Congress Passes Financial Bailout Legislation

On October 3, 2008, the House, following similar action by the Senate on October 1, passed the Emergency Economic Stabilization Act of 2008 (HR 1424) by a vote of 263 to 171. This version of the legislation differs from the one that the House had defeated on September 29 by the addition of a Senate-passed tax package – the Tax Extenders and Alternative Minimum Tax Relief Bill of 2008 (HR 6049).

Held over from the original House version of the legislation are three tax provisions. These would permit banks and other financial institutions that were invested in preferred stock of Fannie Mae and Freddie Mac to treat losses as ordinary losses rather than capital losses, put a $500,000 limit on deductions for executive compensation for entities having securities purchased under the legislation, and extend the mortgage debt forgiveness exclusion for an additional three years.

The added tax provisions include AMT relief, extension of expired provisions, tax cuts related to renewable energy, disaster relief, a few miscellaneous provisions, and several revenue raisers. The AMT portion of the legislation includes a one-year extension of the AMT exemption amount with an inflation adjustment and an extension of the provision allowing nonrefundable personal tax credits against the AMT. Also included in the AMT portion is a provision providing some protection to taxpayers with incentive stock options and who are also subject to the AMT.

The legislation also extends a sizeable number of individual and business expired tax provisions, including the deduction of sales taxes, the credit for research and development, 15-year amortization of leasehold improvements, and the above-the-line deduction for tuition and fees. The legislation also includes several provisions providing Katrina-like disaster relief for Midwest areas affected by tornadoes and floods. The renewable energy package includes extension of expired provisions such as the credit for energy-efficient home improvements, and new renewable energy tax breaks for business and individuals, such as expanding the alternative fuel vehicle credit to include plug-in hybrid cars. Among the miscellaneous provisions included are a provision requiring parity for mental health coverage in health plans and a lower standard for the imposition of tax return preparer penalties.

The legislation includes several revenue raising proposals but is not fully offset. There are approximately $150 billion in tax breaks and $42 billion in revenue raisers in the tax package added to the legislation, raising the total cost of the financial bailout package to roughly $800 billion. Revenue raisers include a freeze on the Code Sec. 199 domestic production activities deduction for oil and gas producers at six percent, a requirement that securities brokers report the cost basis of stock transactions, and a requirement that deferred compensation paid by tax-indifferent parties be treated as current income.

The Administration strongly supports the legislation and is expected to sign it into law as soon as received.