If you go by what Yogi Berra says, tax policy and baseball have a lot in common. Just as we head toward the end of the regular season of baseball and hope we make it to play-offs, Congress is doing the same. Having returned from the August recess, they are looking ahead at what they need to do to finish strong. As for déjà vu, the atmosphere surrounding expired tax provisions is markedly similar to what it was last year around this time. Will the result be different this year? Maybe. Let’s take a look at the issues and what’s happened so far.
Discussions of tax reform have been continuing, but specifics of a comprehensive tax reform package remain elusive as Congress looks at the issues, including how to balance potential winners and losers. This lack of progress, in turn, leads to the need (once again) to address the host of tax provisions that expired at the end of last year, at least on a temporary basis. The House, as they did in the last Congress, is once again examining expired tax provisions in groups and voting to make some permanent. Meanwhile, on the other side of the Hill, similar to what they did last year, the Finance Committee has approved (on a bi-partisan basis) two-year extensions (for 2014 and 2015) of all the provisions that expired in 2014 (and one that expired in 2013). On the policy side, there is general agreement on the need for permanency for some provisions, such as the widely-supported R&D credit. For other provisions, such as renewable energy credits, there is strong disagreement, often along party lines. On the revenue side, while Congress has not paid for temporary extensions for some time, there is disagreement as to the extent expansions of current policy or permanent provisions should be paid for. The House has not included revenue offsets for any of the provisions they would make permanent; whereas the Finance Committee did include some revenue offsets for expansions of current expired provisions.
Despite these differences in approaches, the possibility of compromise that could result in some permanent provisions remains in the air, even as Congress has a variety of other things to deal with, including continuing funding for the federal government and the debt limit. These are very similar circumstances to last year, when discussions of a package with some permanent provisions led to a short-lived not quite “deal” and, ultimately, just a “one-year” extension, through 2014, that expired barely two weeks after it became law in December.
Is there anything new now that could tip the balance in favor of a different result this year? Possibly. The Republican majority in both Houses of Congress may make developing a proposal easier; however Senate rules generally requiring 60 votes to move bills to the floor and White House veto power (not to mention sometimes difficult politics among the House majority) means that any legislation will need Democratic support. Dynamic scoring may provide some relief on the question of how far Congress and the White House are willing to add to the deficit in order to maintain “current policy,” i.e., to extend expired provisions (even potentially permanently), without providing revenue offsets. The House has embraced dynamic scoring as part of its official estimates, and the Senate will consider them as advisory. The Joint Committee on Taxation, the official score keeper for the Congress on tax legislation, estimates that dynamic scoring would reduce the $96 billion cost of the Finance Committee two-year extension package by $10 billion. And, of course, Congress is even more fed up with doing this again and again and again, and would like to add more certainty to the tax Code.
Add to this the desire for long-term highway funding. There is a fair amount of consensus regarding the potential use of international tax reform (including deemed repatriation) to provide funding for a six-year infrastructure bill. The concept, at least, has support among key players, including Ways and Means Chairman Paul Ryan and the White House, and was included in the Finance Committee Tax Reform Working Group reports. A combination of international reform, including possibly an “innovation box,” plus some permanent extenders could be a down payment on tax reform.
There remain, however, considerable political and policy issues to be resolved and it is too early to tell how things will end up. For example, although a core driver for action now is the desire for longer-term highway funding, the Senate has already acted, and passed a three-year highway bill; it’s the House’s turn at bat on this now. With comprehensive tax reform the ultimate goal, many will be wary of taking action this year if it could impair the prospects for comprehensive tax reform in the future. If revenue raisers are needed, for example to finance an “innovation box,” the prospect of picking winners and losers again arises. And, politically, it’s not clear whether a package that doesn’t address rates generally can be accomplished.
Déjà vu, all over again.
As we wait for further developments, let’s look at the scorecard of what’s been done on extenders so far:
60 provisions expired at the end of 2014:
- Here’s the list published by the Joint Committee on Taxation.
8 provisions would be permanently extended (and in some cases modified) in bills passed by the House so far in 2015:
- Section 179 small business expensing, America’s Small Business Tax Relief Act (HR 636)
- Reduced recognition period for built-in gains of S corporations (§1374(d)), America’s Small Business Tax Relief Act (HR 636)
- Basis adjustment of stock of S corporations making charitable contributions of property (§1367), America’s Small Business Tax Relief Act (HR 636)
- Research and development credit (§41), American Research and Competiveness Act (HR 880)
- State and local sales tax deduction (§164(b)), State and Local Sales Tax Deduction Fairness Act (HR 622)
- Tax-free distributions from IRAs for charitable purposes (§408), America Gives More Act (HR 644) (as passed by the House on Feb. 12, 2015)*
- Charitable contributions of food inventory (§170(e)(3)), America Gives More Act (HR 644) (as passed by the House on Feb. 12, 2015)*
- Deduction for charitable contributions of conservation easements (§170(b)), America Gives More Act (HR 644) (as passed by the House on Feb, 12, 2015)*
5 more provisions would be made permanent under bills approved by the House Ways and Means Committee on September 17, 2015:
- Bonus depreciation (§168(k)), A Bill to Amend the Internal Revenue Code of 1986 to Modify and Make Permanent Bonus Depreciation (HR 2510)
- CFC look-through (§954), Permanent CFC Look-Through Act of 2015 (HR 1430)
- CFC active financing (§954), A Bill To Amend the Internal Revenue Code of 1986 to Permanently Extend Subpart F Exemption for Active Financing Income (HR 961)
- 15-year cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (§168(e)), Restaurant and Retail Jobs and Growth Act (HR 765)
- Deduction for expenses of school teachers (§62), Educator Tax Relief Act (HR 2940)
All 60 provisions would be extended for two years under The Tax Relief Extension Act, S 1946, as approved by the Finance Committee.
To say the least, it will be an interesting fall. It’s too early to tell what the result will be; but we know “it ain’t over ‘til it’s over”. For those who want tax reform or permanent extenders, put on your rally caps and wear your favorite (unwashed) socks. Tax legislation, like baseball, may hold to superstition, and can easily go into extra innings.
* HR 644 subsequently became the vehicle for trade legislation, the “Trade Facilitation and Trade Enforcement Act.”