One of the great yearly legislative tax games is the shenanigan surrounding the “expiring provisions” in the tax code. Congress enacts a provision in the tax code for one reason or the other but it expires after a year or two or three. In certain cases, it makes sense to have a short-lived law. However, there may be other reasons this stealth process takes place.
The most likely reason a provision is temporary is its budgetary impact. The revenue impact of a one-year tax credit, for example, is obviously much less than the 10-year impact. It is an illusion, of course. Ten year budget numbers can cause all kinds of procedural and political problems.
For example, the research and development tax credit used by major corporations has a one-year shelf life but is extended year-to-year. No fiscally sane politician wants to call attention to the fact this could be a ten-year $30 billion sop to big business. It is easier to hide it yearly in a bill of tax “extenders”.
In addition confining the realistic revenue loss to the short run, it affords the ability to spend more money now and deal with the consequences later. Lastly, the mere fact that billions of dollar of subsidies are in theoretical jeopardy each year is a good reason to get political contributions. A cynical view but not that far off.
There are dozens and dozens-the middle side passed one hundred- of provisions expiring by the end of this year and next. Looking at a few of them shows how important some of them are, how narrow some of them are and makes a person scratch one’s head to figure out how some provisions became law in the first place.
These are some of the provisions expiring at the end of 2011:
- Credit for electric drive motorcycles, three- wheeled vehicles, and low-speed vehicles- The Republic’s survival and geriatrics depend on this extension;
- Conversion credit for plug-in electric vehicles- Don’t forget the government owns substantially the domestic car industry;
- Incentives for alcohol fuels- This is the gasohol, ethanol provision that may not survive beyond the end of year but then again. My views on this wastefulness have been stated before;
- Incentives for biodiesel and renewable diesel- Similar idiotic provision;
- Tax credit for research and experimentation expenses- This is a huge multi-billion dollar provision extended again and again. Best friend of poor companies such as General Electric;
- Indian employment tax credit; Indian tribes have been quite successful in getting special provisions;
- New markets tax credit- I guess companies cannot find markets without assistance;
- Credit for certain expenditures for maintaining railroad tracks- Railroad companies have been getting federal money since the government gave them half the western United States 140 years ago;
- Credit for construction of new energy efficient homes- Not really helping the home market, is it?;
- Credit for energy efficient appliances- Everyone knows no one can afford a new washer dryer combo without the extra 50 bucks;
- Increased AMT exemption amount-The AMT is a nightmare for everyone. It cost billions and billions of dollars against baseline revenue to fix it every year to prevent million of taxpayers from paying it. This is one of the few tax issues that is not partisan. The AMT just should be repealed and act as if it was never enacted. This is a budget headache and really a sham;
- Deduction for State and local general sales taxes-Effects only taxpayers in a few states not having state income taxes but high sales taxes. I understand the argument but it should not be extended;
- Increase in business expensing limits and expansion of definition of section 179 property- Good provision that should be drastically expanded;
- Seven-year recovery period for motorsports entertainment complexes-This is absolutely one of my favorites. Wonder how it got in the tax code? (See section 168 for verification) Is this related to corporate jet depreciation?;
- Special expensing rules for certain film and television productions-Think anyone in the entertainment business every made a political contribution?;
- Above-the-line deduction for qualified tuition and related expenses;
- Empowerment zone tax incentives- I am not even sure what these are, their cost effectiveness and if there is any merit to them. Probably not, but I could be wrong;
- Disclosure of prisoner return information to certain prison officials- This one is right up there for head scratching. I say, extend it!;
- Temporary payroll tax cut- Part of the trade off deal last year to extend the Bush tax cuts, this provision has major revenue and economic impact. Unless extended (President want to increase it by fifty percent) it will have a direct and adverse impact on the net take-home pay of almost every worker. It also has a $110 billion revenue cost.
Now for next year, the situation becomes even more interesting although the number of expiring provision is less than this year but many of these guys are huge.
- Increase of the size of 15 percent rate;
- Reduced capital gain rates for individuals;
- Dividends of individuals taxed at capital gain rates;
- Ten percent individual income tax;
- Reduction in other individual income tax rates − size of 15 percent rate bracket modified to reflect 10 percent rate, and 28 percent, 31 percent, 36 percent and 39.6 percent rates are reduced to 25 percent, 28 percent, 33 percent and 35 percent.
Recognize any of the above? The so-called Bush tax cuts involved hundreds of billions of dollars and unless something affirmatively is done, they all expire. The fate of these provisions is and will continue to be the premier issue in the election next year.
Oh yeah, and there are these too.
- Dependent care credit;
- Adoption credit and adoption assistance exclusion;
- Child credit increase;
- Refundable child credit floor amount.
And even more--
- Cellulosic biofuel producer credit– I think this is the famous switchgrsss;
- Placed-in-service date for wind facilities-Wind power is dubious without the subsidies;
- Credit for production of Indian coal- Those Indian tribes again.
The expiring provision are usually put in a bill towards the end of the session and sometimes hidden in some other piece of legislation. It is not so easy to pass them routinely anymore as budgetary considerations are at the forefront of everything. While they will be overshadowed by the work on the “Super Committee” and deficit reduction, they bear close watching.