Congress returns this week, and the major tax policy objective for the remainder of the year is to deal with the so-called extenders. These temporary, expired tax provisions have traditionally sailed through Congress (albeit on a delayed and dilatory schedule) for years, with little or no debate about the justification behind each provision. That’s unfortunate because extenders are expensive -- renewing those that have expired will cost $46.6 billion, with over 60 percent of that cost represented by four provisions that are either poorly designed or regressive.
Temporary tax policy is generally bad, but temporary policy that is designed to encourage long-term investment decisions is even worse. That’s the main problem with the research credit, by far the most popular extender (and also the most expensive, as the last extension cost more than $14.8 billion over two years). A white paper by Joshua Smith of the Economic Policy Institute put it best when pointing out that the research credit rewards taxpayers for activities they would have preferred anyway. It isn’t clear that the research credit provides incentives for companies at any level, both because of the complicated way in which it is calculated and the fact that it frequently expires and has to be retroactively reinstated. How can a company decide to undertake new research because of the credit if it isn’t sure when the credit will be available? Even if everyone is in agreement that Congress will never let the credit expire permanently, there are serious financial reporting consequences for firms whenever it isn’t renewed on time.
At least the research credit has something of a laudable policy goal, because the active financing exception, which cost $11.2 billion to renew last time, has none, according to Smith. He says the active financing exception is simply a corporate tax giveaway, passed because U.S. multinationals argued that it would make them more competitive with companies based in lower-tax jurisdictions. But what the exception does is confusing and so narrowly targeted that it can’t be all that helpful in making most U.S. companies more competitive. The exception allows companies to defer taxes on specific financial activities, and while it is a top lobbying priority for some of the biggest U.S. companies, it probably has the distinction of being the worst extender of any of the high-cost provisions.
Many people might think that the renewable electricity production tax credit has a strong policy rationale. More commonly referred to as the wind turbine credit, this provision cost $12 billion when the American Taxpayer Relief Act extended it for two years. The wind credit was in serious jeopardy of being jettisoned until it was put back into new Senate Finance Committee Chair Ron Wyden’s extenders package. Former Finance Chair Max Baucus would have replaced it (along with many other targeted energy tax provisions) with a broader credit for clean electricity, which wouldn’t have given the wind energy industry the subsidies it needed to remain profitable. And that’s the main problem with this expensive provision. Like all targeted energy tax provisions, it favors one activity over another, with no regard for either efficiency or green benefits. Instead of favoring wind production (or hybrids or whatever), Congress should simply be encouraging less emissions, something that would be done more efficiently by a broader provision along the lines of Baucus’s provisions.
The deduction for state and local sales taxes ($5.5 billion cost) was created to level the playing field between taxpayers in states with an income tax and those in states that rely mostly on sales taxes. The deduction for state and local income taxes is part of the permanent tax code (although House Ways and Means Committee Chair Dave Camp has proposed eliminating it), but the state and local sales tax deduction is an extender. Its opponents argue that it is regressive and subsidizes state spending, neither of which are laudable policy objectives.
There was a brief period when it seemed that Congress would take a more thorough approach to renewing extenders. Baucus and Camp wanted to review each extender to make sure it was accomplishing its intended purpose. But Baucus’s departure and the failure of Camp’s comprehensive reform draft to generate any legislative momentum have combined to allow Congress to return to its usual approach to temporary tax policy. Although it isn’t clear when an extenders package will move through Congress, or whether it will be paid for, it’s very likely that almost all of the 50-plus expired provisions will get at least one more free pass back into law.