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Updated CRS report looks at expired tax extenders & recent proposals affecting their fate

April 2, 2014

The Congressional Research Service (CRS) has recently updated a report on the temporary tax provisions that, despite being routinely extended by Congress on a one- or two-year basis, were allowed to expire as of the end of 2013. The issue of how to deal with these “extender” provisions figured prominently into President Obama’s 2015 budget and the recent tax proposal advanced by House Ways and Means Committee Chairman Dave Camp (R-MI), and is the primary focus of the tax extenders bill released yesterday by Senate Finance Committee Chair Ron Wyden (D-OR) (see ¶ 25).

“Tax extenders” defined. The Code presently contains dozens of temporary tax provisions. In the past, legislation to extend some set of these expiring provisions has been referred to by some as the “tax extender” package. While there is no formal definition of a “tax extender,” the term has regularly been used to refer to the package of expiring tax provisions temporarily extended by Congress. These expiring provisions often are temporarily extended for short periods of time (e.g., one or two years).

The report lists a number of reasons why Congress may choose to enact provisions on a temporary basis, including that it gives them a chance to evaluate whether a particular provision reflects sound tax policy and that it can provide temporary economic stimulus or disaster relief. A more jaded rationale is that, for budgetary forecasting purposes, if a provision is technically temporary, regardless of whether it is routinely extended, its monetary impact is only reflected for the time that it is scheduled to be in effect. In other words, this practice minimizes the financial impact that these provisions appear to have on the long-term fiscal outlook.

A majority of the expired extenders were most recently resuscitated as part of the American Taxpayer Relief Act of 2012 (ATRA; P.L. 112-240). Many of them had been allowed to expire at the end of 2011 and were extended retroactively.

List of extenders that lapsed at the end of 2013. The following are among the more significant expired tax extenders:

Individual provisions.

…deduction for state and local sales taxes;
…above-the-line deduction for certain expenses of teachers;
…above-the-line deduction for qualified tuition and related expenses;
…deduction for mortgage insurance premiums deductible as qualified interest;
…parity for exclusion for employer-provided mass transit and parking benefits;
…exclusion of discharge of principal residence indebtedness from gross income;
…credit for health insurance costs.

Business provisions.

…research and experimentation credit;
…work opportunity tax credit;
…increase in expensing to $500,000 / $2,000,000 and expanded definition of Section 179 property;
…bonus depreciation;
…exceptions under Subpart F for active financing income;
…look-through treatment of payments between controlled foreign corporations;
…special treatment of certain dividends of Regulated Investment Companies;
…employer wage credit for activated military reservists;
…special expensing rules for film and television production;
…special rules for qualified small business stock;
…reduction in S corporation recognition period for built-in gains tax;
…election to accelerate alternative minimum tax (AMT) credits in lieu of additional first-year depreciation;
…low-income housing credit rate;
…treatment of military basic housing allowances under low-income housing credit;
…15-year straight line cost recovery for qualified leasehold, restaurant, and retail improvements;
…deduction allowable with respect to income attributable to domestic production activities in Puerto Rico;
…modification of tax treatment of certain payments to controlling exempt organizations;
…accelerated depreciation for business property on Indian reservations;
…Indian employment credit.

Charitable provisions.

…enhanced charitable deduction for contributions of food inventory;
…tax-free distributions from Individual Retirement Accounts (IRAs) for charitable purposes;
…basis adjustment to stock of S corporations making charitable contributions of property;
…special rules for contributions of capital gain real property for conservation purposes.

Energy provisions.

…credit for construction of energy efficient new homes;
…energy efficient commercial building deduction;
…construction date for eligible facilities to claim the production tax credit or wind credit;
…credit for energy efficient appliances;
…credit for nonbusiness energy property;
…alternative fuel vehicle refueling property;
…incentives for alternative fuel and alternative fuel mixtures;
…incentives for biodiesel and renewable diesel;
…placed-in-service date for partial expensing of certain refinery property;
…credit for electric drive motorcycles and three-wheeled vehicles.

Community assistance provisions.

…qualified zone academy bonds – allocation of bond limitation;
…new markets tax credit;
…American Samoa economic development credit;
…empowerment zone tax incentives.

List of extenders scheduled to expire at the end of 2014. In addition to the expired provisions above, the following six provisions are scheduled to expire at year-end:

…incentives for alternative fuels and alternative fuel mixtures involving liquefied hydrogen;
…the credit for fuel cell motor vehicles;
…the credit for hydrogen alternative fuel refueling property;
…the automatic amortization extension for multiemployer defined benefits plans;
…the additional funding rules for multiemployer defined pension plans in endangered or critical status; and
…the deemed approval of adoption, use, or cessation of shortfall funding method for multiemployer defined benefits plans.

Recent proposals. As noted above, there have been a number of proposals relating to tax extenders over the past few months. These include the following:

President Obama’s 2015 budget proposal. In his budget for fiscal year (FY) 2015, provisions that the President proposed permanently extending (in some cases, in modified form) include: the research tax credit, the work opportunity tax credit, increased expensing under Code Sec. 179, the enhanced deduction for conservation easements, the exclusion for qualified small business stock, the new markets tax credit (NMTC), the renewable electricity production tax credit, and the deduction for energy-efficient commercial property. He proposed temporarily extending the exclusion for cancellation of home mortgage debt (through 2016), the tax credit for cellulosic biofuel (through 2024), and the tax credit for energy-efficient new homes (through 2024). The President’s FY 2015 budget also assumes that the American Opportunity Tax Credit (AOTC), the earned income tax credit (EITC) expansions, and the child tax credit (CTC) expansions (currently in effect through 2017 as part of ATRA) are made permanent. (For more details on the President’s budget, see Weekly Alert ¶  17  03/06/2014.)

Rep. Camp’s 2014 Tax Reform Act. In general, Rep. Dave Camp has expressed support for addressing tax extenders as part of broader tax reform. However, his proposed Tax Reform Act of 2014 would make a number of provisions permanent, including the research tax credit and increased expensing under Code Sec. 179. (For more details on these and Rep. Camp’s other business-related tax proposals, see Weekly Alert ¶  20  03/06/2014.) On March 24th, Rep. Camp circulated a memo to other members of the Ways and Means Committee indicating that, beginning in April, the Committee would engage in hearings and markups to determine on a policy-by-policy basis which extenders should be made permanent. He stated in that memo that “a short extension of tax policies is no way to legislate.”

Sen. Wyden’s extenders bill. Sen. Ron Wyden has released a bill (the “Expiring Provisions Improvement Reform and Efficiency,” or “EXPIRE” Act) to retroactively extend many of the expired extender provisions. (For more details on the bill, see ¶ 25.) He has stated, in effect, that his priority as Senate Finance Committee Chairman is to extend these provisions and then turn to comprehensive tax reform, noting that he was “determined that this is the last time we do extenders” and that he “would like to leverage this last extension to reform the broken tax code.”

RIA observation: Late last year, Sen. Harry Reid (D-NV) introduced a bill which would have provided a one-year extension of nearly all of the provisions that were set to expire. That bill failed to advance. It is unclear at this point whether the political climate (or realistic prospect for accomplishing comprehensive tax reform in the near future) will render Sen. Wyden’s bill subject to a different fate.

CBO projections. The Congressional Budget Office (CBO) provided estimates of how much it would cost to extend all of the tax provisions scheduled to expire over the 2014–2024 period. The projected cost of extending all expiring tax provisions over that period is $963.4 billion (up from the $938.3 billion cost that CBO provided for extending all tax provisions scheduled to expire over the 2013–2023 period). Over the 2014–2024 period, extending all temporary investment incentives that expired in 2013 would cost $762.1 billion; extending bonus depreciation would cost $296.4 billion; extending expansions to the child tax credit, earned income tax credit, and American Opportunity Tax Credit (currently scheduled to expire at the end of 2017) would cost $165.4 billion; and extending all other expiring tax provisions would cost $35.9 billion.

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