Inside Congress’s $42B tax-break package

Source: By Bernie Becker, The • Posted: Sunday, December 14, 2014

Congress is poised to enact a $42 billion tax bill that opponents on the left and right insist is full of corporate giveaways, and even supporters acknowledge is no way to set tax policy.

The Senate is expected to vote in the coming days to restore more than 50 tax breaks, all of which expired at the end of 2013, just through the end of this year.

House Republicans passed the measure last week, after President Obama and other Democrats torpedoed an emerging deal that would have made dozens of these incentives permanent.Tax analysts say the more prudent approach would be to sift through the list of expiring tax provisions commonly known as extenders, keep those policymakers think make sense and allow the others to stay on the trash heap.

“This on-again, off-again style of legislating on a temporary basis is a terrible way to make tax policy,” said House Ways and Means Chairman Dave Camp (R-Mich.), who was negotiating the broader tax deal with Senate Majority Leader Harry Reid (D-Nev.).

The one-year deal Congress is passing is also a break from recent history. Over the last six years, Congress has passed two-year deals – retroactively restoring the expired incentives, and then extending them for another year.

All sides agree that the short-term extensions can make life difficult for businesses and families, but there are reasons the extenders have become a package deal.

For starters, the current set-up allows Congress to gloss over the costs of the tax breaks, because the Congressional Budget Office assumes lawmakers won’t renew the preferences.

Plus, putting the tax breaks into one big pile makes it easier for lawmakers to vote for the package, with the desire to extend provisions they like outweighing the wish to kill the other tax breaks.

“There were things in there I didn’t like, but the vast majority of it was just fine,” Sen. Orrin Hatch (R-Utah), the incoming chairman of the Finance Committee, said about a two-year deal he helped write this year with the current chairman, Sen. Ron Wyden (D-Ore.).

While there are plenty of narrowly-tailored incentives that critics call corporate pork, there are also broader preferences for both businesses and working families. The preferences most derided as corporate pork are often just a small percentage of the overall cost of the tax package.

Here’s a partial list of some of the 50-plus tax breaks Congress is passing for this year, at a cost of some $42 billion:

1) Incentives for Individuals:

Teachers – High school and elementary school teachers keep a $250 deduction for books and other supplies paid for out of their own pocket. (Cost: $214 million)

Commuters – Workers who take mass transit would get to exclude $250 from their income, the same amount as the benefit for parking, under a provision backed by Sen. Chuck Schumer (D-N.Y.). (Cost: $10 million)

Distressed Homeowners – This provision, backed by liberals and lawmakers from states hit hard by foreclosures, means homeowners underwater on their mortgage don’t have to pay taxes on up to $2 million in forgiven mortgage debt. (Cost: $3.143 billion)

State and Local Sales Taxes – Taxpayers already can deduct their state and local income taxes. This deduction allows a sales tax deduction for states – like Reid’s Nevada – that don’t have an income tax. Like the mass transit break favored by Schumer, this break would have become permanent under the deal Reid and Camp were negotiating. (Cost: $3.142 billion)

Charitable contributors – Taxpayers setting aside land for conservation get a tax break, while senior citizens get to exclude from their income up to $100,000 in donations to charity given from their retirement accounts. (Combined cost: $513 million)

2) Business Incentives

Research credit – Perhaps the most popular of the extenders, and definitely the most expensive, House Republicans tried to expand and make permanent the tax break for business research this year. Under the simple extension, businesses get up to a 20 percent credit on qualified research. Critics say it subsidizes research that the private sector would have to do anyway. (Cost: $7.629 billion)

New Markets Tax Credit – Some lawmakers love this incentive, which seeks to spur private investment in economically struggling areas, and even want to expand it. Others, like Sen. Tom Coburn (R-Okla.), say many of the investments happen in areas that are not distressed. (Cost: $978 million)

Business Expensing – Two separate provisions – known as bonus depreciation and Section 179 – allow businesses to more quickly write off the cost of certain purchases for tax purposes. Both have bipartisan support, but some have argued the incentives haven’t been great at stimulating the economy. (Combined cost: $2.926 billion)

Veterans – The Work Opportunity Tax Credit gives businesses a tax break on wages paid to certain veterans, ex-felons and people on welfare and food stamps, among others. (Cost: $1.375 billion)

Offshore income – Because of two separate provisions, multinational corporations can shift income tax-free between foreign subsidiaries, and on financial services income made offshore. Not surprisingly, the business community are big fans of the two incentives, while liberals hate them. (Combined cost: $6.236 billion)

Wind energy – The so-called production tax credit gives a credit of up to 2.3 cents per kilowatt hour for wind facilities, as long as their construction started by the current deadline. The Reid-Camp deal would have phased the credit out, but on fairly generous terms for the renewable energy industry. Many Republicans and the industrialist Koch brothers believe this tax break is the worst part of the package, but it also has big-name GOP supporters like Sen. Chuck Grassley (Iowa). (Cost: $6.392 billion)

3) Narrowly Tailored Tax Breaks

Puerto Rico/Virgin Islands – Almost a century old, this provision funnels revenue from a tax on rum in the U.S. to Puerto Rico and the Virgin Islands, who then use the revenue to support their own rum industries. (Cost: $168 million)

Race tracks – This tax break allows motorsports parks a shorter depreciation schedule of seven years. The auto racing industry says it’s unfair to call it a “NASCAR” tax break and that it allows them to compete with amusement parks like Disney. (Cost: $33 million)

Race horses – Kentucky’s own Mitch McConnell (R), the incoming Senate majority leader, is one of the major supporters of this tax break, which allows owners to write off race horses over a three-year period. That, backers say, is in line with how long race horses are active. (Cost: No revenue effect)

Film and television – Companies can expense up to $15 million for film and television productions. (Cost: $6 million)

American Samoa – Employers can get a credit that offsets their tax liability in American Samoa. The biggest beneficiary: the tuna producer StarKist. (Cost: $14 million)

4) What’s Missing?

Healthcare – Sen. Sherrod Brown (D-Ohio) and others are livid that the package doesn’t extend a tax break that helps workers displaced by trade with healthcare costs. Camp has said the tax break can be included in broader trade negotiations. A two-year extension passed by the Senate Finance Committee this year cost $134 million.

Electric motorcycles – One of the few tax breaks on the chopping block, this incentive has long been championed by Wyden. Republicans blame Wyden for helping bring down the larger package, but Camp has repeatedly insisted that not including this incentive was an oversight. A two-year extension cost $2 million.