The Democrats who now control Congress are not likely to push for explicit tax increases. But — like the Republicans they replaced — they will be on a never-ending hunt for provisions that bring in more revenue, disguised as compliance measures or offsets to tax cuts. Carriers should keep an eye on four types of provisions in particular.
Highway taxes. In 2005, Congress abolished installment payments for the heavy vehicle use tax in the name of improving compliance as part of the highway reauthorization law known as SAFETEA-LU. That law was projected to produce enough revenue — barely — to cover highway spending through September 2009. But now it looks as if the Highway Trust Fund will need additional receipts by 2008 to avoid a drastic cutback in construction funds.
The trust fund gets money from taxes on gasoline, diesel fuel, sales of new trucks and truck tires, and the use tax. Three problems are dragging down receipts.
Just three weeks after SAFETEA-LU became law, Hurricane Katrina struck, sending gasoline prices above the $3/gal. mark for the first time. That drove motorists to start conserving and slowed the growth of gasoline tax receipts. Now, economic growth is slowing. So is the demand for trucking and for diesel fuel, which produces the second largest source of trust fund receipts, after gasoline.
In addition, truck sales are widely expected to plunge in 2007, both because of the economic slowdown and because so many trucks were purchased in 2006 to beat the new engine emissions rules. Sluggish new-truck sales will mean lower-than-projected receipts for the third largest source of trust fund revenues.
While revenues are falling short of projections, construction costs are soaring because of high materials costs, making highway tax “tweaks” more likely.
Withholding. Last May, Congress passed — and President Bush signed — a bill with a last-minute added provision to impose income tax withholding at a 3% rate on the gross value of payments to contractors by any level of government, beginning January 1, 2011. This is likely to impose severe cash flow problems for some carriers, since the net on many contracts is less than 3%.
In the last frantic days of the “lame duck” session of Congress in December, there were separate attempts by a Democratic senator and a Republican representative to move up the effective date for this withholding to January 1, 2007. Both efforts were stopped before they came to a vote. But the fact that a Republican-controlled Congress and Republican president put the provision into law, and that members of both parties tried to advance the starting date, should put truckers on notice that this provision will be hard to remove and may even take effect sooner than they expect.
Depreciation. The IRS has signaled that it will take aim at overstatement of depreciation deductions. Trucking is likely to be more affected than others by initiatives in this area, since the industry relies heavily on depreciable assets such as trucks, trailers and terminals.
Environment. Now that ultra-low-sulfur diesel fuel is universally available for highway use and new trucks are required to use it, Congress may try to force older trucks to clean up or get off the road. Lawmakers could turn to either income or excise tax provisions, possibly paired with incentives for buyers of new equipment.
The bottom line: The new Congress is not likely to try passing straight-out tax increases. But this Congress is even more likely than its recent predecessors to use compliance measures and “offsets” to pay for tax cuts and spending initiatives.