At the end of each year, policymakers face a series of expiring 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. provisions that are typically extended on a temporary basis, setting up a recurring and almost ritualistic tax extenders season. At a time of heightened concerns about the economy, high deficits, and 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. , policymakers should prioritize stability and economic growth by making permanent the pro-growth tax provisions in the Tax Cuts and Jobs Act (TCJA) of 2017 and letting temporary provisions related to the pandemic and tax extenders that narrow the 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. expire.
In 2021, there was no tax extenders deal, and numerous provisions expired. This summer, many of the smaller policies that used to be ritually extended for an additional year or two were stretched across a decade as a part of the Inflation Reduction Act (IRA). However, more structural issues are on the table, stemming from pieces of major legislation—like the TCJA, the CARES Act of 2020, and the American Rescue Plan (ARPA) of 2021—expiring or phasing out.
Expiring Provisions from the Tax Cuts and Jobs Act
100 Percent Bonus Depreciation for Equipment and Machinery
In 2023, companies will only be able to deduct 80 percent of their investments in short-lived assets immediately, with the remaining 20 percent spread across the asset’s life. This will fall to 60 percent in 2024, 40 percent in 2025, and effectively phase out completely by 2026.
Amortization of R&D Expenses
Starting in the 2022 tax year, the TCJA requires companies to amortize the cost of R&D investment over five years, rather than deducting those costs immediately. This effectively penalizes R&D investment in the tax code. In late 2021, there was bipartisan interest in preventing this policy from going into effect, but policymakers included delaying R&D amortization in the Build Back Better package that ultimately failed to pass, and the policy took effect at the beginning of this year.
Limit on Business Interest Expenses Based on EBIT
Another major TCJA change that took effect at the beginning of this year, the law originally limited business deductions for interest expenses to 30 percent of Earnings Before Interest, Taxes, 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. , and Amortization (EBITDA), and now limits those deductions to 30 percent of Earnings Before Interest and Taxes (EBIT), effectively a tighter limit.
CARES and American Rescue Plan Issues
Child 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.
One of the most significant policies in ARPA was the expansion of the Child Tax Credit (CTC). Today (and before ARPA), the CTC reaches a maximum value of $2,000 per child, with only $1,400 of it being refundable. But ARPA raised the CTC’s value to $3,000 (and $3,600 for children under six), while making it fully refundable. The last version of the Build Back Better package would have extended the increase by one year and made full refundability permanent. The expanded CTC expired this year, but some policymakers are pushing to bring this expanded credit back as part of a lame-duck tax extenders package.
Other COVID Relief Policies
Numerous other COVID-era tax policies expired in 2021, including expansions of the Earned Income Tax Credit and Child and Dependent Care Tax Credit, a new above-the-line charitable deduction, as well as modified limits to the established itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. for charitable contributions.
There are a few COVID relief policies that are expiring at the end of this year, such as the full deductibility of business meals at restaurants. The TCJA limited businesses to only deducting 50 percent of business meals (and eliminated the deduction for entertainment expenses). However, the Consolidated Appropriations Act (the second COVID relief package passed in 2020) temporarily restored 100 percent deductibility of business meals for 2021 and 2022, although entertainment expenses remain nondeductible.
Additionally, ARPA included a special protection for certain multiemployer pension plans that will expire at the end of the year.
There is also one non-TCJA, non-COVID relief-related provision still expiring at the end of the year: a 50 percent credit for railroad maintenance. Barring action, the credit value will drop to 40 percent.
Perennial Tax Extenders Expired Last Year, Not Dealt with in Inflation Reduction Act
The Inflation Reduction Act reformed and/or re-introduced several of the energy-related tax credits that expired at the end of 2021. While most of those credits are not permanent, they are in law for several years, creating more stability than the pre-IRA status quo. Nonetheless, several other tax provisions remain expired.
|Credit for Two-Wheeled Plug-in Electric Vehicles (sec. 30D(g)(3)€(ii))
|Mine Rescue Team Training Credit (sec. 45N€)
|Credit for Production of Indian Coal (sec. 45€(10)(A))
|Accelerated Depreciation for Business Property on an Indian Reservation (sec. 168(j)(9))
|Three-year Recovery Period for Racehorses Two Years Old or Younger (sec. 168€(3)(A))
|American Samoa Economic Development Credit (sec. 119 of Pub. L. No. 109-432, as amended)
|Indian Employment Credit (sec. 45A(f))
|Increase in State Low-Income Housing Tax Credit Ceiling (sec. 42(h)(3)(I))
|Temporary Increase in Limit on Cover-Over of Rum Excise Tax Revenues (from $10.50 to $13.25 per proof gallon) to Puerto Rico and the Virgin Islands (sec. 7652(f))
|Treatment of Premiums for Certain Qualified Mortgage Insurance as Qualified Residence Interest (sec. 163(h)(3)€(iv))
|Source: Adapted from Alex Muresianu, Erica York, and Will McBride, “A Holiday Tradition: Tax Extenders Slated to Expire at End of 2021,” Tax Foundation, Dec. 22, 2021, https://taxfoundation.org/tax-extenders-expiring-tax-provisions-2021/.
What Really Matters?
Due to arcane budget rules and limited floor time in Congress, tax extenders are sometimes dealt with monolithically, like continuing resolutions to fund the government. However, not all tax extenders are created equal, and it’s important to evaluate them based on the tax policy principles of stability, neutrality, simplicity, and transparency.
Tax extenders in general clearly violate the principle of stability. Some temporary and expiring provisions should be made permanent structural components of the tax code, while others should be allowed to disappear.
One of the most important expiring or recently expired provision that ought to be reversed is R&D amortization. There is no structural argument for R&D to be amortized rather than expensed, and the move to amortization was meant to be a budget gimmick that never took effect. It makes tax compliance more complicated, penalizes R&D investment, and reduces growth, undermining U.S. competitiveness and other policies intended to encourage domestic R&D investment.
The initial phasing-out of 100 percent bonus depreciation is also important. Without action, companies will be allowed to deduct 80 percent of short-lived investment costs immediately next year, with the remainder being subject to complicated depreciation schedules that penalize investment. The provision should be made permanent, and not left to wither in uncertainty over the next few years.
Due to some budget rules, there will be a temptation to temporarily extend the cancellation of R&D amortization and 100 percent 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. , which would be better than allowing them to fully expire. However, policymakers should prioritize permanency for both of these provisions, which would provide certainty for businesses and maximize the pro-growth elements of both provisions.
In contrast, it is for the best that most of the COVID relief measures, including the expanded CTC, were allowed to expire last year. They were part of a response to a major crisis that has mostly subsided. Administering that safety net through the tax code was not ideal to begin with, but the U.S. had to act within the policymaking framework.
Not only do these policies diverge from core tax policy principles, but they would also be inflationary without significantly improving incentives to invest—contributing to aggregate demand, but not aggregate supply, likely making the current situation worse.
Policymakers face a difficult balancing act this year in what is likely to be an unusual tax extenders season. On the one hand, tax extenders offer a rare bipartisan opportunity to pass tax legislation that reduces burdens on taxpayers, albeit by skirting the normal budget process. But on the other hand, the alarming increase in the national debt in recent years and the concomitant return of high inflation means that both parties should focus on tax changes that substantially improve economic growth.
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