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Which Tax Deductions Are Most Likely to Go?

Tax Deductions

Tax loopholes and deductions are under immediate scrutiny in efforts to cut the deficit and raise revenues as Capitol Hill battles to avoid the sequestrations — the massive automatic spending cuts set to begin March 1.

Congressional hearings have begun on the most well-known, and according to some experts, most likely to be reformed or eliminated. Among them: charitable deductions, deductions on home mortgage interest, the so called carried interest — the tax break for private equity and hedge fund managers — and limiting tax deductions on corporate profits.

Loopholes and tax breaks cost the Treasury more than $1 trillion each year, according to government estimates. Among the biggest losses come from tax breaks for U.S. corporations — $114 billion — the mortgage interest deduction — an estimated $77 billion — and charitable donations — $38 billion.

Each of the parties at risk are fighting back. Several charitable groups testified before Congress recently, saying that if their deduction is lowered or eliminated, people will stop giving.

The housing industry — most specifically builders — say the mortgage interest deduction is necessary for the housing market to recover from its recession lows. Corporations say their U.S. tax rates are the highest in the world, at 35 percent.

Hedge funds and private equity firms say part of their fees are based on risk, and therefore their tax rate — which was just raised with the fiscal cliff deal from 20 to 25 percent — should be treated like an investment instead of a salary, and therefore taxed at a different rate. (Read More: Home Builder Confidence Falls)

"Charitable deductions and mortgage interest deductions are more encouragement by the government for people to do things, rather than tax loopholes," said Ian Shane, a tax attorney with the law firm, Golenbock Eiseman Assor Bell & Peskoe.

"By that I mean the government is subsidizing the buying of homes and the giving to charities with the deductions," said Shane. "It's true that reducing or eliminating those would hurt a bit but I don't think people would stop giving to charities or buying homes if they were gone."

"In fact, the mortgage interest deduction really helps wealthier people instead of those who need it. Why should renters not get some sort of benefit since they can't afford to buy a home?" Shane said. "I think the best things would be to phase it out over time."

As for charitable giving, Shane said most people take an altruistic approach rather than just looking at their tax returns.

"When you have relief funds for Hurricane Sandy or some other disaster, most people give because they want to rather than feeling the need for a deduction," Shane said. "It's the American thing to do — give to charities. I don't think there's any other country like this when it comes to helping others. Those that are rich and give big money to charities don't need the deduction."

When it comes to carried interest — where private equity and hedge fund managers share in the profits of an investment fund they manage with the rate of taxation at 25 percent — critics say it's unfair to let money mangers be taxed at lower rates than other workers for what is essentially a paycheck.

One analyst said the hotly debated issue — one President Barack Obama said should be changed — is built around perception. (Read More: Can you Trust Your Taxman)

"There's a perceived unfairness about it and it's more an argument of social equity," said Mitchell Gaswirth, a partner in the tax department of the law firm Proskauer. "You can make the case that they are partners in the investment and deserved to be tax accordingly, like other investors. It's highly charged. But I'm not sure that closing it would raise all that much money."

As for changes in the tax code for corporations critics point to a company like General Electric, which through domestic and overseas deductions and credits paid no federal taxes in 2011, though it did pay state local and payroll taxes.

But lowering the corporate rate seems to be gaining popularity among Democrats as well as Republicans. Senate Finance Committee Chairman Max Baucus (D-MT.) released a statement Friday saying that "a lower corporate tax rate and simpler code will create jobs and boost economic growth."

Both Shane and Gaswirth agree that closing loopholes while lowering the rate — currently at 35 percent — would help motivate corporations to pay their fair share.

"Corporations lobby hard to get their taxes reduced, and it seems only the smaller firms really pay their full taxes," said Shane. "But the bigger corporations do a lot abroad and they're multinational. The tax codes we have are 10 years behind the times on that. They need to change."

"The best thing would be to close all the loopholes for corporations whatever they are but lower the rates," said Gaswirth. "It would be much easier for them to pay the lower rate with out all the deductions."

What analysts said needs to happen with tax deductions and tax reform itself — in order to raise revenues and make it fair — is a completely new way of thinking about what taxes are meant to do.

"Closing the loopholes would help with revenues but they don't really help enough," said Shane.

"We need to make the tax code efficient and get rid of all the deductions," said Gaswirth. "We haven't had major tax reform since 1986. It's way overdue. If we want real revenue, we need to use the tax code for that, not social engineering. If we want solar power, Congress should just fund it, instead of giving tax deductions.

"Let's make tax codes do what they were supposed to do — raise money and not bring about social engineering."

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The U.S. Accused China of Spying

Accusations by a U.S. computer security company that a secretive Chinese military unit is likely behind a series of hacking attacks are scientifically flawed and hence unreliable, China said on Wednesday.

The statement came after the White House said overnight that the Obama administration has repeatedly taken up its concerns about cyber-theft at the highest levels of the Chinese government, including with Chinese military officials.

The security company, Mandiant, identified the People's Liberation Army's Shanghai-based Unit 61398 as the most likely driving force behind the hacking. Mandiant said it believed the unit had carried out "sustained" attacks on a wide range of industries.

The Chinese Defence Ministry, which has already denied the charges, went further in a new statement, slamming Mandiant for relying on spurious data.

"The report, in only relying on linking IP address to reach a conclusion the hacking attacks originated from China, lacks technical proof," the ministry said in a statement on its website.

"Everyone knows that the use of usurped IP addresses to carry out hacking attacks happens on an almost daily basis," it added.

"Second, there is still no internationally clear, unified definition of what consists of a 'hacking attack'. There is no legal evidence behind the report subjectively inducing that the everyday gathering of online (information) is online spying."

As hacking is a cross-border, anonymous and deceptive phenomenon, by its very nature it is hard to work out exactly where hacks originated, the statement said.

Chinese Foreign Ministry spokesman Hong Lei, asked about the U.S. taking up its concerns about hacking with Beijing, said: "China and the U.S. have maintained communication over the relevant issue".

Unit 61398 is located in Shanghai's Pudong district, China's financial and banking hub, and is staffed by perhaps thousands of people proficient in English as well as computer programming and network operations, Mandiant said in its report.

The unit had stolen "hundreds of terabytes of data from at least 141 organizations across a diverse set of industries beginning as early as 2006," it said.

Most of the victims were located in the United States, with smaller numbers in Canada and Britain. The information stolen ranged from details on mergers and acquisitions to the emails of senior employees, the company said.

(Read More: 10 Ways Companies Get Hacked)

But the Chinese Defence Ministry said China's own figures show that a "considerable" number of hacking attacks it is subjected to come from the United States.

"But we don't use this as a reason to criticize the United States," the ministry said.

However, the Global Times, a widely read tabloid published by Communist Party mouthpiece the People's Daily, said China should be more active in publicly airing its complaints about hacking attacks, especially as the United States does so.

"Some officials have been punished for internally reporting that government websites have been hacked and secrets leaked, but almost no details have come out," it wrote.

"The Americans really know how to talk this (issue) up. All China can do is concede defeat."

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Obama Faces Tough Decision on Oil Pipeline

By John M. Broder, Clifford Krauss and Ian Austen

President Obama faces a knotty decision in whether to approve the much-delayed Keystone oil pipeline: a choice between alienating environmental advocates who overwhelmingly supported his candidacy or causing a deep and perhaps lasting rift with Canada.

Canada, the United States' most important trading partner and a close ally on Iran and Afghanistan, is counting on the pipeline to propel more growth in its oil patch, a vital engine for its economy. Its leaders have made it clear that an American rejection would be viewed as an unneighborly act and could bring retaliation.

Secretary of State John F. Kerry's first meeting with a foreign leader was with Canada's foreign minister, John Baird, on February 8. They discussed the Keystone pipeline project, among other subjects, and Mr. Kerry promised a fair, transparent and prompt decision. He did not indicate what recommendation he would make to the president.

But this is also a decisive moment for the United States environmental movement, which backed Mr. Obama strongly in the last two elections. For groups like the Sierra Club, permitting a pipeline carrying more than 700,000 barrels a day of Canadian crude into the country would be viewed as a betrayal, and as a contradiction of the president's promises in his second inaugural and State of the Union addresses to make controlling climate change a top priority for his second term.

(Read More: What Obama Can Do About Climate Change)

On Sunday, thousands rallied near the Washington Monument to protest the pipeline and call for firmer steps to fight emissions of climate-changing gases. Groups opposing coal production, nuclear power and hydraulic fracturing for natural gas were prominent; separate groups of Baptists and Catholics, as well as an interfaith coalition, and groups from Colorado, Toronto and Minneapolis joined the throng.

One speaker, the Rev. Lennox Yearwood, compared the rally to Martin Luther King's 1963 March on Washington for civil rights, but, he said, "while they were fighting for equality, we are fighting for existence." In front of the stage was a mock-up of a pipeline, looking a bit like the dragon in a Chinese new year parade, with the motto, "separate oil and state."

Michael Brune, executive director of the Sierra Club, predicted that Mr. Obama would veto the $7 billion project because of the adverse effects development of the Canadian oil sands would have on the global climate.

"It's rare that a president has such a singular voice on such a major policy decision," Mr. Brune said. "Whatever damage approving the pipeline would do to the environmental movement pales in comparison to the damage it could do to his own legacy."

(Read More: Nebraska Governor OKs Rerouted Oil Pipeline)

Mr. Brune was one of about four dozen pipeline protesters arrested at the White House on Wednesday, in an act of civil disobedience that was a first for the 120-year-old Sierra Club.

So far, Mr. Obama has been able to balance his promises to promote both energy independence and environmental protection, by allowing more oil and gas drilling on public lands and offshore while also pushing auto companies to make their vehicles more efficient. But the Keystone decision, which is technically a State Department prerogative but will be decided by the president himself, defies easy compromise.

"This is a tricky political challenge for the president," said Michael A. Levi, an energy fellow at the Council on Foreign Relations. "The reality is everyone has defined the stakes on Keystone in such absolute terms that it is borderline impossible to see a compromise that will satisfy all the players."

The proposed northern extension of the nearly 2,000-mile Keystone XL pipeline would connect Canada's oil sands to refineries around Houston and the Gulf of Mexico, replacing Venezuelan heavy crude with similar Canadian grades.

Proponents say its approval would be an important step toward reducing reliance on the Organization of the Petroleum Exporting Countries for energy. Opponents say that the expansion of oil production in shale fields across the country has already reduced the need for imports. Environmentalists have singled out the pipeline because it would carry oil derived from tar sands, in a process that is dirtier than other forms of oil production and that releases more carbon dioxide.

The State Department appeared poised to approve the pipeline in 2011, but Mr. Obama delayed a decision based on concerns about its route through vulnerable grasslands in Nebraska. The pipeline company, TransCanada, submitted a revised route, and the governor of Nebraska approved the plan last month, sending the final decision to Washington.

The Keystone pipeline is treated mainly as a domestic issue in Washington. But for Canada's Conservative government, which has its power base in the oil-rich province of Alberta, it represents a crucial moment in Canada's relationship with its most vital foreign partner even if the oil sands are also a divisive issue within Canada. Mr. Obama and Prime Minister Stephen Harper are not close, and the two make a portrait of contrasts in style and substance. While Mr. Obama comes from the liberal wing of his party and is known for stirring speeches, Mr. Harper is conservative even by the standards of his own Conservative Party and can be stiff in public. His political base, the province of Alberta, is the heart of the Canadian oil patch.

Mr. Obama's recent expressions of concern about climate change contrast starkly with Mr. Harper's stated priorities. Under Mr. Harper, Canada formally withdrew from the Kyoto Protocol on climate change, which was agreed to by a previous Liberal government. (The United States never ratified the protocol.)

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Obamacare Exchange Buildout Shifts Into High Gear

Health care costs Obamacare affordable care act

By Bertha Coombs

Vermont is a small state with just 660,00 residents, but getting the health insurance exchange here ready in time for the rollout of Obamacare in 2014 is still a very big job.

Mark Larson, the chief of the Department of Vermont Health Access (DVHA), likens the last few months to mobilizing for a prolonged state of emergency.

"On some level, we have to work as if we are operating in a limited time frame to respond to a crisis," Larson said.

His staff at the DVHA has grown by 50 percent to 180, and they've brought in a team of consultants nearly as big from CGI Group, with subcontractors from Oracle and KPMG.

They've all just moved into a new 26-thousand square foot office space, where they are literally working hand in hand now on the design and implementation of the all pieces that have to come together in the online marketplace that will serve as the gateway for people to access insurance under the Affordable Care Act (ACA).

"Often times the focus is on the website," said Melissa Boudreault, VP of State Health Solutions at CGI Group, who is leading the buildout effort. "Really what it takes to build an exchange is bringing together different technologies — everything from how people shop to how you create bills."

Boudreault has done much of it before. She was one of the founding directors of the Massachusetts health exchange when it launched in less than six months in 2006. But the work she's doing now in Vermont has added complexity.

Making the system simple

"One of the significant elements of the ACA was the move to a highly simplified eligibility model," she said.

They are most focused on developing the infrastructure that will let people determine whether they're eligible for Medicaid or for a federal tax credit when to buy private insurance when they sign up for coverage. Current Medicaid and Medicare programs don't integrate eligibility and access in one place.

"Of all the things that are being done in the exchanges that move to simplified eligibility is probably the most sweeping change because it allows states to move to an administration simplification that wasn't ever possible before," Boudreault said.

There's a lot riding on CGI getting the systems right for the start of enrollment season. A lot of Americans will be using its exchange interfaces to access coverage.

In addition to Vermont, CGI building state exchanges in Massachusetts, Colorado and Hawaii. It is also building the default federal state exchange which will serve millions of individuals and small businesses in more than 30 states whose leaders have opted out of building their own exchange.

"The federal exchange is already starting to do testing and draw information from carriers," Boudreault said. She's confident they'll make the October deadline to have all exchanges up and running.

Beyond the buildout

Vermont Commissioner Mark Larson is confident about the progress on his state's exchange, but he's also preparing in case there are problems.

"We're trying to streamline years of, frankly, inefficient business practices," Larson said. "We're also trying our best to make sure we have contingency plans, to make sure if certain functions need back-up that those back-ups will be in place."

None of it comes cheap. The state has tapped nearly $150 million in federal grants to build and run the exchange in the first year, and to do widespread outreach.

The next phase of the rollout is to contract with and train social service and small business groups to serve as navigators, who will make individuals and small firms aware of the exchanges and eventually help them navigate the enrollment process.

The state estimates it will $18 million a year to maintain and run the exchange and outreach programs. After the first year, they'll fund it through a tax on insurance claims.

When I pointed out that revenues may come up short of revenues, if people become healthier and file fewer claims, Commissioner Larson smiled.

"Of all the problems to have, that would be an okay one."

"This is a public private partnership," said Larson. "Ideally, when we merge those areas together we create something that is very special."

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Food Stamp Program Could Face Big Cuts

10 grocery savings secrets from insiders

By Allison Linn

The approximately 47 million Americans who rely on the modern food stamp program could see their monthly assistance cut this year because a recession-era benefits boost is set to expire.

People who receive food assistance — now known as the Supplemental Nutrition Assistance Program, or SNAP — got a raise starting in April 2009, as part of the American Recovery and Reinvestment Act. The increase in benefits, which amounted to about $80 more a month for a family of four, was part of a massive effort to help mitigate the worst effects of the Great Recession.

The temporary boost is set to expire on Oct. 31. If Congress doesn't pass legislation to extend it, the Center on Budget and Policy Priorities estimates that a family of four could see its benefits cut by about $25 a month. Smaller households would see smaller cuts.

The maximum allotment for a family of four is currently $668, but benefits levels can vary greatly. The average monthly benefit in November was $135.72 per person, or $281.21 per household, according to the Department of Agriculture.

The cut would be less than the original increase because the new rates would be set based on current food prices, which have gone up in the past few years due to inflation. The exact rate change would be clear until this summer, when new benchmarks are set.

Nevertheless, experts say the effect could be quite significant for poor individuals and families who are struggling to make ends meet.

"Families being able to afford less food is fundamentally the impact," said Stacy Dean, co-author of the Center on Budget and Policy Priorities report.

The use of the SNAP program has increased substantially in recent years, as the country has struggled with a weak and uneven economic recovery. About 46.6 million people used the program in 2012, up from about 26.3 million in 2007, according to the Department of Agriculture.

Experts say one problem is that many poor Americans are still feeling the brutal effects of the Great Recession. The recession officially ended in mid-2009, but the recovery remains weak and unemployment remains elevated.

"The recovery isn't playing out the same way for folks at the lower income on the income scale," Dean said.

Most people who receive SNAP benefits are in dire financial circumstances. A report released earlier this year by the Carsey Institute, which does research on vulnerable families, found that the median annual household income for SNAP users was $18,014 in 2011, substantially lower than the nation's median household income of $50,502 that year.

The program is one of the few places families and individuals can turn to for quick help meeting basic needs, according to experts.

"It's the largest social safety net program that is like cash," said Craig Gundersen, a professor of agricultural and consumer economics at the University of Illinois.

Proponents also argue that it's a successful program because it helps people meet a basic need. SNAP benefits can only be used for food items, and the Department of Agriculture said nearly all benefits are used at supermarkets or farmer's markets within 30 days.

Gundersen said that he would like it if SNAP benefits were even higher. Nevertheless, he argued that the program would continue to be a key way to help poor Americans even if the benefits are scaled back.

"If you cut back on benefits, that's going to hurt people, but it's still going to be successful," he said.

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