Daily Tax Update - November 3, 2010: Republicans Score Landslide Victory In House and Make Big Inroads In Senate

THE DAILY TAX UPDATE WILL BE PUBLISHED ON A PERIODIC BASIS UNTIL CONGRESS RECONVENES ON NOVEMBER 15TH.

REPUBLICANS SCORE LANDSLIDE VICTORY IN HOUSE AND MAKE BIG INROADS IN SENATE: After yesterday’s mid-term election results were tabulated, Republicans swept control of the House and bolstered their numbers in the Senate in a historic shift in the balance of power. While all House members were up for reelection, approximately one-third of the Senate seats were at stake. Voter frustration, the faltering economy, and the influence of the Tea Party translated into large numbers of incumbents that were ousted in both the House and in the Senate. At this time, it is projected that Republicans will see a net gain of about 65 seats in the House and pick up 6 seats in the Senate and a few races remain undecided. With a handful of races too close to call, Republicans so far have won 46 Senate seats to the Democrats' 50 and 2 races are undecided. Two Independents vote with Democrats. In the House, 218 seats are needed for a majority and Republicans so far have officially won 240 versus 184 won by Democrats with 11 races undecided. It will be several more weeks before some election results are officially certified.

  • President Obama now faces major challenges in getting his agenda through a split party Congress. Today at a press conference, the President said that he must take "direct responsibility" for the frustration over the economy and vowed to do more to reach a "consensus" with Republicans. The President also said that he was eager to sit down with the leaders of both parties "and figure out how we can move forward."  Obama said, "I want to engage both Democrats and Republicans.... I do believe there is hope for civility. I do believe there's hope for progress."
  • In today's press conference, President Obama also signaled a willingness to negotiate on the tax cuts. The President said, "With respect to the tax cut issue, my goal is to make sure that we don’t have a huge spike in taxes for middle-class families. Not only would that be a terrible burden on families who are already going through tough times, it would be bad for our economy. It is very important that we’re not taking a whole bunch of money out of the system from people who are most likely to spend that money on goods, services, groceries, buying a new winter coat for the kids." The President added, "So my goal is to sit down with Speaker-elect Boehner and Mitch McConnell and Harry and Nancy sometime in the next few weeks and see where we can move forward in a way that, first of all, does no harm; that extends those tax cuts that are very important for middle-class families; also extends those provisions that are important to encourage businesses to invest, and provide businesses some certainty over the next year or two. And how that negotiation works itself out I think is too early to say. But this is going to be one of my top priorities, and my hope is, is that given we all have an interest in growing the economy and encouraging job growth, that we’re not going to play brinksmanship but instead we’re going to act responsibly." When the President was asked if he was willing to negotiate, he responded, "Absolutely."
  • The President's remarks can be accessed here.
  • In the new session of Congress which begins in January, the Administration will have to negotiate and compromise with a sharply divided Congress on its legislative priorities in order to get any bills passed. The Senate faces legislative gridlock because Senate rules require that legislation pass by 60 votes and the margin held by Senate Democrats has been greatly reduced.
  • And on the House side, Republican Rep. John Boehner (R-OH), who will be elected Speaker, has said that he's not planning to negotiate with the White House or congressional Democrats on his party's top priorities. Last night, Boehner said, "It's clear tonight who the winners really are, and that's the American people. Across the country right now, we are witnessing a repudiation of Washington, a repudiation of big government and a repudiation of politicians who refuse to listen to the American people." Boehner and House Republicans will push their "Pledge to America," which includes extending the Bush tax cuts to all income earners and repealing the health care reform act. Last week, Boehner reiterated his stance in support of repealing the new health care act. Boehner said, "This is not a time for compromise, and I can tell you that we will not compromise on our principles."  
  • The upcoming and likely highly contentious lame duck session is scheduled to begin November 15 and presents many challenges for several important pending tax issues. It is unclear whether Democrats will try to move an extension of the Bush tax cuts for only middle income taxpayers in the lame duck or the issue will be delayed until the new Congress. Even if a middle income tax cut passes the House in the lame duck session, it is unlikely to get through the Senate. Republicans have been strongly advocating that they want the tax cuts extended for high income taxpayers as well as middle income earners. In addition to the Bush tax cuts, other issues that need to be addressed are an estate tax fix, an AMT patch and the extenders. A divided Congress also makes it more challenging to reach a consensus on how to reform the tax code. The President’s commission on tax reform (President’s Economic Recovery Advisory Board - PERAB) will release its recommendations in December.
  • In addition to the Leadership changes in the House, the composition and chairmanships of the committees will also change. Some Committee assignments will be made in December, followed by assignments to the tax-writing committees in January. With Boehner as House Speaker, the current House Majority Leader, Steny Hoyer (D-MD), would then likely become Minority Leader, who will is expected to be selected over current House Speaker Nancy Pelosi. Senate Majority Leader Harry Reid (D-NV) narrowly captured his re-election bid.
  • The tax-writing committees also face turnover among its members due to retirements, members running for other offices or Election Day defeats. Several members from both committees retired or ran for higher office including: House Ways and Means members, Rep. Kendrik Meek (D-FL), Rep. Artur Davis (D-AL), John Tanner (D-TN) and Republicans Ginny Brown-Waite (R-FL) and John Linder (R-GA). Senate Finance Committee member Jim Bunning (R-KY) retired. Finance member Blanche Lincoln (D-AR) and Ways and Means members Earl Pomeroy (D-ND) and Bob Etheridge (D-NC) were defeated.
  • All of the vacancies on Ways and Means and Finance may not be finalized until early or mid-January and committee ratios are expected to change to reflect Republican gains. Rep. Dave Camp (R-MI) is expected to be named Ways and Means Chairman. It is unclear at this time who will be ranking member on Ways and Means since Reps. Sander Levin (D-MI), Richard Neal (D-MA), and Charles Rangel (D-NY) are all expected to vie for that post. Because of Republican rules, ranking Senate Finance member Charles Grassley (R-IA) will become ranking member of the Judiciary Committee while Sen. Orrin Hatch (R-UT) will become ranking Finance member.
  • A SPECIAL ELECTION ANALYSIS BY STEPTOE & JOHNSON LLP CAN BE ACCESSED HERE.

MISCELLANEOUS GUIDANCE RELEASED TODAY:
Notice 2010-75 publishes the inflation adjustment factor for the credit for carbon dioxide (CO2) sequestration under § 45Q of the Internal Revenue Code for calendar year 2010. The amount of credit must be adjusted for inflation for taxable years beginning in a calendar year after 2009.   

Announcement 2010-88 extends from Dec. 31, 2010, to June 30, 2011, the deadline for Indian tribal governments to issue tribal economic development bonds (TEDBs) pursuant to volume cap allocated by the IRS in the first allocation tranche under Notice 2009-51, 2009-28 I.R.B. 128 (July 13, 2009). This announcement also provides for an additional 6 month extension to Dec. 31, 2011, for such issuers to issue TEDBs, upon issuer’s written request submitted to, and approved by, the IRS.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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