With only a few weeks before the new year, Congress has yet to settle tax uncertainty that has been brewing for more than a year. What will the tax rates for owners of pass-through business entities, such as S corporations and LLCs, be in 2011? What will the estate tax rules be? Will provisions such as the research credit be effective for 2010; more than two dozen provisions expired at the end of 2009. Will there be a “patch” for the alternative minimum tax?

One of the problems with uncertainty is the additional cost to the economy that is not easily measured:

  • Businesses that might have hired new workers have stayed on the sidelines until owners know for certain what their tax rates will be in 2011. Owners are already dealing with cost uncertainties created by health care legislation earlier this year. Bottom line: Small businesses that normally create about 65% of all new private sector jobs have just not been focused on job creation.
  • Businesses that rely on the research credit to help fund their research efforts have been stymied for the past year. Now the credit is poised to be extended, but only through 2011. This makes long-term planning difficult for affected businesses. (More than 12,000 businesses claimed this tax credit in 2008, the last year for statistics.) To compete in the world marketplace with innovations, tax support for research needs to be a permanent feature in the law so that American companies can plan ahead.
  • The IRS has been preparing withholding tables for 2011 based on the assumption that the Bush tax cuts will not be enacted. Now, revised tables must reflect not only the extension of these cuts, but also a 2% Social Security payroll tax cut.

Even if the tax package compromise announced by President Obama on December 6 is enacted, this merely kicks the can down the road. In two more years, we’ll be in the same predicament. Comprehensive and permanent tax reform is needed to change what has become the unproductive and costly status quo.