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Saturday January 31, 2015

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Debt Limit Deadline Again

As the February 7 debt limit deadline approaches, Treasury Secretary Jacob Lew sent a letter to Speaker of the House John Boehner (R-OH).

Secretary Lew shared his hope that Congress would act by February 7 to extend the ability of the Department of Treasury to borrow additional funds. Lew noted, "As you know, the Continuing Appropriations Act suspended the statutory debt limit through February 7, 2014. When that suspension ends, the United States will again reach the debt limit. The best course of action would be for Congress to act before February 7 to ensure orderly financing of the government. In the absence of Congressional action, Treasury would be forced to use extraordinary measures to continue to finance the government on a temporary basis."

The extraordinary measures described by Secretary Lew include borrowing from various pension and other internal funds. However, he points out that the situation in February is quite different from the borrowing that occurred in the middle of 2013. While the federal borrowing last year amounted to approximately $330 billion, the need to pay tax refunds in February would limit the borrowing capability to approximately $200 billion.

Lew emphasizes that it is important to protect "the full faith and credit of the United States" and that this is an ongoing responsibility of Congress.

This week Lew attended the World Economic Forum in Davos, Switzerland. News media asked what Lew would do if Congress were to tie the increase in the debt limit to corporate tax reform. Lew stated that he would not be willing to negotiate on the debt limit. He continued, "Not negotiating means not negotiating." Lew indicated that he is quite willing to discuss corporate tax reform but that the debt limit is "not a lever that can extract something from the White House."

Editor's Note: The two parties have substantial differences on corporate tax reform. The Democratic preference is to combine corporate tax reform with reductions in depreciation and other items. The tax savings would fund a substantial increase in roads, bridges and other infrastructure. Most Republicans prefer to address tax reform for both the corporate and the personal system in one comprehensive bill.

Thirty-Three Senators Support Charitable Deduction

In a January 23 letter to Senate Finance Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT), 33 senators emphasized their support for the charitable deduction. They recognized that Sen. Baucus is now preparing discussion drafts for various areas of taxation. While no bill has yet been drafted, the discussion drafts may have a substantial impact on a future tax reform bill.

The 33 senators emphasized three major characteristics of the charitable deduction that are grounds for protecting it even though other itemized deductions are modified.

1. Unique – The charitable deduction is the only provision that encourages taxpayers to make gifts for the benefit of others.

2. Lifeline, Not a Loophole – Because it assists those in need, any proposal to "cut, cap or limit the charitable deduction" could weaken after-school programs, medical research projects, soup kitchens and other programs for the needy.

3. Prudent Fiscal Policy – The generosity of Americans provides many services that would otherwise be funded by the federal government. Allowing individuals to make charitable gifts is good fiscal policy with direct financial benefit to the federal government.

The senators conclude, "As you contemplate a comprehensive tax reform bill, we understand that all tax expenditures must be reviewed and considered. However, in this context, we ask that you keep our views on this important tax deduction in mind."

Editor's Note: Tax reform continues on a very slow track because lowering rates requires broadening of the tax base. This inevitably will require changes in the rules for deducting medical expenses, mortgage interest, retirement contributions, state and local taxes and other items. Because these four items are very popular, they will be difficult to change. It is very favorable to philanthropy that one-third of the Senate is now on record for creating a separate category for charitable deductions. Even if a tax reform bill inevitably limits the other itemized deductions, many senators believe the full charitable deduction should be protected. It is especially significant that the lead signers on the bipartisan letter included Sen. Ron Wyden (D-OR) and Sen. John Thune (R-SD). Both are likely to be in future leadership positions in the Senate.

Published January 24, 2014
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