Congress Considers Extending Expired Tax Breaks

The House Ways and Means Select Revenue Measures Subcommittee held a hearing Friday on various expiring and already-expired tax breaks.

During the hearing, lawmakers made the case for extending tax credits, particularly the production tax credit for wind energy, which is still needed to make the industry competitive with other sources of energy. Proponents of tax credits for other forms of energy emphasized the need to continue them for all forms of energy and not just for a single source.

The hearing came a few weeks after a similar hearing at which a succession of lawmakers presented their views on which tax provisions were among their priorities. Friday’s hearing focused more on the principles of good tax policy, and the specific metrics against which Congress should test the merits of particular provisions.

“The days of simply rubber-stamping the extenders package are behind us,” said subcommittee chairman Pat Tiberi, R-Ohio.

Donald B. Marron, director of the Urban-Brookings Tax Policy Center, discussed the so-called “fiscal cliff” facing the country with the expiration of the traditional tax extenders along with the Bush tax cuts at the end of the year. He noted that expiring and expired tax provisions make up most of the direct deficit reduction, including $221 billion for the income, estate, and gift tax cuts originally set in motion in 2001 and 2003, plus the expired “patch” to the Alternative Minimum Tax; $95 billion for the 2 percentage point cut in employee payroll taxes; and $65 billion for dozens of other temporary tax provisions.

“Like the AMT patch, most of these other temporary provisions expired at the end of 2011, but much of their revenue impact won’t occur until fiscal 2013,” he noted. “In deciding the fate of these ‘tax expirers,’ Congress should consider the larger problems facing our tax system. That system is needlessly complex, economically harmful, and widely perceived as unfair. Because of a plethora of temporary tax cuts, it’s increasingly unpredictable. And it fails at its most basic task, raising enough money to pay our government’s bills.”

Alex Brill, a research fellow at the American Enterprise Institute, recommended that each tax extender provision should be considered individually on its own merits and against clearly defined objectives. “No tax policy should be intentionally temporary,” he said. “Any tax extenders deemed appropriate should be made permanent and the rest should be allowed to expire. A successful evaluation of tax extenders—keeping the good and eliminating the bad—may set a useful precedent for the bigger challenges of tackling other tax expenditures.”

James R. White, director of strategic issues at the Government Accountability Office, presented a report from the GAO setting out various factors for evaluating expiring tax provisions, such as for higher education, domestic ethanol production, the research tax credit and the New Markets Tax Credit. Those factors should include the revenue effects; measurement challenges such as gathering the necessary data to assess how a particular tax expenditure is used; the relationship with other policy tools, such as spending, grants, loans and regulations; and various criteria for good tax policy.

“Three long-standing criteria typically used to evaluate tax policy—equity; economic efficiency; and a combination of simplicity, transparency, and administrability—can be applied to the expiring tax expenditures,” said the GAO report. “Because the criteria may sometimes conflict with one another, there are usually trade-offs to consider when evaluating particular tax expenditures.”

Massachusetts Undersecretary for Housing and Community Development Aaron Gornstein urged the lawmakers to extend the New Markets Tax Credit, Build America Bonds, Empowerment Zones and Low Income Housing Tax Credits, arguing they have created hundreds of thousands of jobs and housing units throughout the country. “As we continue to climb out of the Great Recession, now is the time to extend these programs and the work they support,” he said. “We cannot afford to lose these instruments of economic growth, and the Congress should take action to extend these programs as soon as possible. On the longer horizon, as this committee undertakes the important task of reforming our tax code, it is important to understand the tradeoffs that are involved in eliminating these provisions, as there often does not exist a comparable way to enhance community development through other sectors of the government.”

Rep. Mike Thompson, D-Calif., noted that he had co-sponsored a bill to make permanent the enhanced Conservation Easement incentive to preserve open spaces and family farms, along with other jobs-related tax incentives, such as Build America Bonds and the 48C advance manufacturing investment tax credit. “When so much of the rest of Congress is gridlocked, this committee can act quickly and in a bipartisan way to extend expired provisions that will help kick-start job creation and get this economy going again,” he said.