Legislative Updates: February 2013
2012 was a busy political year, and looming over it was "the sequester". This was a package of massive defense and entitlement budget cuts (totaling $85 billion) that were assembled after the bipartisan Congressional Super Committee failed to solve the nation's debt problems in late 2011. It was designed to be equally painful for both parties, so most of Washington expected Congress to get a budget deal done during 2012 to avoid it.
What was once a worst-case scenario is now just days from becoming reality. After the Republicans helped postpone the original January 1 deadline by agreeing to allow taxes to rise on individuals earning more than $400,000 per year ($450,000 for married couples), they are now refusing to support raising additional tax revenue without cutting more spending. President Obama and the Congressional Democrats have called for a "balanced approach" of tax increases, the closing of tax loopholes and targeted cuts to pay for another temporary extension of the sequester, and are speculating that Republicans will come around and oppose the cuts to defense spending as the new March 1 deadline draws near. Once again, it seems Congress is strolling toward the fiscal cliff while America's economic security hangs in the balance.
Another unwelcome surprise in January came from the House Ways and Means Committee, which introduced a discussion draft on the tax treatment of financial products, including derivatives. Presented as a way to "update and rationalize the tax treatment of financial products", it would instead have a potentially chilling effect on the options industry. The draft would radically revise the taxation of listed options, and would make the use of listed options much less attractive than it is under current law.
The stated goal of the Committee's Chairman, Dave Camp (R-MI), is to overhaul the entire tax code "to make it more fair and eliminate loopholes" while reducing the ordinary income tax level to a rate (25% has been discussed) that would benefit everyone. However, it will be very difficult to convince most Democrats to lower the ordinary income tax level, and Congress might use Chairman Camp's proposal as a vessel to raise revenues under the guise of tax reform. There is a deadline, as Chairman Camp has publicly stated that he would like to pass comprehensive tax reform legislation out of his Committee by the end of 2013. The options industry is in the process of reviewing the draft legislation and preparing an action plan on how to proceed.
It is also worth noting that the Senate Finance Committee Chairman Max Baucus (D-MT) has not commented on Chairman Camp's proposals other than to say that his Committee is also planning on passing tax reform legislation in the future. Chairman Baucus' bill is likely to be very different than Chairman Camp's discussion draft, so this is just the beginning of a long and arduous journey toward tax reform.
REGISTER FOR THE OPTIONS
- Free, unbiased options education
- Learn in-person and online
- Advance at your own pace