The Lame Duck Facts

June 19, 2012

Gearing up for the Lame Duck:

Congress putting off lots of work until after the election

After the 20th Amendment to the Constitution was ratified, it created the possibility of lame-duck sessions. Any time Congress meets after the November election but before the new Congress takes effect (generally on January 3), it is considered a lame-duck session1. After this upcoming November election, Congress will only have about 20 legislative days of the lame-duck session2. Why does this matter? It matters because it appears that Congress is putting off lots of work until after the election. Will they even have time to do it all? Will they rush and pass bills that no one reads?

Below we take a look at several issues that Congress could address during the lame-duck session.

  • Debt Ceiling
  • Sequester
  • Tax Increase Set Without Action
  • Medicare’s Payment to Doctors
  • Emergency Unemployment Insurance

Debt Ceiling
Nearly 10 months ago, the President signed the Budget Control Act into law. In exchange for an immediate increase in the debt ceiling—the largest debt ceiling increase in American history—the law laid out steps to reduce the deficit over ten years.3

But it didn’t do much to reduce the deficit because now the head of the U.S. Treasury is telling us that we will need to increase the debt ceiling by the end of this year4 .

Because of this, it is looking increasingly likely that this issue will come up during the lame-duck session of Congress.

Sequester

The same bill that increased the debt ceiling last August also triggered a process called sequestration because Congress failed to find further deficit savings as mandated by the law.

What is sequestration? By definition, sequestration makes spending reductions to get budget levels in line with statutory spending goals5.

It may go without saying but, Congress and the president have the ability to amend the sequestration process triggered by the Budget Control Act6. And now there is talk about Congress modifying the sequestration process.

In specific, the cuts trigged by sequestration go into effect in January
2013. Some want to stop these cuts, totaling $109 billion for just next year, from taking effect. With approximately half the cuts coming from defense spending, many Republicans are looking for a way out. In fact, on May 19, 2012, the House adopted legislation that replaces the sequester7. Although this issue is unlikely to move in the Senate at this time, it is certainly possible that this issue will come up during the lame-duck session of Congress.

Tax Increase Set Without Congressional Action
At the end of 2012, many tax policies are set to expire. Although many of these tax provisions are commonly referred to as the “Bush tax cuts,” President Obama extended many of these provisions for two years in December 20108.

Individual Income Tax Rates
In December 2010, President Obama extended the income tax cuts of 2001 and 2003 through the end of 2012.

  • Prior to the 2001 law, the tax rates were as follows (with the actual rate depending on what the taxpayer earns): 15 percent, 28 percent, 31 percent, 36 percent, and 39.6 percent.
  • Through 2012, the rates are as follows: 10 percent, 25 percent, 28 percent, 33 percent and 35 percent.

As is stands now, these tax rates will reset to the rates before the 2001 law passed at the start of next year.9 However, Congress is likely to address this issue in some capacity in the lame-duck session.

Estate Tax Rate

The current rate for the estate tax is 35 percent, with an estate having an exemption of nearly $5 million. (In 2010, the estate tax was repealed—but just for just that year.)

Without action, the rate of the estate tax is set to skyrockets to 55 percent, with the estate exemption falling to $1 million.10 Congress is likely to address this issue in some capacity in the lame-duck session.

Dividend and Capital Gain Tax Rates

A dividend is “a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of shareholders11.” In other words, if an individual owns a stock that pays a dividend, they generally receive a portion of a company’s earnings in cash.

  • The current dividend tax rate is 15 percent for most taxpayers.
  • Next year, without action, dividends will be taxed as ordinary income so the rate will skyrocket up to 39.6 percent.12
A capital gain is “an increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price13.” In other words, if you own stock and sell it at a later date for more than you purchased it for, the difference is a capital gain.
  • The current capital gains tax rate is between 15 percent and 5 percent, with the rate depending on how much income you earn.
  • Next year, without action, the capital gains tax rate will increase to a rate between 20 percent and 10 percent.14
Congress is likely to address this issue in some capacity in the lame-duck session.
Payroll Tax Holiday
In December 2010, Congress created a temporary measure that reduced what employees pay in Social Security taxes. In February 2012, this provision was extended through the end of 201215. Currently, employees pay two percent less in Social Security payroll taxes than what is traditionally paid. If this provision expires it “means low-income workers will pay several hundred dollars more than they’re paying now, while high-income workers will pay roughly $2,340 more16.”

Since this “temporary tax holiday” has been extended more than once, it could be extended again during the lame-duck session.

Tax Extenders
Many tax extenders provisions expired at the end of 2011. Some of these provisions may not be renewed but many are likely to be. The research and development tax credit, for example, is likely to be extended. These expiring provisions generally “fall into a group of tax deductions, credits and provisions — now known as ‘extenders’ — which Congress has repeatedly renewed, but never makes permanent, simply because it doesn’t want to acknowledge their true costs.”17

It is likely that Congress retroactively extends some of these tax extenders for 2011 in the lame-duck session. As a point of reference, the last time Congress addressed the tax extenders issue, it retroactively passed it as well18.

Alternative Minimum Tax (AMT)
In 1969, Congress created the AMT as a separate tax system. The stated goal of the AMT was to make sure the wealthiest Americans owed some income taxes. In 1967, the Treasury secretary reported 155 people with incomes more than $200,000 owed no income tax because they were able to use tax code deductions and credits to bring their tax liability to zero. The AMT isn’t indexed for inflation, which means more and more middle class families now fall under the AMT.19

To limit the impact of the AMT, Congress traditionally passes a “patch.” “Patching” means raising the income level automatically exempt from the AMT, usually for one year or two.” For 2011, the AMT exemption for a single person is $48,45020.

Like tax extenders, the AMT is not permanently addressed because Congress simply doesn’t want to acknowledge its true cost. According to the independent Joint Committee on Taxation, the AMT patch for 2010 and 2011 is estimated to reduce revenue to the federal government by nearly $137 billion over 10 years21.

Currently, there is no patch for the AMT for 2012, so “all taxpayers can do is wait for Congress to approve another patch.22

Congress is likely to address this issue in some capacity during the lame-duck session—before individuals file their 2012 tax returns.

Medicare’s Payment to Doctors
In an effort to reduce the budget deficit in 1997, Congress passed the Balanced Budget Act. This law outlined a “sustainable growth rate” (SGR) for Medicare payments to doctors. SGR restricted doctors’ reimbursements for certain Medicare payments23. Specifically, the law limited the reimbursement to doctors so “total pay for physicians could not exceed the growth rate of the rest of the economy24.”

However, SGR hasn’t been implemented as the law scheduled it to be. Congress routinely blocks the SGR formula on a “temporary basis.” The current block lasts until the end of 201225. Why does Congress only enact temporary fixes? Because it “costs” too much to eliminate the SGR on a permanent basis. Therefore, Congress prefers blocking SGR on a short-term basis.

Congress is likely to address this issue in some capacity during the lame-duck session.

Emergency Unemployment Insurance
Unemployment insurance is distributed jointly by federal and state governments. Before the recession, a person in a state with low unemployment generally could receive unemployment benefits for about 26 weeks. Because of the recession, the 2009 stimulus bill extended this benefit for up to 99 weeks.26 (The amount of time a person can be on unemployment varies from state to state.)

Today someone can be on the program for up to 73 weeks–down from the high of 99 weeks. This extension last until January 2013.27

Since emergency unemployment insurance has been extended several times, it’s possible to be extended again during the lame-duck session.

So there you go. No matter how you slice it, waiting until after the election— with only about 20 legislative days on the calendar to actually do work—to address these issues is too much work to pile on the plate at one time. Both houses of Congress and the White House should cooperate and work together to address some of these items now.

To view this document as a .pdf, click here.

 

  1. Congressional Research Service. Lame Duck Sessions of Congress, 1935 – 2010. August 30, 2011. http://www.senate.gov/CRSReports/crs-publish.cfm?pid=’0E%2C*P%3CC%3C%23%20%20%20%0A
  2. National Journal. Lame-Duck Nightmare: The Doc Fix Implodes. May 30, 2012. http://nationaljournal.com/member/daily/lame- duck-nightmare-the-doc-fix-implodes-20120530
  3. FactCheck.Org. Dueling Debt Speeches. July 27, 2011.
  4. Reuters. Debt Ceiling Debate Doesn’t Have to Mean Crisis. May 18, 2012. http://www.huffingtonpost.com/2012/05/17/timothy-geithner-debt-ceiling_n_1524010.html
  5. CRS: Budget Sequesters: A Brief Review. March 8, 2004. P. 2
  6. CRS: The Budget Control Act of 2011. August 19, 2011. P. 27. http://www.himss.org/content/files/pulse/2011CRSRept-TheBudgetControlActof2011.pdf 
  7. Library of Congress. Bill status of H.R. 5652 http://thomas.loc.gov/cgi- bin/bdquery/D?d112:1:./temp/~bdQdMx:@@@R|/home/LegislativeData.php
  8. CQ House Action Reports. 111-38. Subscription required.
  9. CQ House Action Reports. 111-38. Subscription required.
  10. CQ House Action Reports. 111-38. Subscription required.
  11. Investopedia. Definition of ‘Dividend.” http://www.investopedia.com/terms/d/dividend.asp#axzz1wYQU2Af3
  12. CQ House Action Reports. 111-38. Subscription required.
  13. Investopedia. Definition of Capital Gain. http://www.investopedia.com/terms/c/capitalgain.asp#axzz1wYQU2Af3
  14. CQ House Action Reports. 111-38. Subscription required.
  15. CQ House Action Reports. 112-4. Subscription required.
  16. CNN Money. Countdown to tax hike. December 21, 2011. http://money.cnn.com/2011/12/20/news/economy/payroll_tax_cut_impact/index.htm
  17. Forbes: Dozens of tax breaks set to expire on Dec. 31. http://www.forbes.com/sites/janetnovack/2011/12/02/dozens-of-tax- breaks-set-to-expire-on-dec-31/
  18. CQ House Action Reports. 111-38. Subscription required.
  19. Tax Foundation: Backgrounder on the individual Alternative Minimum Tax http://www.taxfoundation.org/news/show/498.html
  20. SmartMoney. The AMT. February 3, 2012. http://www.smartmoney.com/taxes/income/the-alternative-minimum-tax-9540/
  21. CQ.com. Fact Sheet 111.38. Subscription required.
  22. CNBC. AMT to Hit Record Number of Taxpayers this Year. April 2, 2012. http://www.cnbc.com/id/46903302/AMT_to_Hit_Record_Number_of_Taxpayers_This_Year
  23. Congress Research Service: Medicare Physician Payment Updates and the Sustainable Growth Rate System, August 6, 2010. http://aging.senate.gov/crs/medicare15.pdf
  24. The Fiscal Times: Is There a Doctor Fix in the House…and Senate? November 23, 2011. http://www.thefiscaltimes.com/Articles/2011/11/23/Is-There-a-Doctor-Fix-in-the-House-and-Senate.aspx#page1
  25. CQ House Action Reports. 111-38. Subscription required.
  26. The New York Times: How Unemployment Benefits Became Twice as Generous. November 2, 2011. http://economix.blogs.nytimes.com/2011/11/02/how-unemplont-benefits-became-twice-as-generous/
  27. CQ House Action Reports. 112-4. Subscription required.

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