On May 17, during a special bill signing on the south lawn of the White House, President Bush signed into law the Tax Increase Prevention and Reconciliation Act of 2005 (H.R. 4297), which extends the tax cut package implemented by the president in 2003. The ceremony was attended by Vice President Cheney, the speaker of the House, members of Congress and prominent business leaders from various industry sectors. I was honored to receive an invitation to the ceremony and was very fortunate to be able to represent MCAA and its members during this momentous occasion.
The tax cuts are meant to put money back into the pockets of individual taxpayers, investors and small business owners. The legislation includes key provisions that encourage small-business owners, such as mason contractors, to continue to grow and expand their businesses and move the American economy forward.
The bill includes $70 billion that will extend for two years the 15-percent rate on long-term capital gains and dividends, which was included in the Jobs and Growth Tax Relief Reconciliation Act of 2003. Under the new law, the rates which were scheduled to expire in 2008 will remain in place until 2010. The rates will then rise to 20 percent for long-term capital gains and to the individual's top income tax rate for dividends.
The key provision affecting small businesses is a two-year extension or Section 179 expensing. The Jobs and Growth Act of 2003 originally increased Section 179 expensing limits, but the increased limits were scheduled to expire after 2007. The legislation signed by the president extends the increased expensing limits through 2009.
Under the new law, the expensing limits the amount of new investment a business can expense in a given year increased from $25,000 to $100,000. The law also increased the amount of total investment a business can make in a year from $200,000 to $400,000 and still fully qualify for expensing under Section 179. Extension of the 2003 law and the increase of expensing amounts will allow mason contractors to immediately expense critical investments. Bush stated that, since 2003 when the cuts were passed, business investment has been growing more than 9 percent a year, and spending on equipment and software has hit record levels.
Since this is an election year, the passage of the Tax Relief legislation was a particularly big victory for the GOP. Passage of the tax-cut extensions was the first step of a two-track strategy for advancing the GOP's election-year tax cut agenda. Democrats overwhelmingly opposed the legislation signed by the president, saying the tax cuts on capital gains and dividends will flow mostly to the rich. The GOP argues that the tax cuts, first enacted in 2003, have created 5.2 million jobs since August 2003 and bolstered tax revenue by nearly 15 percent last year. According to the White House, the cuts have helped spur growth by keeping $880 billion in taxpayers' pockets during the past five years.
In addition to provisions aimed at assisting and encouraging growth for small businesses, the legislation includes an Alternative Minimum Tax (AMT) patch, enabling millions of upper middle-income families to avoid paying higher taxes in 2006. The measure extends, for one year, recent changes to the AMT, to prevent that tax from ensnaring more upper middle-income families. The alternative minimum tax was designed to hit the very wealthy. Now, however, it is common for taxpayers, especially those families in high-tax states, to pay the AMT on incomes of $100,000 and more. This tax was established in 1969 to ensure that all taxpayers pay at least some tax, but it was not indexed for inflation. Now, it often hits better-off taxpayers in high-tax states, such as New York and California, where it threatens benefits such as the child tax credit or state tax deductions. While Democrats generally opposed the tax cut extensions, Democratic representatives and senators support the changes in the alternative minimum tax relief. At about $34 billion, it is the single costliest part of the bill.
Unfortunately for those members of Congress up for reelection, the voters will not feel the impact before the November election. For investors, it won't be until the next president is about to take office in 2009, when they will finally enjoy the benefits of this legislation.
A separate bill containing about $22 billion to $23 billion in tax breaks backed by Republicans and Democrats is expected to advance soon as a follow-up to this bill.
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