Taxes
As more lawmakers balk at making Bush’s tax cuts permanent ...
Taxwriters are considering an array of offsetting tax hikes to build support for cuts while keeping the deficit from rising higher.
There’s a good chance Congress will modify the phone tax to explicitly cover cents-per-minute and unlimited-calling plans. The change would reverse a series of court cases lost by the IRS.
Odds are firms will lose the first-year write-off for heavy SUVs. It’ll be cut from $25,000 to about $3,000. Pickup trucks would be exempt.
Also likely: A ceiling on discounts for estate tax valuation for family partnerships, such as for lack of control or of marketability. A prohibition on the use of pretax dollars from flexible spending plans to buy non-Rx drugs. And penalties for more types of tax shelters.

Facing bleaker prospects: Barring write-offs of interest that’s paid on new home equity loans. Capping tax-free rentals of homes for 14 days or less at $2,000. Taxing unearned income of kids under 18 at 35% instead of at the parents’ marginal tax rate. Slashing write-offs for the personal use of company airplanes and vacation facilities.

Some other major changes will be tied to Social Security reform.
They’re too controversial to get through Congress on their own. One proposal calls for repealing the FICA exemption for salary reductions in flexible spending accounts, cafeteria plans, and parking subsidies. Another would levy self-employment tax on more earnings of partners and shareholders of S corporations and limited liability firms. A third would make all state and local government workers pay the Medicare tax.

Trade
Finally, China seems to be taking counterfeiting seriously. U.S. business leaders are encouraged that a high-level figure in the Chinese government, Wu Yi, is the point person in U.S.-China talks to curb the widespread practice. Most counterfeit goods come from China.
But Beijing’s influence is limited. It can certainly do more ... by imposing hefty fines and stiff jail terms on pirates, for example. Stopping them cold, however, is another story. Many are in provinces far from Beijing’s control, aided and abetted by corrupt local officials who see no economic benefit in ending a lucrative trade in bogus goods.
Breaking counterfeiters’ backs will take decades. They won’t quit until Chinese business leaders and politicians at all levels understand that undermining intellectual property rights discourages innovation. Without homegrown R&D, China’s economy will suffer in the long run. That’s a tough sell, though, with China’s GDP growth exceeding 9% a year.

U.S. firms are stepping up antipiracy efforts on several fronts:
On Capitol Hill, where business lobbyists are pushing legislation to strengthen existing laws against traffickers in counterfeit goods. They also back H.R. 32, a bill to give the U.S. trade representative more clout to protect intellectual property rights in trade negotiations.
In PR campaigns aimed at consumers ... highlighting frequent use of child labor in factories that churn out fake purses, jeans, and so on.
And in the global arena, where they’ll turn up the heat on China by pressing the U.S. to petition for help from the World Trade Org.

Don’t expect much of a dent in the U.S. trade deficit with China anytime soon, despite a coming decline in the dollar vs. China’s yuan.
Beijing won’t let the yuan rise more than 10% against the buck, a move that we expect China to make during the second half of the year. The shift will be barely perceptible, disappointing U.S. businesses battling the effects of cheap Chinese imports on their own sales.

Energy
China’s and India’s thirst for oil could give the U.S. fits in coming years. As they move aggressively to make large deals with Venezuela, Russia, Iran, and others, American firms and consumers will surely see long-term costs rise as oil and gas become scarcer.
Two chilling prospects: An oil-buying spree by China in Canada, which supplies about 17% of U.S. oil imports, can’t be ruled out. And China is mulling the purchase of Citgo, a Venezuelan-owned refiner based in Texas. Citgo accounts for 15% of U.S. refining capacity.
If push came to shove, Uncle Sam would step in, leaning on Canada and other suppliers that are also political allies to fill U.S. demand. But in a free marketplace, the government’s influence would be limited.

Electricity theft is a growing problem for many utilities, and thieves aren’t just pot growers trying to hide telltale energy use. With energy costs up, utilities are finding more and more contractors, building owners, and others willing to bypass or sabotage electric meters to underreport power usage. That costs suppliers up to $5 billion a year and may show up in higher bills for honest businesses and homeowners.
New detection methods will thwart freeloaders. Software tools are helping utilities match power use with billing in suspected areas. Utilities will also send out more sleuths to look for altered meters.
Violators can expect to be prosecuted. Progress Energy Florida nailed about 4400 pilferers last year, recovering nearly $3 million.

© 2005 The Kiplinger Washington Editors, Inc.