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Even Congress Doesn’t Like the Tax Plan It’s Ready to Pass

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U.S. lawmakers, about to pass a short-term deal to extend dozens of targeted tax breaks, know what they’re doing is bad policy. And they’re doing it anyway.

Dozens of tax breaks expired on Dec. 31, 2013, and Congress spent the year fighting over them. Now, with just four weeks left in the year, the House of Representatives plans today to punt the whole debate and slap on a new expiration date: Dec. 31, 2014.

Policy experts say tax cuts like these should be predictable and stable. This plan is far from that, because it means that business executives and individuals on New Year’s Day will have no idea if they can take the breaks again in 2015.

“We’re going to go back to the uncertainty that plagues the code, the lack of stability that plagues investment,” said Representative Richard Neal, a Massachusetts Democrat. “We have no choice, because there was not the institutional will to do something bigger and longer.”

The $45 billion plan set to be passed in the waning days of the session would give windfall benefits to companies for actions they took during the first 11 months of 2014. It would provide businesses with almost no time to take advantage of the breaks before they lapse again.

U.S. lawmakers, who earlier this year flirted with the most significant revamp of the tax code since 1986 before abandoning the effort, said they don’t like what they’re doing. They recognize that the short-term deal will force Congress and taxpayers back into the same cycle in January.

GE, Wal-Mart

The tax breaks in question include benefits for big corporations such as General Electric Co. and Wal-Mart Stores Inc., with incentives for hiring workers from disadvantaged groups and for installing wind turbines.

Individual taxpayers have a few items at stake, too, including the ability to deduct sales taxes, which benefits residents of states such as Washington and Nevada that don’t have income taxes. People who have debt forgiven in short sales of homes would be able to exclude that from their income for 2014 if the bill passes.

The breaks, known on Capitol Hill as tax extenders, have survived for years as a package. They typically are tacked onto more important legislation and benefit from lawmakers’ willingness to vote for a few ideas they oppose while their colleagues reciprocate.

Grover Norquist

Supporters of the House bill include Americans for Tax Reform, the group led by anti-tax advocate Grover Norquist, and the National Association of Manufacturers. Opponents include Koch Industries Inc., the conglomerate that is against the production tax credit for wind energy.

A few twists and turns are possible before the House bill, H.R. 5771, becomes law. Obama administration officials have expressed openness to a short-term deal without endorsing the measure.

Senate Democrats may try to add an extra year of extensions or revive some jettisoned by the House, such as a tax credit that pays for the health care of laid-off workers or a break for plug-in electric motorcycles.

“Game on,” Senate Finance Chairman Ron Wyden told reporters yesterday. Failed Effort

How Congress got here is no game.

The tax extenders proposal followed a four-year effort by Dave Camp, chairman of the House Ways and Means Committee. Camp, a Michigan Republican, sought to revamp the tax code by lowering rates and eliminating breaks.

When that effort fizzled, Republicans tried to lock in permanent extensions of a few of the lapsed breaks, including the research and development tax credit and more generous capital equipment write-offs for small businesses.

Camp and Senate Majority Leader Harry Reid almost had a deal last week. It would have made those policies and others permanent while extending the rest of the breaks through 2015.

That plan, too, fell apart, victim to a fight among Democrats over the party’s priorities. President Barack Obama threatened to veto the emerging deal because it didn’t extend expansions of the child tax credit and earned-income credit that lapse at the end of 2017.

Administration officials, including Treasury Secretary Jacob J. Lew, contended that the package was tilted too heavily toward corporations and away from low-income families.

Temporary Deal

“Given how bad that was, a temporary deal is a much better outcome and maybe the best that we can hope for from this Congress,” said Harry Stein, associate director for fiscal policy at the Center for American Progress, a group aligned with Democrats that opposed the tentative agreement.

Camp and House Republicans then turned to the one-year retroactive bill.

“Half a loaf is better than no loaf at all,” said Senator Johnny Isakson, a Georgia Republican. “You owe it to the people who have expected us to make this year’s retroactive to do it.”

For entrenched breaks where extensions are routine and bipartisan, such as the research credit, business groups say the gaps are annoying and disruptive without being catastrophic.

“Each time we go through this, I think the possibility has become more real that Congress won’t act for whatever reasons,” said Dave Koenig, vice president for tax and profitability at the National Restaurant Association, which backs higher expensing limits for small businesses and more generous depreciation rules.

Conservation Easements

For others, late is almost as bad as never.

The tax-break package includes popular tax incentives for people to donate conservation easements — the development rights to land.

Those donations require timely appraisals and complicated transactions between donors and land trusts. The incentive would have been made permanent under the bipartisan agreement that fell apart last week.

Donors and land trusts don’t want to spend time and money preparing transactions without the certainty that the tax break will be there, said Russ Shay, director of public policy at the Land Trust Alliance in Washington.

“We can tell them to go ahead and hope for the best, but they really can’t do that,” he said. “We need two years to get one, and even that’s not long enough for most of our donors. We’re really caught in this and want out in the worst way.”

Transit Commuting

Similarly, a tax break that lets workers set aside more pretax money for transit commuting each month has little benefit retroactively.

In May, the Joint Committee on Taxation estimated that an extension of that provision through 2015 would cost the government $180 million in forgone revenue. An extension for 2014 would only cost $10 million.

The decision to cut off the extensions on Dec. 31 will create more work next year for the new chairmen of the tax- writing panel, a fact that both of them — Representative Paul Ryan and Senator Orrin Hatch — pointed out yesterday.

“The president and his allies here in the Senate missed a big opportunity to address some of their party’s priorities,” Hatch said in a Senate floor speech. “It’s difficult to imagine that they’ll have another bite at that same apple in the next Congress.”

If it passes, the House bill will be combined with another bill that creates tax-advantaged accounts for disabled people.

— Check out House to Vote on Tax Extender Bill by Thursday on ThinkAdvisor.


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