A group of Democrats and an independent lawmaker in the Senate have introduced a bill that would codify the so-called Buffet Rule by imposing a minimum 30% tax rate on taxpayers whose adjusted gross income exceeds $1 million, including capital gains and dividends.
The bill, “Paying a Fair Share Act,” which was introduced on Feb. 1, would also urge Congress to enact tax reform that “repeals unfair and unnecessary tax loopholes and expenditures” and eliminates the alternative minimum tax for the middle class. If passed — which is unlikely with a Republican-dominated House — it would become effective Dec. 31, 2012.
The legislation is similar to a proposal President Obama urged Congress to consider in his State of the Union address last week. The Buffet Rule is named after billionaire investor Warren Buffet, chairman of Berkshire Hathaway Inc., who has complained he pays an effective lower tax rate than his secretary and urged Congress to require the wealthy to pay their fair share of taxes.
The “fair tax” would be phased in for taxpayers with incomes that fall between $1 million and $2 million, with those taxpayers paying a proportional amount of the added tax to take them to a 30% effective rate, a Senate aide said.
Imposing the 30% tax rate could make munis more attractive to investors subject to the higher tax rate and give them a relative advantage compared to other forms of investment, said Bill Daly, senior vice president for government relations at Bond Dealers of America. Under the current federal tax code, tax-exempt bond interest is excluded in calculations of adjusted gross income.
However, the capital gains from the sale of tax-exempt bonds would be affected, said Jerry Spector, a member of the law firm Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC and former chair of the American Bar Association’s tax-exempt financing committee.
However, he said the muni market is “well-known for being predominantly a buy-and-hold market, at least on the retail side. Muni bonds purchased at par and held to maturity will generally have no capital gain component.” Capital gains are currently taxed at a 15% rate.
Market participants agree that removing the AMT would significantly benefit the market, especially for private-activity bonds because it would lower their borrowing costs. The AMT is a federal income tax that’s calculated separately from the regular federal tax and aims to prevent the wealthy from taking so many tax deductions and exclusions that they pay little or no tax.
PABs used to finance airport, water and sewer, housing and other projects are subject to the AMT and their interest is included in calculations of AMT income.
The interest from PABs can push taxpayers into the AMT and can increase borrowing costs for PAB issuers because investors tend to demand a higher bond yield to compensate for the risk.
The bill contains a “sense of the Senate” provision that encourages Congress to enact tax reform and eliminate unfair and unnecessary tax loopholes and expenditures, but does not elaborate on whether the expenditures would include tax-exempt bond interest. Spector suggested the provision “is a placeholder until full tax reform can be implemented.”
“If we are serious about addressing this deficit crisis, it is imperative that we have a tax system which is fair and which asks the wealthiest people in our country to pay their fair share,” co-sponsor Sen. Bernie Sanders, I-Vt., said in a release.
Sen. Sheldon Whitehouse, D-R.I., is the chief sponsor of the bill. Sens. Daniel Akaka, D-Hawaii, Mark Begich, D-Alaska, Richard Blumenthal, D-Conn., Tom Harkin, D-Iowa., Sanders, Patrick Leahy, D-Vt., and Chuck Schumer, D-N.Y., have signed on to the bill as cosponsors.
The legislation is currently awaiting a score by the Joint Committee on Taxation.