Nearly every year, for over a decade, Congress has scrambled at the last minute to renew 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. extenders – dozens of temporary, constantly-expiring tax breaks for individuals and businesses. Now, the latest tax bill passed by Congress may put the saga of the tax extenders to rest once and for all.
The omnibus tax and spending bill that Congress passed at the end of December made over a third of the tax extenders into permanent law. Some of the most important tax extenders, including expanded section 179 expensing and the research tax credit, have now been made permanent. As a result, the stakes of this year’s tax extender negotiations will be much lower; it is possible that Congress will neglect to renew the remaining tax extenders altogether.
Which tax extenders will be up for renewal at the end of 2016? Last Friday, the Joint Committee on Taxation published a comprehensive list of sections of the tax code that are set to expire over the next few years. Because of the latest tax bill, there are now only 36 temporary provisions that are set to expire at the end of 2016, compared to the 52 that expired at the end of 2014. Most of the remaining tax extenders are relatively low-cost; according to recent JCT estimates, these 36 provisions are only expected to reduce federal revenue by about $17.7 billion a year.
The provisions expiring at the end of this year fall into three general categories:
1. Renewable Energy Incentives
16 of the provisions that are set to expire at the end of 2016 are tax incentives for renewable energy. Most of these provisions are tax credits – for electric vehicles, biodiesel, residential energy equipment, and more. All in all, these provisions are expected to reduce tax revenues by at least $7.4 billion in 2016.
2. Provisions for Homeowners
The two largest provisions that are set to expire at the end of 2016 are both targeted at homeowners. One of these provisions exempts some homeowners from being taxed on the amount they receive in mortgage loan forgiveness. The other allows homeowners to count mortgage insurance premiums towards their mortgage interest deductions. Extending these two provisions into 2016 is expected to cost $7.5 billion.
3. Miscellaneous Provisions
The remaining 18 tax provisions are a grab bag of incentives for different economic interests, ranging from railroad companies to rum producers. These provisions are relatively minor; all together, they will reduce federal revenues by at least $2.8 billion in 2016. Notably, several of these provisions allow for more favorable 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. schedules, which help shift the tax code towards full expensing.
Looking over the list below of remaining tax extenders, none of them seem like “must-pass” policies. As a result, the pressure is off of Congress to renew all of the tax extenders as a package. Instead, Congress should take the time to evaluate the remaining tax extenders one by one, making the good provisions permanent and letting the bad ones expire. Temporary tax policy is bad tax policy, and it’s about time that Congress laid the ritual of tax extenders to rest once and for all.
|
Tax Provisions Recently Extended to December 31, 2016 |
Cost of extending provision to 2016 (millions of dollars, over 2016-2025) |
|
Credit for certain nonbusiness energy property |
$1,331 |
|
Credit for qualified fuel cell motor vehicles |
$6 |
|
Credit for alternative fuel vehicle refueling property |
$112 |
|
Credit for two-wheeled plug-in electric vehicles |
$4 |
|
Second generation biofuel producer credit |
$45 |
|
Incentives for biodiesel and renewable diesel: a. Income tax credits for biodiesel fuel, biodiesel used to produce a qualified mixture, and small agri-biodiesel producers b. Income tax credits for renewable diesel fuel and diesel used to produce a qualified mixture c. Excise tax credits and outlay payments for biodiesel fuel mixtures d. Excise tax credits and outlay payments for renewable diesel fuel mixtures |
$2,563 |
|
Special depreciation allowance for second generation biofuel plant property |
<$1 |
|
Energy efficient commercial buildings deduction |
$324 |
|
Credit for construction of new energy efficient homes |
$760 |
|
Beginning-of-construction date for non-wind renewable power facilities eligible to claim the electricity production credit or investment credit in lieu of the production credit |
$1,356 |
|
Incentives for alternative fuel and alternative fuel mixtures: a. Excise tax credits and outlay payments for alternative fuel b. Excise tax credits for alternative fuel mixtures |
$918 |
|
Discharge of indebtedness on principal residence excluded from gross income of individuals |
$5,143 |
|
Premiums for mortgage insurance deductible as interest that is qualified residence interest |
$2,318 |
|
Credit for production of Indian coal |
$75 |
|
Indian employment tax credit |
$126 |
|
Railroad track maintenance credit |
$428 |
|
Mine rescue team training credit |
$4 |
|
Qualified zone academy bonds: allocation of bond limitation |
$196 |
|
Three-year depreciation for race horses two years old or younger |
<$1 |
|
Seven-year recovery period for motorsports entertainment complexes |
$95 |
|
Accelerated depreciation for business property on an Indian reservation |
$159 |
|
Election to expense advanced mine safety equipment |
<$1 |
|
Special expensing rules for certain film, television, and live theatrical productions |
$26 |
|
Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico |
$234 |
|
Deduction for qualified tuition and related expenses |
$608 |
|
Special rule for sales or dispositions to implement Federal Energy Regulatory Commission (“FERC”) or State electric restructuring policy |
<$1 |
|
Empowerment zone tax incentives a. Designation of an empowerment zone and of additional empowerment zones b. Empowerment zone tax-exempt bonds c. Empowerment zone employment credit d. Increased expensing under sec. 179 e. Nonrecognition of gain on rollover of empowerment zone investments |
$498 |
|
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 |
$336 |
|
American Samoa economic development credit |
$32 |
|
Note: This list of provisions is drawn from List of Expiring Federal Tax Provisions, 2016-2025, Joint Committee on Taxation. Revenue estimates are drawn from Estimated Budget Effects of Division Q of Amendment #2 to the Senate Amendment to H.R. 2029, Joint Committee on Taxation. |
|
Other Tax Provisions Expiring on December 31, 2016 |
|
Credit for residential energy property |
|
Credit for hybrid solar lighting system property |
|
Credit for geothermal heat pump property, small wind property, and combined heat and power property |
|
Credit for qualified fuel cell and stationary microturbine power plant property |
|
Five-year cost recovery for certain energy property |
|
Medical expense deduction: adjusted gross income (AGI) floor for individuals age 65 and older (and their spouses) remains at 7.5 percent |
|
Special rate for qualified timber gains |
|
Note: This list of provisions is drawn from List of Expiring Federal Tax Provisions, 2016-2025, Joint Committee on Taxation. |