Sunday May 19, 2013
Washington News
Reduced Interest on Student Loans
Members of both parties have introduced bills in the House and Senate that would avoid a scheduled increase in the interest rate on student loans. If there is no action by Congress, the interest on Stafford student loans is scheduled to increase from 3.4% to 6.8% on July 1, 2012.
Leaders of both parties and President Obama have indicated a willingness to pass legislation to avoid the scheduled increase in interest rates. While there is bipartisan support for maintaining the reduced 3.4% rate for one year, there are different opinions on the best methods to pay for the cost. A one year extension of the lower rate is estimated to cost $5.9 billion.
Senate Majority Leader Harry Reid (D-NV) introduced the Stop the Student Interest Rate Hike Act of 2012 (S. 2343). This bill extends the 3.4% rate for one year. It pays for the $5.9 billion cost through a change in the law on Subchapter S corporations.
For Subchapter S corporations with one to three employees who have incomes over $250,000 per year ($200,000 for single persons), they would no longer be able to pass through income directly from the Subchapter S corporation. Rather, the income would be reported personally and owners would pay Social Security and Medicare taxes on that income.
Rep. Judy Biggert (R-IL) introduced in the House the Interest Rate Reduction Act (H.R. 4628). It also extends the 3.4% interest rate for one year, but reduces funds in the Prevention and Public Health Fund to pay the $5.9 billion cost.
It is anticipated both the Senate and the House will vote on bills to extend the 3.4% interest rate within the next few weeks.
Editor's Note: Your editor and this organization do not take a position on the best method for payment for the bill. The good news for individuals with student loans is that both parties now support the lower interest rate extension. In the negotiation over offsets, the parties are far apart. Given the political differences and the fact that this is an election year, the bill may be passed without any offsets.
On April 25, 2012, the Senate Finance Committee held a hearing to discuss tax reforms at the federal level that impact state governments.
Chair Max Baucus (D-MT) opened the hearing by acknowledging that the state governments were facing budget problems and seeking federal assistance. He stated, "Most state governments are in tough financial shape. In 2010, 48 states had budget shortfalls. All states except one are required by state law to balance their budgets. That has forced states to make tough decisions, such as raising taxes or cutting spending. Since the financial crisis, 46 states have cut services and 30 states have raised taxes."
Sen. Baucus notes that the federal government provides substantial assistance to the states from stimulus funds. In addition, he indicated that 36% of total state revenue is transferred through various grants from the federal government.
Baucus also observed that the states benefit through the federal tax exemption on state and local bonds. In addition, many state and local taxes are deductible on IRS Form 1040. The total benefit to states from these tax savings is $105 billion per year.
Ranking Member of the Senate Finance Committee, Sen. Orrin Hatch (R-UT), stated, "Federal discussions about state finances frequently highlight budgetary pressures that have required cuts in spending. These are no doubt difficult issues for states, but it simply is not the responsibility of the federal government to address state budget shortfalls."
In the view of Sen. Hatch, state governments are collecting more taxes. He noted that the 2011 state tax revenues were 8% higher than those in 2010. With the tax savings granted to the states through income tax deductions and the federal grants to states, Hatch suggests that "state officials need to take responsibility for their own spending decisions."
Leaders of both parties and President Obama have indicated a willingness to pass legislation to avoid the scheduled increase in interest rates. While there is bipartisan support for maintaining the reduced 3.4% rate for one year, there are different opinions on the best methods to pay for the cost. A one year extension of the lower rate is estimated to cost $5.9 billion.
Senate Majority Leader Harry Reid (D-NV) introduced the Stop the Student Interest Rate Hike Act of 2012 (S. 2343). This bill extends the 3.4% rate for one year. It pays for the $5.9 billion cost through a change in the law on Subchapter S corporations.
For Subchapter S corporations with one to three employees who have incomes over $250,000 per year ($200,000 for single persons), they would no longer be able to pass through income directly from the Subchapter S corporation. Rather, the income would be reported personally and owners would pay Social Security and Medicare taxes on that income.
Rep. Judy Biggert (R-IL) introduced in the House the Interest Rate Reduction Act (H.R. 4628). It also extends the 3.4% interest rate for one year, but reduces funds in the Prevention and Public Health Fund to pay the $5.9 billion cost.
It is anticipated both the Senate and the House will vote on bills to extend the 3.4% interest rate within the next few weeks.
Editor's Note: Your editor and this organization do not take a position on the best method for payment for the bill. The good news for individuals with student loans is that both parties now support the lower interest rate extension. In the negotiation over offsets, the parties are far apart. Given the political differences and the fact that this is an election year, the bill may be passed without any offsets.
Federal Taxes and the State Budget Crunch
On April 25, 2012, the Senate Finance Committee held a hearing to discuss tax reforms at the federal level that impact state governments.
Chair Max Baucus (D-MT) opened the hearing by acknowledging that the state governments were facing budget problems and seeking federal assistance. He stated, "Most state governments are in tough financial shape. In 2010, 48 states had budget shortfalls. All states except one are required by state law to balance their budgets. That has forced states to make tough decisions, such as raising taxes or cutting spending. Since the financial crisis, 46 states have cut services and 30 states have raised taxes."
Sen. Baucus notes that the federal government provides substantial assistance to the states from stimulus funds. In addition, he indicated that 36% of total state revenue is transferred through various grants from the federal government.
Baucus also observed that the states benefit through the federal tax exemption on state and local bonds. In addition, many state and local taxes are deductible on IRS Form 1040. The total benefit to states from these tax savings is $105 billion per year.
Ranking Member of the Senate Finance Committee, Sen. Orrin Hatch (R-UT), stated, "Federal discussions about state finances frequently highlight budgetary pressures that have required cuts in spending. These are no doubt difficult issues for states, but it simply is not the responsibility of the federal government to address state budget shortfalls."
In the view of Sen. Hatch, state governments are collecting more taxes. He noted that the 2011 state tax revenues were 8% higher than those in 2010. With the tax savings granted to the states through income tax deductions and the federal grants to states, Hatch suggests that "state officials need to take responsibility for their own spending decisions."
Published April 27, 2012
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