the new limit, a substantial portion of a new vehicle's cost can be written off through the combination of expensing and depreciation."
Provides $5 billion in state sales-tax deductions.
The new law will allow taxpayers to deduct state sales taxes if they live in one of seven states that have no state income tax, or choose to deduct state sales taxes when large purchases exceed their state income-tax liability. The deduction is applicable for tax years 2004 and 2005, and only for those who itemize their returns.
Taxpayers can choose either to determine the deductible amount by relying on their own receipts or by using tables to be drawn up by the IRS, which might not be ready in time for the 2004 tax filing season.
Luscombe said he knows of no good rationale for the new law, other than "the power of the Texas legislature."
Sprinkles a few tax goodies to individuals.
Some classes of individual taxpayers were singled out for favorable treatment.
Rural mail carriers, for example, will be able to deduct expenses on vehicles they employ on their routes, while plaintiffs in employment discrimination lawsuits will be allowed to take attorney's fees as above-the-line deductions. And Alaskan natives can take charitable tax deductions for certain expenses associated with outfitting subsistence whale hunts.
Brings on the debt collectors.
For the first time ever, the IRS will contract with collection agencies to recover unpaid taxes, worth an estimated $1 billion. If taxpayers cannot pay in full, the companies are empowered to offer five-year installment plans.
There have been concerns raised about the IRS sharing taxpayers private financial information with outside companies, said Luscombe, but they were overridden.
"This gets to the general staffing problems at the IRS," he said. "If you don't have the time and energy, you outsource. Getting some of that tax back is better than getting none."