Financial Services Update

August 6, 2010

Authored by: Matt Jessee

Romer to Leave Council of Economic Advisors

On Thursday night, the White House announced that Dr. Christina Romer, chair of the Council of Economic Advisors, will leave September 3rd to return to the University of California at Berkley. Some are speculating Friday’s announcement of the 9.5% July unemployment rate may have contributed to her resignation since Romer predicted the 2009 stimulus bill would help keep the unemployment rate under 8 percent. Sources indicate that Council of Economic Advisors member Austan Goolsbee appears to be the front-runner to succeed Romer as Chairman. There is also speculation that Romer is under consideration to replace Janet Yellen as president of the Federal Reserve Bank of San Francisco. Yellen was recently nominated to be Vice Chairman of the Federal Reserve.

July Jobs Report Released

On Friday, the Department of Labor released the July jobs report showing that nonfarm payrolls declined by 131,000 jobs and the unemployment rate remained steady at 9.5 percent. 71,000 private-sector jobs were added last month while 143,000 temporary workers on the 2010 census were let go. The June data were revised down significantly showing that payrolls fell by 221,000, more than the 125,000 drop previously reported, as only 31,000 jobs were added in the private sector. Taking into account revisions to prior months this year, the U.S. economy added an average of less than 100,000 jobs a month in the first seven months of 2010.

Tax Cut Showdown In September

On Wednesday, Senate Majority Leader Harry Reid (D-NV) announced that the Senate would vote on a package of expiring tax cuts when the Senate returns in September. It remains unclear whether Senate Finance Committee Chairman Max Baucus (D-MT) will hold a committee markup on the bill or it will be brought directly to the floor. Moderate Democratic Senators Kent Conrad (D-ND) and Evan Bayh (D-IN) have called for an extension of all the “Bush” tax cuts, including those benefiting individuals earning more than $200,000 and families earning over $250,000 annually. If the Senate passes such an extension, it would likely set up a showdown with the House where a majority of Democrats do not want to extend tax cuts for all individuals. Some Democrats on the Ways and Means Committee have discussed a proposal to repeal the Bush tax cuts for the top tax brackets but delay the collection of those revenues until 2012.

Senate Passes State Aid/International Tax Bill, House To Return Next Week

On Thursday, the Senate approved a $26.1 billion fiscal aid package for state and local governments. Of the total, $16.1 billion will be given to states for Medicaid and the other $10 billion will be distributed to state and local school boards to help retain teachers who might otherwise be at risk of layoffs due to shrinking state and local budgets. Last year’s stimulus bill boosted the base federal Medicaid payment by 6.2 percent and made further adjustments depending on a state’s unemployment rate. The stimulus Medicaid increase is due to run out in December, and the Senate’s bill would extend the aid for six months but reduce the increase to 3.2 percent in the first quarter of 2011 and then 1.2 percent for the second. The bill’s spending is offset by eliminating $9.7 billion in foreign tax credits and $11.9 billion of food stamp benefits. While the House had already recessed for August, Speaker Pelosi announced Thursday that the House will return next week to take up the measure on Tuesday and will then return to recess until the first week of September.

The bill contains a series of important international tax law changes including:

1) Establishing a “matching rule” to prevent taxpayers from using tax structures to split foreign tax credits from their associated foreign income;

2) Denying of foreign tax credits with respect to foreign income not subject to U.S. taxation by reason of covered asset acquisitions;

3) Limiting the use of Section 956 for foreign tax credit planning;

4) Repealing the “80/20” rules;

5) Repealing the advance earned income tax credit.

More Information

If you have any questions regarding any of these issues, please contact:

Matt Jessee, Policy Advisor
(202) 508-6341

Dave Russell, Senior Policy Advisor
(202) 508-6353