Yesterday, the Senate Committee on Finance met to consider a bill that would renew over 50 recently expired provisions of the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code, commonly known as tax extenders. By a 23-3 vote, the committee approved the measure, which would extend these tax provisions until the end of 2016, costing an estimated $95.2 billion over the next decade.
If the preceding paragraph seems like deja vu, it is. Over the last few years, tax extenders have come up for renewal several times, making them one of the most persistent features of Congressional tax policy discussions. Eight months ago, Congress held a last-minute vote to renew the tax extenders until December 31, 2014, and retroactively apply them to the 2014 tax year. Then, two weeks later, the tax extenders expired once again, leaving it up to Congress to renew them for 2015.
This year’s tax extender package is virtually identical to the one passed last December. It contains 52 miscellaneous tax provisions, all of which have been renewed at least once before, and some that have been extended up to sixteen times. The provisions range from the relatively trivial (lower taxes on Puerto Rican rum) to the highly significant (bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings, in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. ). They fall into three general categories: deductions and exclusions for individuals, economic incentives for businesses, and tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s for various energy sources. The package also contains a few modifications from last year’s tax extenders bill, such as one that indexes the deduction for teachers’ expenses to inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. , and another that provides special expensing rules for live theater productions.
In advance of yesterday’s Senate Finance Committee meeting, members of the committee proposed 105 separate amendments to the tax extenders package. Over 20 of these amendments were efforts to make various tax extenders into permanent law. At the beginning of the meeting, Senator Hatch made clear that these proposed amendments were not germane to the main purpose of the bill, and that making any tax extenders permanent would have to wait until later in the year. The committee only voted on two amendments, though it discussed over two dozen others during its session.
One of the most interesting portions of the Finance Committee meeting was an extended discussion about bonus depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. , a provision that allows businesses to immediately deduct half of their investments, rather than doing so over time. Two senators had offered amendments regarding bonus depreciation: Senator Roberts (R-KS) proposed making bonus depreciation permanent, while Senator Warner (D-VA) proposed scaling back the benefit from 50% of investments to 30%. In defense of his amendment, Roberts commented, “One of the main reasons for [slow economic growth] has been the lack of investment in capital stock, and property, and plants, and equipment… Bonus depreciation is one of the key tools to grow the economy.” Senator Warner responded by arguing that “Bonus depreciation was put in in 2008 as part of the reactions to the recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. … it was never meant to be a permanent part of the tax code.” In the succeeding discussion, several Democratic and Republican Senators defended bonus depreciation, with Senator Stabenow (D-MI) commenting, “Whatever we can do to encourage capital investment, to encourage more investment sooner, would be a good thing for jobs and a good thing for the country.”
As we’ve commented before, not all extenders are worth extending. Many of the 52 expired provisions are tax breaks narrowly targeted at specific industries and activities, which distort economic activity and cost the federal government a significant amount of money. But other tax extenders, such as the research and development credit, Section 179 expensing, and bonus depreciation help move the tax code toward a neutral tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , and cause economic growth.
Yet, no matter whether tax extenders are good public policy or not, their effectiveness is surely undercut by their precarious legislative status. Businesses will not make long-term decisions in response to tax provisions unless they feel confident that the provisions will be in place in upcoming tax years. The tax code cannot incentivize investment if the provisions that do so are perpetually under threat of expiration. And it does not help that, by this point, tax extenders are being renewed retroactively, a sure mark of poorly designed tax policy.
It is a positive sign that the Senate Finance Committee mustered the political will to approve this tax extender package relatively early in the year, and that they have extended the tax provisions until 2016. Ideally, this step will allow Congress some time to consider which tax extenders are worth making permanent and which should be eliminated altogether, without the pressure of a looming deadline.Share