Congress recessed in December without voting to extend the 55 "tax extenders” – temporary tax breaks (actually, tax subsidies) that range from a tax credit on corporate research to a tax break for workers who use mass transit.
When the extenders expire every year or two, Congress usually renews them retroactively – as a bundle – without offsetting the cost. Sen. Ron Wyden (D) of Oregon and chairman of the Senate Finance Committee wants to do just that. But what would happen if Congress didn't renew them until it undertook serious tax reform and examined carefully how much each of these extenders really benefits the nation?
Lobbyists would howl, pointing out that extenders help underwater homeowners avoid an onerous tax when the bank forgives a portion of their mortgage and help give a break to teachers who spend their own money for classroom materials. What they don't say is that individuals only benefit from eight of the 55 extenders and receive only a small share of the tax benefits – roughly 10 percent, according to Congress's Joint Committee on Taxation.
The biggest beneficiary is business – especially big business, since the corporate extenders typically don't include the caps or limits imposed on extenders for individuals ($250 for teachers' expenses, for example). Does this form of corporate welfare really provide such a national benefit that it's worth an estimated $107.3 billion? This is the estimate of lost federal tax revenues over two years, the time needed for Congress to reform the tax code -and to get through the 2014 election.
A number of the tax breaks for businesses are special rules for capital expenditures – expenses related to capital assets such as improvements to buildings used for the business. These expenditures must be deducted over a period of years. One tax break allows leasehold, restaurant, and retail improvements to be deducted over 15 years instead of 39 years (at a loss of $650 million to the US Treasury over two years). And motor-sports race tracks have their own extender for capital improvements – seven instead of 39 years ($70 million).
Another break for capital expenditures allows annual expensing of up to $500,000 for certain capital expenditures such as equipment but not land or buildings ($12.1 billion). It's an extension for "small business expensing," although such a large allowance suggests it really helps large businesses. (How many small businesses spend that much in one year to buy rather than lease equipment?)
A popular business tax break is the research tax credit ($8.2 billion). This credit, originally created in 1981 and substantially reformed in 1986 (because of flagrant abuses), is intended to encourage businesses to engage in research and experimentation to benefit society – a lofty goal. The Obama administration proposes to make this credit permanent (over $100 billion over 10 years).
But this tax break is riddled with problems, according to a recent report by Citizens for Tax Justice (CTJ), a progressive tax watchdog based in Washington. Businesses have received credits of questionable benefit to society – $11.6 million for the development of FedEx’s internal-use software. The report points out that one major accounting firm advertises that it can help clients in the food industry receive the benefits for developing or redesigning packaging.
Even Congress must wonder how much of an incentive the extender really is for corporate research since it has let it expire 15 times and never made it permanent.
There are 25 energy-related extenders ($6.3 billion) including incentives for renewable electrical energy generated from wind turbines and for alternative and biodiesel fuels. The renewable energy credits might not be extended because of strong opposition from the well-funded oil and gas industry. (Their tax breaks, by the way, are not subject to periodic extension.)
The last time the extenders were allowed to expire was in 2011. Congress waited a whole year before voting right after New Year’s Day 2013 to renew the extenders retroactively to Jan. 1, 2012 – but only through 2013. Some members of Congress expect the extenders to be taken up in the spring. But one tax publication predicted that they wouldn’t be voted on until late in the year – a delay that would give members of Congress up for election in 2014 almost a year to exact campaign contributions from lobbyists urging support for their corporate clients’ favorite tax breaks.
Of the $107.3 billion in tax revenues that would be lost over two years, $96.2 billion is from the corporate tax extenders, according to the Joint Committee on Taxation.
Of the eight individual breaks, the exclusion for mortgage forgiveness is by far the most important. Homeowners won’t negotiate for a lower mortgage amount if it means they are going to be stuck with a tax bill they can’t pay. If this provision gets a two-year retroactive extension sometime this year, it will cost an estimated $1.25 billion in lost revenue.
The biggest break allows individuals who itemize to take either the deduction for state and local income taxes or a deduction for state and local general sales taxes ($5.3 billion). Based on a CTJ analysis using 2011 data, taxpayers with incomes over $200,000 save over a fourth of the benefit with average savings of $1,130 while taxpayers with incomes less than $60,000 receive less than a fifth of the benefit with average savings of $100. Most taxpayers who choose to deduct sales taxes are much better off after taxes – because they usually live in one of the few states without an individual income tax.
One break can’t be solved with a retroactive fix – the employer-provided mass transit and parking benefit must be implemented through payroll. This break gives transit commuters parity with taxpayers who commute by car (at a loss of $220 million). If not extended, the tax break will revert to $130 for mass transit and $250 for parking.
Besides the $250 deduction for unreimbursed classroom expenses ($400 million), the other tax breaks for individuals are: 1) tuition deduction ($1.7 billion), 2) certain tax-free distributions from IRAs to public charities ($877 million), 3) contributions of capital gain real property for conservation purposes ($132 million), and 4) a deduction for mortgage insurance ($1.3 billion). (These breaks indirectly benefit colleges and universities, charities, and insurers, too.)
Continuing to extend tax subsidies for businesses with little or no thought about whether they are serving their intended purposes makes no sense whatsoever – especially since Congress has been shredding the safety net for individuals because of its cost. It won’t break the bank to extend the most deserving of the individual tax breaks – the $250 deduction for teacher expenses and the exclusion for the discharge of mortgage indebtedness. And an act to give the same tax benefits for transit and parking makes eminent sense.
But the rest of these extenders need to be considered in the context of comprehensive tax reform – as proposed late last year by the outgoing chairman of the Senate Finance Committee, Sen. Max Baucus, who is now ambassador to China. And if our congressional leaders make it clear that tax extenders will be extended no more, we just might get there.