90TH CONGRESS HOUSE OF REPRESENTATIVES 2d Session TAX ADJUSTMENT ACT OF 1968 { N REPORT No. 1104 February 23, 1968.—Committed to the Committee of the Whole House on the State of the Union and ordered to be printed Mr. MILLS, from the Committee on Ways and Means, REPORT [To accompany H.R. 15414] The Committee on Ways and Means, to whom was referred the bill (H.R. 15414) to continue the existing excise tax rates on communication services and on automobiles, and to apply more generally the provisions relating to payments of estimated tax by corporations, having considered the same, report favorably thereon without amendment and recommend that the bill do pass. I. SUMMARY This bill continues until December 31, 1969, existing excise taxes imposed with respect to manufacturers' sales of passenger automobiles and with respect to certain telephone services. Thereafter it provides for the gradual reduction and eventual elimination of these taxes. This bill also provides for the acceleration of income tax payments by corporations to place these payments of tax on a comparable basis to that applying in the case of individual taxpayers, including sole proprietors. While this bill does not increase tax liabilities above those now payable, it is estimated the changes made by this bill will increase revenues by $1.1 billion in fiscal year 1968 and by $3.1 billion in fiscal year 1969. The larger revenues in part are attributable to continuing existing excise tax rates and in part to speeding of the collection of corporate existing tax liabilities. In view of the budget deficits in excess of $20 billion forecast in both 1968 and 1969, without taking into account proposed tax increases, your committee believes that it is inappropriate to allow a reduction in existing excise tax rates. Moreover, it appears to be an appropriate time to complete action to place corporate tax payments on a current basis. At the same time, however, provision is made for quick refunds for corporations after the end of the year in those cases where their estimated tax payments significantly exceed their tax liability. The excise tax extension and acceleration of income tax payments by corporations were recommended by the administration. Action on these matters is not intended to prejudice possible future action with respect to other tax changes on which the committee is still reserving judgment. To simplify compliance for corporations, your committee's bill repeals the present requirement that corporations file a declaration of estimated tax. This does not affect existing payment procedures. The bill also establishes that a deposit of tax will be considered to be paid on time if it is mailed to a depositary at least by the second day before the due date. II. GENERAL STATEMENT The President's budget message estimates receipts and expenditures under the new unified budget, before taking into account the President's proposals with respect to tax legislation in fiscal years 1968 and 1969, at the following levels: 1 1 These data indicate deficits of $22.8 billion in 1968 and $21.1 billion in 1969. With prospective deficits of such magnitudes, your committee has concluded that it is inappropriate to permit reductions in the excise taxes to occur in 1968 or 1969 as scheduled by existing law. It also has concluded that this is an appropriate time to remove the remaining disparity in the treatment of individuals and corporations under the current tax payment system. While your committee is limiting its action in this bill to these proposals of the administration, this is not intended to prejudice possible future action with respect to other tax recommendations which have been proposed by the administration. In view of the fact that the excise tax reductions, in the absence of this bill, would occur on April 1, and the fact that the corporate speed-up to be effective this year must occur before April 15, your committee concluded that it should act now on these recommendations without awaiting any disposition or determination concerning the other recommendations of the administration. Excise tax extensions Under present law the 7-percent manufacturers excise tax on passenger automobiles 2 is scheduled to drop from 7 to 2 percent on April 1, 1968, and then on January 1, 1969, to drop to 1 percent. The 1-percent rate under present law is to be a permanent tax. Your committee has concluded that the present 7-percent rate of tax should be continued until 1970. In its consideration of the Excise Tax Reduction Act of 1965, your committee concluded that reductions in the manufacturers excise tax on passenger automobiles should be enacted in a series of gradual steps to prevent possible dislocations in the industry. As the prices of new cars have an important bearing on the prices of used cars, it was recognized that a sharp reduction in the excise tax on new automobiles might have a severe impact on the used car market. It was also feared that the anticipation by consumers of a substantial reduction in the excise tax rate might delay purchases of new automobiles for a considerable period before the rate reduction actually took place. These considerations are still valid. Therefore, your committee's bill provides for the reduction in the excise tax on passenger automobiles in a series of steps which is to begin on January 1, 1970, and conclude on January 1, 1973, with the repeal of the tax. As indicated previously, under existing law the tax would have been retained at a permanent level of 1 percent. Your committee has been advised by representatives of the automobile industry that excise tax reductions scheduled for the beginning of the calendar year are less likely to disrupt the normal operations of the industry than reductions scheduled at other times. If buyers defer purchases until the first of the year as a result of reductions scheduled for that time, this will merely shift some sales from the period of brisk activity that normally follows the introduction of new models to the winter months when activity usually is slow. For this reason, your committee's bill schedules successive reductions of 2 percentage points for January 1, 1970, January 1, 1971, and January 1, 1972, and provides for the repeal of the remaining 1-percent tax on January 1, 1973. Under present law the excise tax on local telephone service, toll service, and teletypewriter exchange service is scheduled to be reduced from 10 percent to 1 percent as of April 1, 1968, and on January 1, 1969, the 1 percent tax is to be repealed. Your committee has concluded that the present 10 percent rate of tax should be continued until 1970. Your committee's bill provides a schedule of rate reductions for the tax on telephone service comparable to that provided in the case of passenger automobiles; that is, the 10 percent rate on these various types of telephone service is reduced to 5 percent as of January 1, 1970, and is reduced by 2 percentage points a year thereafter until 1973, when the final 1 percent tax is removed. * Passenger automobile chassis and bodies and other chassis and bodies for trailers and semitrailers (other than housetrailers) suitable for use in connection with passenger automobiles. Current payment of corporate income tax liabilities Your committee also concluded, in view of the budgetary outlook, that it is appropriate now to complete action designed to place corporations under substantially the same obligations with respect to the current payment of income tax liabilities as those placed upon individuals and unincorporated businesses. This objective has long been sought by Congress and your committee. Action was taken in each of the revenue acts of 1950, 1954, 1964, and 1966 to place the payment of corporate tax liabilities on more nearly the same basis as that of individuals and unincorporated businesses. The development has been gradual because of a desire to ease possible transitional problems for the corporations involved, but commitment to the objective has not varied. While large corporations with substantial taxable incomes are now on roughly the same basis as individuals with respect to the timing of estimated-tax payments, important disparities still exist. Individual proprietors and partners are generally required to make estimated tax payments equivalent to at least 80 percent of their tax liabilities in order to avoid additions to tax, but corporations need to make estimated tax payments equal to only 70 percent of any liabilities in excess of $100,000 in order to avoid similar impositions. Even wider differences exist between the treatment of smaller corporations and unincorporated businesses. Corporations whose tax liabilities amount to less than $100,000 are under no obligation to file declarations and make quarterly payments of estimated tax while the owners of unincorporated businesses must do so if their tax liabilities are expected to be as little as $40. Furthermore, while corporations whose taxes are expected to exceed $100,000 are not required to make estimated tax payments based on the initial $100,000 of tax, individuals must make estimated tax payments based on the entire amount of their liability if that liability is expected to exceed $40. The present system extends a competitive advantage to small- and medium-sized corporations relative to unincorporated businesses by allowing the corporations to defer all, or a substantial portion, of their tax payments until the close of the tax year while requiring unincorporated businesses to pay their income tax liabilities currently. The $100,000 of corporate tax liability which is exempt from the current payment provisions is quite large in relation to the liabilities of most unincorporated businesses. Furthermore, the exemption benefits only a small minority of the Nation's businesses, since most of the latter are unincorporated. Of the 8.6 million businesses with net incomes in 1965, 7.7 million were sole proprietorships or partnerships, leaving only about 900,000 corporations (of these nearly 200,000 were subchapter S corporations whose income is taxed to the individual shareholders rather than to the corporations.) Placing corporations on the same current tax payments schedule as that of individuals should also prove of benefit to some small corporations who might otherwise fail to make adequate provision for tax payments and find themselves faced with deferred liabilities in a year of low earnings or at the time of liquidation. Many individuals, including owners of unincorporated businesses, find the current payment provisions help them to meet their obligations under the present tax law in the most efficient manner. For these reasons, your committee's bill raises the percentage of estimated tax liability necessary to be paid currently by corporations from 70 to 80 percent the percentage applicable to individuals. This change is made fully effective for 1968 tax liabilities. The bill also reduces the exemption from the corporate current payment provisions from $100,000 to $40. This latter change is made effective gradually over a 5-year period beginning with 1968 tax liabilities. This is accomplished by requiring the inclusion in 1968 (in addition to tax liabilities in excess of $100,000) of 20 percent of the tax liabilities below $100,000 which a corporation will eventually have to include, by increasing this to 40 percent for 1969 liabilities, 60 percent for 1970 liabilities, 80 percent for 1971 liabilities, and 100 percent for 1972 liabilities and later years. Your committee phased in the reduction of the $100,000 exemption for corporate estimated tax payments because it believed that to do otherwise would impose a hardship on many corporations not now required to make quarterly payments of estimated tax and also on those corporations which will be required to make substantial increases in the amount of estimated tax they pay. Your committee's bill provided the 5-year transition period before the new standards of current payment become fully effective to insure that no single corporation experiences undue difficulty as a result of the new requirements. Another provision of your committee's bill will simplify the estimated tax payment requirements of corporations by repealing the existing requirement that corporations file declarations of their estimated tax. Under the terms of the bill, corporations will not have to complete a form indicating the manner in which they determine their estimated tax payments, but will merely have to make those payments on or before the quarterly due dates. Your committee made a further change designed to ease the impact of the full current payment system on corporations. It recognizes that applying the system for corporations to estimated tax liabilities above $40 might in some cases result in substantial overpayments by corporate taxpayers if the final results of their operations fall below their expectations in the forepart of the year, since the last estimated tax payment by corporations is required to be made before the end of their tax year. This can result from a widely varying set of circumstances, such as the burning or flooding out of a business, a strike, or a sharp downturn in expected sales. For some of these firms the overpayment of estimated tax may create a cash shortage at the very time the need is the greatest. These corporations cannot obtain a refund of estimated tax under current law until they file their tax returns. However, many corporations have difficulty in filing their returns within 2%1⁄2 months after the close of their tax year and must ask for a 3- or 6-month extension before filing their returns. This delays still further the time when any overpayment of estimated tax can be refunded to them. For these reasons your committee has added a provision permitting a corporation to obtain a quick refund of overpayment of estimated tax by filing an application during the period between the end of its taxable year and the time it files its tax return for that year (or the due date of the return if earlier). When these quick refund applica |