A raft of ostensibly temporary tax breaks benefiting everything from racehorse owners to NASCAR tracks appears likely to be renewed for tax year 2014, after a bill that would have made some of the measures permanent died under a presidential veto threat.
The tax breaks in question, collectively known as tax extenders, mostly expired at the end of December 2013, and though many are viewed as “must-pass” legislation, Congress has paid only on-again off-again attention to them since the summer.
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The tax extenders benefit any number of constituencies. Lower-income workers benefit from the Earned Income Tax Credit (EITC), families benefit from the Child Tax Credit, and businesses benefit from a large array of breaks that help every kind of company, from mom-and-pop operations to the Fortune 500.
In general, the breadth of the collection of 70-some provisions is such that it contains something for everyone to love and something for everyone to hate, which has allowed it to move through Congress every few years without too much drama.
That’s why the White House objected last week when word leaked that Senate Majority Leader Harry Reid (D-NV) was making a deal with House Speaker John Boehner (R-OH) to make permanent several of the breaks most favorable to business, such as a research and experimentation tax credit, while leaving those favored by Democrats, such as the EITC and the Child Tax Credit, subject to periodic renewal votes.
Democrats were convinced that if they made the Republicans’ favored tax breaks permanent they would have to pay some sort of legislative ransom every time the breaks they preferred came up for renewal.
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Whether it was a good deal or a bad one, the Reid-Boehner discussions appear to have been shut down, and the result looks to be that the whole package of extenders will be renewed for a year. On Monday afternoon, House Ways and Means Committee Chairman Dave Camp introduced the legislative vehicle to make that happen: the “Tax Increase Prevention Act of 2014.”
To be clear, this doesn’t mean that the tax breaks will all be extended through 2015. It just means that, for the most part, the breaks that expired in December of last year will be applied to income earned in 2014. As soon as 2015 begins, businesses and individuals that have come to expect the various benefits the tax extenders deliver will be left wondering whether they will still apply to the income they earn in the new tax year.
Tax experts were, to say the least, unimpressed:
This is a terrible way to make tax policy. The Politics and Policy of Tax Extenders http://t.co/68Icsoelw0 via @TaxPolicyCenter— Len Burman (@lenburman) December 1, 2014
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In a blog post, Burman elaborated: “In theory, allowing tax provisions to expire periodically could precipitate a careful reexamination of the effectiveness of each program in light of our fiscal situation and priorities. In practice, the expiration of popular temporary provisions such as the R&E credit creates a vehicle for all sorts of budget-busting mischief.”
As Burman and others have pointed out, the practice of renewing tax breaks at the last minute on an annual or biannual basis makes efficient tax planning by businesses and individuals practically impossible.
Whether one agrees that the R&E credit spurs innovation or not, companies can’t make decisions about long-term research projects based on tax laws that may or may not be around in a couple of years. And claiming that the R&E credit spurred investment and innovation in 2014 when its renewal still isn’t assured even in December makes no sense at all.
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At the individual level, while the EITC and child credit were not due to expire until 2017, other provisions that did expire at the end of last year can hardly have encouraged the sort of behavior they are meant to incentivize in 2014 when their extension was no sure thing. Teachers who spent their own money on classroom supplies didn’t do so in September knowing that they would be able to write some of them off, because there was no guarantee they would be able to do so. People who withdrew money from retirement savings accounts in order to make charitable donations during tax year 2014, at least so far, didn’t do it with the certainty of light tax treatment of the distributions, because they had no way of knowing they would receive it.
Why it matters: If Congress acts as expected to push a long-term decision about how to deal with more than 70 different tax breaks for another year, not only will the legislation fail to create the incentives lawmakers intended, they will complicate tax planning for businesses and individuals.
To the extent that tax policy is intended to encourage or discourage certain behaviors, it is thoroughly undermined by a process in which those receiving the breaks don’t know whether they’ll get them or not until after the key decisions are made. But unless something changes, that appears to be how Congress is making tax policy for the coming year, at least.
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