For years, Congress engaged in a Christmas season ritual of showering special interests with tens of billions of dollars of tax breaks – everything from renewable energy and railroad track maintenance credits to loopholes for horse breeders, film producers, and even Puerto Rican rum manufacturers.
Because none of the more than 50 measures were part of the permanent federal tax code, they had to be renewed every year or two or else they would disappear. For that reason, they were called “tax extenders.” These provisions ranged in quality from the very serious – like the Earned Income Tax Credit and Child Tax Credit -- to the frivolous, like tax breaks for NASCAR track owners.
Last December, lawmakers engaged in what proved to be a final orgy of year-end tax policy gift-giving, when they transformed 21 of the “extenders” into permanent provisions while giving the others another year or two of life.
Among those gaining permanent status were the R&D tax credit for small businesses, at the cost of $8 billion a year, and a highly generous business investment write-off provision worth roughly $22 billion annually, according to government estimates.
But the holiday tax cheer abruptly came to an end this month, and the 36 remaining extenders – valued at $17.7 billion annually -- have been left to expire by the end of the year. Although these measures have enjoyed bipartisan support in the past, that all changed in the wake of the Republicans’ historic election victory Nov. 8.
A massive $1.1 trillion continuing resolution to keep the government operating through April 28 appeared to be the only possible vehicle for reauthorizing the three-dozen remaining tax extenders.
However, Republican President-elect Donald Trump and Senate and House GOP leaders have vowed to push through major tax cuts and reforms next year, and reauthorizing dozens of special interest tax loopholes appeared counter-productive and a waste of time.
House Speaker Paul Ryan (R-WI), and Ways and Means Committee Chair Kevin Brady (R-TX) had signaled for months that more than a decade of catering to a select group of special interests had come to an end as Congress looked towards more fundamental tax reform.
“Congress made a large package of these provisions permanent last year, negating the need to relook at them every year,” said AshLee Strong, Ryan’s spokesperson, in an email Thursday. “Any provisions not made permanent will be a discussion for comprehensive tax reform.”
Emily Schillinger, Brady’s spokesperson, added that “Chairman Brady has made it clear that this year is not the time to consider additional extenders and that instead, we must move forward with pro-growth tax reform.”
One thing that these measures all have in common is that they aren’t paid for. Despite GOP and Democratic hand-wringing about rising deficits and government waste, tens of billions of dollars of foregone federal revenues are added to the national debt every year because of these tax breaks.
Last year’s massive tax break giveaway legislation ironically was called the Protecting Americans from Tax Hikes (PATH) Act. The Joint Committee on Taxation (JCT) has estimated that the PATH Act – with few offsets -- would lose approximately $622 billion over the next 10 years.
Robert L. Bixby, executive director of the Concord Coalition, an anti-deficit group, said Congress was long overdue for jettisoning most of those provisions and reconsidering their value to the economy.
“These are just things that complicate the tax code, drain revenues, and favor individual activities or industries,” Bixby said in an interview. “So maybe what Congress did was a blunt way of going about it, but it helps to simplify the tax code. And it’s also good for the budget.”
Scott Hodge, president of the non-partisan Tax Foundation, said that only “cats and dogs” tax breaks and credits remained after Congress’s action a year ago and that few lawmakers had any appetite for defending them again.
“I don’t think that the Senate wanted to take it up, and certainly the Ways and Means Committee didn’t want to take it up,” he said in an interview. “And many of the specific ‘cats and dogs’ issues that were left hanging I think had more Democratic support than Republican. I don’t think either the House or Senate wanted to take it up. They just preferred to let them die.”
According to a Tax Foundation analysis, the remaining 36 tax extenders fall into three broad categories: tax incentives for renewable energy, tax breaks for homeowners, and miscellaneous provisions for businesses. “None of these provisions are particularly large or consequential; most are aimed at narrow sectors of the U.S. economy,” according to the analysis by Scott Greenberg.
Here is a brief summary of the tax extenders about to expire:
- Renewable Energy Incentives. There are 16 of these tax credits that cover electric vehicles, biodiesel fuels, residential energy equipment and other activities. Taken together, these measures cost the government at least $7.4 billion in 2016.
- Provisions for homeowners. One exempts some homeowners from being taxed on the amount they receive in mortgage forgiveness. The other permits homeowners to count mortgage insurance premiums towards their mortgage interest deductions. These two alone will cost $7.5 billion this year.
- Miscellaneous Provisions. The remaining 18 tax provisions are a “grab bag of incentives” for different economic interests and include some of the most specious write-offs. Those include the tax break for rum producers and favorable business depreciation schedules. In aggregate, these provisions will reduce federal revenue by at least $2.8 billion this year.
|Tax Provisions Recently Extended to December 31, 2016
|Cost of extending provision to 2016 (millions of dollars, over 2016-2025)
|Credit for certain nonbusiness energy property
|Credit for qualified fuel cell motor vehicles
|Credit for alternative fuel vehicle refueling property
|Credit for two-wheeled plug-in electric vehicles
|Second generation biofuel producer credit
|Incentives for biodiesel and renewable diesel:
a. Income tax credits for biodiesel fuel, biodiesel used to produce a qualified mixture, and small agri-biodiesel producers
b. Income tax credits for renewable diesel fuel and diesel used to produce a qualified mixture
c. Excise tax credits and outlay payments for biodiesel fuel mixtures
d. Excise tax credits and outlay payments for renewable diesel fuel mixtures
|Special depreciation allowance for second generation biofuel plant property
|Energy efficient commercial buildings deduction
|Credit for construction of new energy efficient homes
|Beginning-of-construction date for non-wind renewable power facilities eligible to claim the electricity production credit or investment credit in lieu of the production credit
|Incentives for alternative fuel and alternative fuel mixtures:
a. Excise tax credits and outlay payments for alternative fuel
b. Excise tax credits for alternative fuel mixtures
|Discharge of indebtedness on principal residence excluded from gross income of individuals
|Premiums for mortgage insurance deductible as interest that is qualified residence interest
|Credit for production of Indian coal
|Indian employment tax credit
|Railroad track maintenance credit
|Mine rescue team training credit
|Qualified zone academy bonds: allocation of bond limitation
|Three-year depreciation for race horses two years old or younger
|Seven-year recovery period for motorsports entertainment complexes
|Accelerated depreciation for business property on an Indian reservation
|Election to expense advanced mine safety equipment
|Special expensing rules for certain film, television, and live theatrical productions
|Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico
|Deduction for qualified tuition and related expenses
|Special rule for sales or dispositions to implement Federal Energy Regulatory Commission ("FERC") or State electric restructuring policy
|Empowerment zone tax incentives
a. Designation of an empowerment zone and of additional empowerment zones
b. Empowerment zone tax-exempt bonds
c. Empowerment zone employment credit
d. Increased expensing under sec. 179
e. Nonrecognition of gain on rollover of empowerment zone investments
|Temporary increase in limit on cover over of rum excise tax revenues (from $10.50 to $13.25 per proof gallon) to Puerto Rico and the Virgin Islands
|American Samoa economic development credit
|Note: This list of provisions is drawn from List of Expiring Federal Tax Provisions, 2016-2025, Joint Committee on Taxation. Revenue estimates are drawn from Estimated Budget Effects of Division Q of Amendment #2 to the Senate Amendment to H.R. 2029, Joint Committee on Taxation.