Every year or two Congress acts to extend dozens of temporary tax cuts known as “extenders” that have expired or are scheduled to expire.  On April 3, the Senate Finance Committee passed by a voice vote a retroactive 2-year package of tax extenders for 2014 and 2015 that expired at the beginning of this year.  Business and energy tax breaks comprise approximately 90 percent of the tax extenders with the remaining going to individuals.  These tax cuts are routinely extended without scrutinizing their merit.  Congress has no appetite for offsetting the approximately $85 billion cost of renewing these tax cuts by increasing other revenues or cutting spending.  In contrast, Republicans are currently demanding that extending unemployment insurance be paid for by service cuts.
The largest individual tax break allows taxpayers to deduct property and income taxes paid to state and local governments from their federal income tax.   Other individual tax breaks include mortgage debt forgiveness, deductions for tuition and fees for higher education, out-of-pocket expenses for teachers for classroom materials, and transit and parking deductions for commuters.

Large corporations are the biggest beneficiaries of the tax expenditures.  The most expensive, costing $281 billion over 10 years is bonus (or ‘accelerated’) depreciation, allowing businesses to write off the cost of investments in new equipment at a faster rate than under normal tax rules.   Proponents of business tax breaks argue that they help companies create more jobs and are good for the economy.  However, the non-partisan Congressional Research Service in a recent report concludes that “accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”  The second most expensive break is the research and experimentation tax credit with a 10-year price tag of $66 billion.  Its intent is to encourage research and development.  This incentive is questionable when the credit is claimed retroactively, and the lack of transparency allows some activities to qualify that likely would be found unacceptable under scrutiny.

Particularly egregious to many advocates is the corporate tax loophole that results in multinational corporations avoiding U.S. taxation.  The “Active Financing Exemption” (AFE), is also known as the GE loophole because GE uses it extensively.  It allows a company to shift certain profits offshore, thus delaying payment of U.S. taxes indefinitely.  The 10-year loss to Treasury of the AFE is approximately $62 billion.

A new study from Americans for Tax Fairness documents the extensive lobbying done by companies and trade associations in support of business tax extenders.  From January 2011 to September 2013 1,359 lobbyists (more than 1 in 10 registered lobbyists in Washington in 2013) representing 373 companies lobbied on tax extenders.  GE alone had 48 lobbyists working to preserve the AFE and other tax extenders.  The end result is that from 2008-2012 GE, which had $27.5 billion in profits, received $3.1 billion in federal tax refunds for an effective tax rate of minus 11.1 percent.

Many of the business and energy tax breaks also enjoy bi-partisan or regional support in Congress and are difficult to end.  Citizens for Tax Justice and many advocates contend that some of the tax extenders should be allowed to expire.  Furthermore, they are calling for Congress to offset the cost of the remaining tax extenders, noting that it is unconscionable to demand offsets for extending unemployment insurance for jobseekers while allowing often questionable unpaid for tax breaks for profitable corporations.    See the Citizens for Tax Justice report for more information on tax extenders.

New Senate Finance Committee Chairman Ron Wyden (D-OR) agrees that tax extenders should be scrutinized and those deemed beneficial should be made permanent.  He decried the practice of temporary extensions, asserting during the Finance Committee markup of the bill last week, “This will be the last tax extenders bill the Committee takes up as long as I’m chairman.”

House Ways and Means Committee Chairman Dave Camp (R-MI) had held out hope of dealing with tax extenders in the context of overall tax reform.  His retirement at the end of the year and the difficulty of passing comprehensive tax reform in the current contentious political environment has forced him to reconsider.   On April 8 he held a hearing on a small number of selected business tax extenders that he wants to make permanent and suggested multiple markups on individual extenders.  While Chairmen Wyden and Camp agree on ending the temporary extensions they do not agree on which tax extenders are worthy of being made permanent.  An earlier draft tax reform plan developed by Chairman Camp ends some tax breaks supported by Chairman Wyden and extends others he opposes.

It is unclear when the full Senate will consider the tax extenders package.  There is not a sense of urgency to pass the tax extenders as most would be claimed when filers prepare taxes early in 2015 for the current tax year.  Early passage does give businesses and individuals more certainty going forward.

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