Talking Shop Blog

Marilyn Stewart is the President of the Chicago Teachers Union.

Last week she was a guest on the Don Wade & Roma talk radio show on WLS 890 AM in Chicago ( http://wlsam.com/  )

One of the topics discussed was the Chicago Teacher Advancement Program (TAP).

TAP is a federally funded program designed to improve student achievement, attract and retain quality teachers and decrease teacher turnover in participating schools.

The Chicago program was funded with a $27.5 million grant from the U.S. Department of Education.

Wade questioned whether the tax money was well spent, as a recent report showed that participating schools performed no differently than non-participating schools.

Stewart replied “that was not tax money, that was federal grant money.”

Of course Wade correctly pointed out that grant money IS tax money.

It’s our money.

That $27.5 million grant was money that came out of the taxes you and I pay.

So whether it’s a tax credit, a tax subsidy, or a federal grant, it’s our money they’re spending.

Mayor Daley of Chicago doesn’t mince words.

He butchers them.

"Go swim in the Potomac."

Not all the time, just occasionally.

One of my favorite Daleyisms is the time he was commenting about the public scrutiny he receives:

“I get scrootened every day… from each and every one of you.”

Earlier this week Daley went off on the federal government.

The EPA sent a letter for the city to clean up the Chicago River to make it swimmable.

Daley’s response to the feds?

“Go swim in the Potomac.”

He also said “We’re trying to make this river every day more cleanable.”

More cleanable?

Daley did bring up a great point when he talked about unfunded mandates.

Federal agencies issue mandates to cities and states all the time. But they usually don’t provide the funds to carry out the mandates.

Right now many states and cities are facing budget crises. The recession, declining tax revenues, fiscal mismanagement, wasteful spending and bloated budgets are all factors.

And so are unfunded mandates from the feds.

This week we’ve addressed a couple of the provisions in the tax extenders bill, including the “carried interest” provisions and the self employment tax provisions for professional services businesses.

(See http://blogs.duganlopatka.com/general/2010/06/02/the-carried-interest-proposals/ ; http://blogs.duganlopatka.com/general/2010/06/01/the-latest-on-the-tax-extenders-bill/ ).

The Joint Committee on Taxation has released its report on the budget effects of the legislation, HR 4213, the American Jobs and Closing Tax Loopholes Act of 2010.

JCT estimates that the “carried interest” provisions would raise $17.7 billion in revenues over 10 years. That’s the largest revenue raiser in the bill.  

The self employment tax provisions for professional services businesses would raise $11.2 billion, the fourth largest revenue raiser.

You can access the report, JCX-30-10, in PDF format from the the JCT website. 

The direct download link is at http://www.jct.gov/publications.html?func=startdown&id=3685 .

As usual, they leave out the zeros. So you’ll need to add them to see how the numbers really look in long form.

JCT has also released a technical explanation of the bill, JCX-29-10.

The carried interest provisions are discussed in detail starting on page 267. The professional services business provisions are covered starting on page 292.

The direct download link is http://www.jct.gov/publications.html?func=startdown&id=3684 .

WARNING: Exposure to Technical Explanations of Federal Tax Legislation has been found to cause headaches and drowsiness in laboratory tests (TPS Report # 1954-01).

Sometimes Congress gets carried away with legislation.

The “carried interest” provisions in the tax extenders bill (HR 4213) is a good example.

A carried interest is an interest in a partnership received in exchange for services to the partnership.

Fund managers in hedge funds and private equity funds typically receive a 20% interest in the profits of the fund in exchange for managing the fund.

Say a fund has $100,000 in long term capital gains for the year. The manager’s 20% share, $20,000, is currently taxed at the 15% capital gains rate. The same applies to dividends qualifying for the 15% tax rate.

The bill, if enacted, would tax that income at the higher ordinary income rates. And the income would be subject to self employment tax as well.

Maybe there’s a good argument for taxing a fund manager’s profits this way. Maybe not.

But Congress wants these provisions to apply to rental and investment real estate ventures as well.

And that’s getting carried away.

It’s common for a general partner to acquire a profits interest when putting together a real estate deal.

The general partner/developer is the one who takes the entrepreneurial risks associated with real estate ventures.

And the reward is a share in the potential “upside” of the deal.

Congress should treat “entrepreneurial capital” the same as other forms of “capital”, like money and property.

And that means capital gains rates, not ordinary income rates.

You can read more about this topic at  http://www.naiop.org/governmentaffairs/issues/carriedinterest.cfm

We’re still tracking the status of the so-called” “tax extenders bill”.

Last week the House passed a new scaled back version, which is contained in HR 4213, the American Jobs and Closing Tax Loopholes Act of 2010.

The House passed bill includes a controversial revenue raiser that we’ve been following.

HR 4213 would require owners in certain professional service companies to treat all business income as self-employment income.

The new rule would apply to an S corporation that provides professional services if its principal asset is the reputation and skill of three or fewer employees. And it would apply to any S Corporation that is a partner in a professional service business.

The bill would affect professional service companies engaged in “health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment, management or brokerage services”.

The bill now goes back to the Senate for consideration sometime after it returns on June 7 from the Memorial Day recess.

You can track the status of HR 4213 at http://www.govtrack.us/congress/bill.xpd?bill=h111-4213