The Senate Finance Committee held a hearing Tuesday to examine the growing number of tax extenders in the Tax Code that need to be renewed every year or two, and how there could be greater predictability with overall tax reform.
Senate Finance Committee Chairman Max Baucus, D-Mont., outlined the problem at the start of the hearing. “Benjamin Franklin once said, ‘In this world, nothing can be said to be certain, except death and taxes.’ But today not even our taxes are certain. There are currently 132 expiring provisions in the code. That number has more than tripled since 1998. These policies, commonly-known as ‘tax extenders,’ expire every year or every two years. The lack of certainty about these tax incentives is bad for American families, it’s bad for businesses looking to create jobs and it’s bad for our economy. It leaves businesses unable to plan ahead and invest, because year-to-year incentives are ineffective.”
He noted that various industries depend on specific tax credits, such as for wind energy and biodiesel fuel. In 2010, when the tax credit for biodiesel fuel lapsed for a year, the biodiesel industry was devastated, leading to the loss of more than 9,000 jobs and the closing of 80 facilities.
“It is difficult to find many people who will argue that Congress can, or should, continue dealing with tax extenders in a business as usual manner,” said Sen. Orrin Hatch, R-Utah. “The explosion of temporary tax provisions in recent years is a very notable and problematic trend. The number of temporary tax provisions has grown from 42 in 1998 to 154 in 2011. Even those tax extenders that are sound tax policy lose much of their power due to their temporary character. For example, Congress has recently allowed important temporary tax incentives such as the research and development credit to expire. Then, after business decisions have already been made, Congress has retroactively extended the tax provisions. If a provision is worthy of being in the tax code, then it generally should be made permanent. For instance, the R&D credit is an extremely worthy provision, and it should be enhanced and made permanent, as Chairman Baucus and I proposed in a bill that we introduced in September 2011.”
He noted that certainty in the Tax Code is a very Important factor in allowing businesses to plan their affairs, make investments and create jobs.
Sen. Chuck Grassley, R-Iowa, noted that there are nearly 60 tax provisions that expired at the end of 2011 and even more that expire at the end of 2012. However, he noted that not all tax extenders were needed. “The oil and gas industries have received massive, permanent tax breaks for over a hundred years,” said Grassley. “In contrast, tax incentives for alternative energy have existed only for a few decades and have always been temporary. These incentives first appeared in the 1970s, in direct response to the oil crisis and they help to incentivize renewable resources. Yet, discussions on incentives for the oil industry and for alternative energy often fail to consider that a key reason to support renewable energy sources should be energy independence.”
Grassley said that in the short term, Congress should extend tax incentives for alternative energy sources, such as biodiesel and wind.
The lawmakers also heard from a panel, including Rosanne Altshuler, an economics professor who chairs the economics department at Rutgers University. She argued that many tax extender provisions were originally designed with a limited shelf life and should only be extended in the context of overall tax reform.
“The vast majority of extenders we are considering today were originally enacted to provide specifically limited incentives for certain activities or investments,” she said. “Unlike other tax provisions that provide targeted tax benefits, however, extenders have a limited shelf life. Much like the items in the meat section of the grocery store, our Tax Code is littered with expiration dates. As we will hear today, the past-due inventory is quite large. I believe these extenders must be considered within the context of fundamental tax reform.”
Carolina Harris, chief tax counsel at the U.S. Chamber of Commerce, noted that the Chamber supports comprehensive tax reform but believes that fundamental tax reform is still a long way down the road. “Thus, in the interim, we believe this committee and Congress must take action on the annual extender provisions now,” she added.
Jason Fichter, a senior research fellow at George Mason University’s Mercatus Center, argued for reducing the statutory corporate tax rate. “To increase employment and expand their economies, most developed countries are both reducing their corporate tax rates and restructuring their corporate tax systems to make them simpler,” he said. “The United States appears to be taking the opposite approach. The very fact that we are here to discuss the dozens of tax provisions that expired last year alone is evidence of the Tax Code’s complex and temporary nature—two faults that increase both uncertainty and costs for American businesses. This drives competitive, profit-seeking corporations to minimize their tax exposure and defer income overseas to lower tax countries. Unless the United States reforms its corporate tax system, the country will fall further behind in global competitiveness.”
Calvin Johnson, a law professor at the University of Texas School of Law, said that some tax extender provisions should stay expired. “Congress needs to exercise budget responsibility and give strict scrutiny to the items of this extender list,” he said in his prepared testimony. “I have gone through the list and conclude that 13 of the provisions, worth about $18 billion over ten years, need to be left expired. They expired at the end of 2011 and good riddance. Rejoice in the news that they are dead.”
Among those provisions he feels should stay expired are exception under subpart F for active financing income; 15- year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements; and the deduction for state and local general sales taxes. “Do not resurrect,” he said. “Enjoy its death.”
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