Congress Is Already Making Next Year’s Tax Season More Confusing
Policy + Politics

Congress Is Already Making Next Year’s Tax Season More Confusing

And…they’re back. The temporary tax breaks known as “tax extenders” that caused so much tension on Capitol Hill in late 2014 are returning to the legislative fore tomorrow, as the Senate Finance Committee prepares to mark up a bipartisan effort to reinstate them for two years.

A quick refresher: The tax extenders are an alphabet soup of special tax provisions, mostly targeted at business, that most members of Congress seem to believe ought to be made permanent, but which never are. These include things like mortgage insurance premium deductions on individual tax returns, businesses tax breaks for research and experimentation costs, and tax credits for energy efficient construction.

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They also contain a number of highly targeted tax breaks that some find objectionable. There’s a special allowance for Puerto Rican rum, a cut tailored specifically to the owners of NASCAR tracks, and possibly the most controversial, a cut for the mostly wealthy owners of racehorses.

The extenders also cost a lot of money. They represent foregone tax revenue of more than $150 billion in Fiscal 2016 alone.

A large number of the provisions are meant to create incentives for certain desirable behavior – getting businesses to invest in research, or homeowners to pay for energy efficient upgrades. But the creation of effective incentives requires lawmakers to provide taxpayers with certainty that the tax benefits will be there when it comes time to file for them. And lawmakers haven’t been very good at that.

For example, the tax extenders that were supposed to incentivize certain behaviors in tax year 2014 were actually not in effect for the first 50 weeks of the year. When Congress finally voted to renew them on their way out the door in December of last year, Sen. Ron Wyden, the Oregon Democrat who was then the chair of the Senate Finance Committee fumed, “This tax bill doesn’t have the shelf life of a carton of eggs.”

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Wyden wasn’t wrong. The tax breaks the bill authorized promptly expired two weeks later, at the beginning of tax year 2015, meaning that whatever incentive effect they are supposed to have is being watered down by the uncertainty of their passage this year.

The bill to be considered by the Senate Finance Committee tomorrow contains 52 different provisions, 31 of which apply to business taxes, while 13 are energy-related and another eight affect individual income tax returns.

“This markup will give the Committee a timely opportunity to act on extending a number of expired provisions in the tax code that help families, individuals and small businesses,” said Sen. Orrin Hatch, the Utah Republican who took over the chairmanship of the committee when the GOP took control of the Senate in January.

“This is the first time in 20 years where a new Congress has started with extenders legislation having already expired, and given that these provisions are meant to be incentives, we need to advance a package as soon as possible,” Hatch said. “This package is a result of strong bipartisan work, and I look forward to working with the full Committee to ensure members are able to work their will and examine these provisions carefully.”

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Wyden, who remains the top Democrat on the Committee added, “The tax code should work for, not against, Americans. We need to extend these tax provisions now in order to provide greater certainty and predictability for middle class families and businesses alike.  However as we look beyond next week, it’s critical we all recognize and take action to end this stop and go approach to tax policy through extenders.” 

However, if history is any guide, this is little more than wishful thinking. Last year, the Finance Committee’s mark-up took place in April, and the extenders still languished until December.

Part of the reason is that the tax-extenders are seen as must-pass legislation, which means that they often get held up to be used as possible leverage for difficult negotiations on related legislation.

Another reason is that Republicans in the House of Representatives remain interested in breaking up the extenders package, and making some of their favored tax breaks permanent. Democrats have fought this approach in the past, and it’s unclear the there is much reason to expect it to be successful this time around, either. However, it’s another argument that could leave the package in limbo until the last minute.