Legislative Outlook

This is the year jewelers and other small businesses will probably see permanent repeal of the federal estate tax, more tax relief, and action on health insurance.

The 108th Congress, which convenes this month, is expected to deal with these and other issues of concern to small businesses.

As a result of November’s midterm elections, Republicans control both houses of Congress as well as the White House, and “that’s mostly good news for small business,” notes Nathan Olsen, legislative counsel with Haake Associates, lobbyist for Jewelers of America (JA) in Washington, D.C. “This Congress will be a more pro-business environment, with a more conservative agenda. In general, business can look forward to more tax cuts and incentives,” says Olsen. He also believes more Democrats will work with the president, although partisan squabbling in Congress’s lame-deck session after the elections killed bankruptcy reform, which had wide business support.

What happens in this Congress also will be influenced by the 2004 election, notes Olsen. “Events after Sept. 11, 2001, delayed [action on] some domestic and economic issues. Now, these will get the full attention of Congress and the White House because they’re preparing for the presidential election.”

The state of the economy and the possibility of high deficits also could influence the congressional agenda, but the real wild card is Iraq. “If the United States is engaged in a deep conflict with Iraq [in 2003], it will affect a lot of things, including which legislative issues get priority and funding,” says Olsen.

Estate tax. Gradual phasing out of the federal estate tax by 2010 was approved by the 107th Congress in 2001, but because of a procedural point, that tax returns in full force on Jan. 1, 2011.

As a result, business associations—including JA and the Family Business Estate Tax Coalition—and their supporters in Congress have pushed to make repeal permanent. The House endorsed that (256-171) last year, but despite majority support in the Senate, a proposal there for permanent repeal, which needed 60 votes to pass, was defeated 54-44.

But with majority support in both houses, along with President Bush’s repeated calls for a permanent repeal, the issue will be raised again this session. With Republican control of both branches, passage is almost certain.

In fact, the Republican-controlled Congress is likely to try to make permanent most, if not all, the tax policies and tax cuts that were part of the tax package passed early in the previous session. Those also were due to expire in 2010 and include reductions in various tax brackets.

Small business taxes. There was much effort in the last Congress to put together a small-business tax relief package, but no consensus emerged. Ideas under consideration included association health plans, increased expensing, health insurance tax credits, expanded medical savings accounts, and larger deductions for capital losses and capital gains.

The Senate Finance Committee dropped its efforts on a small-business tax bill last year because of sparring between Republicans and Democrats over the size of proposed tax cuts and a possible minimum wage hike, notes the National Federation of Independent Businesses (NFIB). In the House, Republicans dropped plans for their own package, including tax breaks for investors.

Bankruptcy reform. Consumer bankruptcies, which often leave retail bills unpaid, reached 1.5 million in 2001, notes the NFIB. Agreement on legislation to reform the federal bankruptcy system—a long-standing goal of various trade groups, including JA—was reached last year by a House-Senate conference committee. Of interest to jewelers are sections stating that consumers able to repay debts (including merchandise purchases) can’t declare Chapter 7 bankruptcy, which erases all debt, but must file for Chapter 13, which mandates repayment if consumers meet certain criteria.

Congress was set to vote on the compromise bill in September. However, a provision drafted at the insistence of some Senate Democrats barring abortion foes convicted of criminal protests from filing for bankruptcy to write off court fines was opposed in the House by some anti-abortion Republicans. Despite the support of House Republican leaders and the president, the bill was blocked in the House in September and defeated in November’s lame-duck session. A House-approved version minus the abortion provision was then sent to the Senate, which refused to consider it before adjourning.

It’s likely that bankruptcy reform will come up again in this Congress.

Minimum wage. A $1.50 increase in the minimum wage (to $6.65 an hour) was proposed in spring 2001 in both the House and the Senate. However, that was tabled following the Sept. 11 tragedy and because of homeland security issues facing Congress. It is unlikely to come up soon in this GOP-controlled Congress but “can’t be excluded entirely” from being raised, possibly next year, says Olsen. “It is a hallmark issue for labor, some influential people in Congress, such as Sen. Ted Kennedy (D-Mass.), and some Republicans supported by labor,” he notes.

Association health plans. Some 43 million Americans currently have no health insurance, and 60% of them are small business owners, their dependents, and their employees and their dependents. Association health plans (AHPs) would let small businesses band together across state lines to pool their purchasing power and buy health insurance at competitive rates through trade groups such as Jewelers of America. “This would ensure greater bargaining power, lower administrative costs, and freedom from costly state insurance mandates,” says the NFIB. “Major corporations and big labor unions already enjoy this type of purchasing clout; small business deserves the same fair shake.”

This a popular proposal—both Republicans and Democrats favor some form of AHPs—and committees in the House and the Senate last year attached AHP amendments to patient protection and tax package legislation, though these failed to reach a final vote before Congress adjourned.

Olsen calls AHP “a prime candidate for being one of the first bills to be voted out in the new Congress.” A patient bill of rights and improvements in expanded medical savings accounts will probably “also be a high priority,” he says.

Leasehold improvements. Currently, a building owner must depreciate building improvements over 39 years. However, because many retailers’ leases require that they remodel every five to seven years, a more reasonable depreciation would more accurately reflect the lifespan of improvements. In the last session, legislators introduced proposals to reduce the depreciation period to 10 or 15 years and to allow an immediate 30% depreciation deduction on any interior improvements on a nonresidential (i.e., business) building by the landlord or tenant. So, expect this to come up again.

Internet sales tax. In 1998, Congress declared a three-year moratorium on taxes on goods sold on the Internet. Last October, it extended that two more years to give federal and state governments, traditional brick-and-mortar retailers, and high-tech telecom companies more time to work out a plan for tax collection.

Online retailers oppose an Internet sales tax; brick-and-mortar retailers, who must collect sales taxes, favor it because without it, they argue, they’re at a competitive disadvantage. Meanwhile, some states are developing online systems to collect taxes on Internet purchases made within their borders.

A big step toward a universal tax system is a November multi-state agreement to simplify sales tax laws across the nation and eliminate inequities. Thirty-four states and the District of Columbia approved it at a session of the Streamlined Sales Tax Implementing States (SSTIS) group in Chicago. It takes effect when at least 10 states with 20% of the U.S. population pass supporting legislation. Once the system is simplified, says a NRF spokesperson, “we’ll try to convince Congress to apply the same rules to everyone, whether they sell their merchandise from a storefront, over the phone, through a catalog or on the Internet.”