No Government Shutdown
Did you get all of the things you wanted for Christmas? Probably not, but perhaps you got some of what you wanted and will work to get the rest over time. That's also the way it went in Congress in the week before Christmas with the passing of the massive $1.15 trillion dollar government-spending bill — along with a tax bill including an estimated $650 billion in relief over the next ten years.
Both Democrats and Republicans had plenty to cheer for and to complain about, but how did the American people do in the bill financially? (We will not even consider the many riders that are not directly financial in nature.)
The Spending Side
Most of the noteworthy action was on the tax break side, but there are several unexpected items on the spending side to note that have national impact beyond regional projects.
In a concession to the reeling oil industry, the 40-year old ban on the US exports of crude oil was lifted. In exchange, alternative energy supporters won continued green energy tax incentives for wind and solar energy producers. The US still is a net importer of crude oil, but the oil industry finds the policy change useful because of a mismatch between the type of oil US refineries have been built to process (heavier overseas crude) and the new domestic oil supplies being produced via fracking.
Spending from the National Institute of Health (NIH) received an unexpectedly large $2 billion budget increase for health research purposes. The measure will boost research facilities and should trickle down via NIH grants through universities and on to small businesses that support the efforts.
The Tax Side
Along with the wind and solar energy tax credits discussed above, the 233-page tax bill contained a Christmas Wish List of many other tax savings/credits. Some are industry or region-specific, like the breaks for cider makers, automobile racetrack owners, and live-theater productions, but the majority has nationwide impact.
The tax bill made permanent several tax breaks that have been annual budget bargaining chips, such as special provisions of the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC). "Marriage penalty" relief and larger-family provisions for the EITC and the lower earnings exclusion for the CTC are designed to assist the working poor claim tax credits. The Center on Budget and Policy Priorities estimated that allowing these provisions to expire would throw 1.8 million Americans into poverty and deepen the woes of 14.6 million other impoverished Americans. These provisions were backed with bipartisan support.
Certain tax elements of Obamacare were delayed for two years, including the "Cadillac Tax" on overly generous health insurance programs and the tax on medical device manufacturers. The Cadillac Tax was further adjusted by making it fully refundable upon being enacted. A separate tax on health insurance plans was delayed by one year, while the bill continued funding blocks on risk corridors that are designed to help insurers during the shift to Obamacare (in other words, partially subsidizing insurance industry losses).
Another bipartisan effort extended the R&D Tax Credit for businesses, including an expansion to cover start-up businesses and increasing credits to a maximum of 15% of the qualified costs. Innovation tends to drive economic booms, and the R&D Tax Credit is necessary to keep research efforts funded by businesses (not to mention keeping many research-oriented jobs in place).
Adjustments to charitable donation tax policy include the ability for individuals to transfer IRA funds directly to a qualified charity without penalty (up to $100,000), expansion of tax breaks for businesses donating food, and breaks aimed at donations by S-corporation owners.
Real estate tax law was altered to induce greater foreign investment in US real estate projects. This partially rolls back the effect of the Foreign Investment in Real Property Tax Act (FIRPTA) that imposed a 30% withholding tax upon a foreign entity's sale of real property. The original intent was to discourage foreign purchases of real estate and farmland — a major concern when the law passed in the 1980s, but in today's growth market, foreign capital is welcomed. New provisions raise the threshold of ownership for the tax to take effect while exempting foreign pension funds that hold REITs and similar properties.
On the punitive side of real estate law, the bill includes a prohibition on companies spinning off their real estate assets into REITs to gain tax advantages. Darden Restaurants, the owner of several restaurant chains including the Olive Garden, recently completed just such a move.
Other tax credit provisions include the extension of the $250 tax credit for teachers spending their own money on qualified classroom expenses and the American Opportunity Tax Credit for college tuition and certain related expenses. Both have been threatened with extinction at every past opportunity.
The Regulatory Side
Republicans used the budget bill to attempt to blunt effects of the Dodd-Frank legislation and the Consumer Financial Protection Bureau (CFPB) but generally failed in their efforts. The Department of Labor regulation raising the standards for investment advisers was spared from blockage, as was a change in the number of banks that meet the "systematically important" status that subjects them to greater financial scrutiny and oversight.
Does this budget deal constitute financial progress or not? If you are an ideologue, probably not, because you think both sides gave away the store. If you are more practical and understand that the government needs a budget bill to function normally, you probably are more pleased with this result. Americans affected by the tax extenders, such as the Earned Income Tax Credit, are very happy — assuming they realized that they were in danger in the first place.
Meanwhile, deficit hawks are fuming at the lack of fiscal restraint. Loren Adler of the Committee for a Responsible Federal Budget estimates that this bill will increase the national debt by $4 trillion over the next two decades. Realistically, a slowly growing economy needs a smoothly functioning government and reasonable spending to propel the economy forward, but we are going to have to come to terms with the deficit eventually before it becomes too large to "grow out of" through increased economic output.
As an individual, you are most likely impacted through the tax breaks. Double-check your eligibility against the bill's actions and make sure you are taking all the tax breaks that are available to you from on both a personal and business owner's standpoint. Use up-to-date resources, as information printed before the budget bill will not have accounted for the tax extensions.
From the investing viewpoint, the main effect of the tax and spending bill is derived from its mere existence. There is no drama about partial government shutdowns to rattle Wall Street. Analysts will be poring over the provisions for weeks looking over the long-term economic effect, such as how the Obamacare tax provisions will eventually leak out as increased costs somewhere else. For now, you should be more concerned about other economic factors such as the effect of future interest rate hikes and slow worldwide growth.