Tax Quote of the Week
"Taxes are what we pay for civilized society... A penalty on the other hand is intended altogether to prevent the thing punished."
-- Oliver Wendell Holmes Jr.
Bailout Passes with IRA Rollover and Tax Extenders
On October 3, 2008 the House passed the Emergency Economic Stabilization Act of 2008 (H.R. 1424). The Senate had passed the bill 74-25 earlier in the week.
Congressional leaders, business leaders, the White House and millions of Americans who plan to borrow funds for any purpose in the next years were all pleased with the bill. Federal Reserve Chairman Ben Bernanke stated, "The legislation is a critical step towards stabilizing our financial markets and ensuring an uninterrupted flow of credit to households and businesses."
The comprehensive legislation includes several divisions that cover four principal areas. These are as follows:
- Economic Bailout of Bad Debt. There is initial authority for Treasury to spend $100 billion to purchase at discount the subprime debt securities of banks and major financial institutions. The authority may be increased up to a total of $700 billion. This section also includes a limit of $500,000 on deductible executive salary and increases the FDIC insurance on bank deposits from $100,000 to $250,000 per account.
- Tax Extenders. The tax extenders section includes popular provisions that extend the sales tax deduction, the teacher's expense deduction, the research and development credit, favorable depreciation for restaurants and the IRA charitable rollover. The IRA rollover permits IRA owners over age 70½ to transfer up to $100,000 per year to public charities tax free. It is available for both 2008 and 2009.
- Energy Incentives. The act adds incentives for solar, wind and other renewable energy methods. There also are provisions that will increase the use of oil shale and "clean" coal.
- Mental Health. The Mental Health Parity Bill provisions have been included. These are intended to expand coverage of mental health conditions by placing them on the same level as other types of illness.
Editor's Note on the Bailout Silver Lining
Congress was under great pressure to pass an unpopular bill just four weeks from the November election. However, following the 777 point drop in the Dow when the first bill was rejected on Monday of last week, the e-mails and calls from constituents to members of Congress changed dramatically. Opposition had been running 100 to 1 against the bill, but individuals age 40 to 60 with 401Ks and other retirement plans realized that failure to enact a bill was going to greatly damage retirement prospects. These "I hope to retire by age 65" constituents persuaded many members of Congress to support the economic bailout.
In addition, as Sen. Kent Conrad (D-ND) noted during a hearing, a failure to resolve the credit crisis "would mean between 3 and 4½ million more Americans would lose their jobs in the next six months." Members were also persuaded by a letter from Governor Schwarzenegger of California who indicated that without a bailout that restores normal bank financing, the state would need a loan from the federal government of $7 billion to make payroll by the end of October. Given all of the very harmful effects of not acting, Congress chose to move forward with the economic bailout plan.
The silver lining for philanthropy in this process is that the tax extenders bill appeared deadlocked on Monday evening. However, because the Senate leaders (Sen. Baucus and Sen. Grassley) knew that the tax extenders would be popular in both the House and Senate, they added the tax extenders (with the IRA rollover) to the improved Senate bailout bill. As a result, by Friday afternoon President Bush signed the bailout bill with the IRA charitable rollover.
Thousands of donors who have IRAs and want to support their favorite charities can now use an IRA rollover this year. It is especially useful for those who do not itemize. Because about 71% of taxpayers age 71 and over use the standard deduction, they can save taxes by making 2008 gifts from their IRAs and then taking a lower taxable required minimum distribution (RMD) from their IRA.
White House, Senate and House Supported Bailout
The House vote of 263 to 171 reflected a massive lobbying campaign by the President, leaders of the Senate and leaders of the House from both parties. President Bush stated, "This is an issue that's affecting hardworking people. They're worried about their savings, they're worried about their jobs, they're worried about their houses, they're worried about their small businesses. And the House of Representatives must listen to these voices and get this bill passed so we can get about the business of restoring confidence."
Senate Majority Leader Harry Reid (D-NV) acknowledged that the bill was not "a perfect bill by any means, but it is much improved from the administration's initial proposal. It will help stabilize our economy and protect Main Street from the crisis on Wall Street. It also cuts taxes for middle-class families and creates jobs here at home."
A key Senator directly involved in many aspects of the bailout bill was Sen. Max Baucus (D-MT). Recognizing the sensitivity of the American public about the need to protect taxpayer dollars, Sen. Baucus indicated that he is "committing to watch every taxpayer dollar that is used, and promising to work to see that this kind of financial meltdown never, ever happens again in this country."
Sen. Baucus highlighted the taxpayer protections that include limits to salary payments to CEO's and "golden parachute" plans for executives, an Inspector General to fight waste, fraud and abuse in the Treasury program, tax relief for homeowners facing foreclosure and help for community banks.
