Nutter's Washington

Congress Leaves Town: Results for 2013 and outlook for 2014

 

Congress only has a couple of legislative days left in this calendar year. The House has already left town. There have been few achievements as political bickering prevailed. Congress passed only one regular appropriation bill, failed to adopt a budget so far, (although this is still possible) and failed to move on important issues such as tax reform. A series of missteps, miscalculations and scandals from the Administration occupied a great deal of Congressional attention. An impasse over the implementation of Affordable Care Act resulted in a partial government shutdown of 16 days.  There is enough blame and finger pointing to go around for all those involved.

Budget

Looking forward to next year, the most important business in Congress will involve the fiscal affairs of the government. The government will run out of money to spend on January 15, 2014. However, unlike October, a shutdown is not likely. There has been an agreement increasing the budget by almost $70 billion. A capitulation of sorts by Republicans who are scared of another government shutdown. It appears business as usual in Washington for short term spending for longer-term budget gimmicks. Gasp. However, Republicans have no need to fight over funding health care; they are winning the political issue hands down for the time being and do not have the legislative power to make any substantive changes. Health care will be a major issue in the 2014 election.

There are substantive and political issues in the budget agreement, such as tax reform, sequestration, extension of unemployment insurance and other significant issues that divide the two major political parties. Move on, I guess, nothing to see here.

Debt Ceiling

In addition to funding the government though the end of its fiscal year, the federal debt ceiling will be hit sometime in the second week of February. Raising the borrowing authority of the government is a big deal but the process is probably not going to be as confrontational as in October.  It is not clear how much of an increase will be agreed upon and for how long. Unless changed by any budget reset, the sequester will eventually continue to squeeze and limit discretionary spending in an un-artful way, but is a squeeze.

Tax Extenders: Expiring provisions not forgotten but should be

 

Lost in all the budget negotiations and the talk about tax reform are the yearly legislative tax games and 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 can expire 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.

Unless Congress acts, many provisions-some more worthwhile than others and some just laughable- will cease to exist come 2014.(subject to later reinstatement) These are in tax parlance the "extenders". Could be a music group.  

These temporary creatures exist for the most part because of their 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, a provision such as research and development tax credit used by major corporations has a short 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 affords the ability to spend more money now and deal with the consequences later.

There are dozens and dozens 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 taken from a list from the Congressional Research Service expiring at the end of 2013: (Some of the “how did this happen” are in italics)

Individual Provisions

• Above-the-Line Deduction for Certain Expenses of Elementary and Secondary School Teachers
• Deduction for State and Local Sales Taxes
• Above-the-Line Deduction for Qualified Tuition and Related Expenses
• Premiums for Mortgage Insurance 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 for Individuals
• Credit for Health Insurance Costs of Eligible Individuals

Business Provisions

• Tax Credit for Research and Experimentation Expenses
• Temporary Increase in Limit on Cover Over of Rum Excise Tax Revenues to Puerto Rico and the Virgin Islands
• Work Opportunity Tax Credit
• Indian Employment T ax Credit
• Accelerated Depreciation for Business Property on Indian Reservations
• Exceptions under Subpart F for Active Financing Income
• Look- Through Treatment of Payments Between Controlled Foreign Corporations under the Foreign Personal Holding Company Rules
• Credit for Railroad Track Maintenance
• 15-Year Straight-Line Cost Recovery for Qualified Leasehold, Restaurant, and Retail Improvements
• 7-Year Recovery for Motorsport Racing Facilities
• 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
• Treatment of Certain Dividends of Regulated Investment Companies (“RICs”)
• Employer Wage Credit for Activated Military Reservists
• Special Expensing Rules for Film and Television Production
• Increase in Expensing to $500,000 / $2,000,000 and Expansion of X Definition of Section 179 Property
• Reduction in S Corporation Recognition Period for Built-In Gains Tax
• Election to Accelerate AMT Credits in Lieu of Additional First-Year
• Depreciation
Low-Income Housing Tax Credit (LIHTC) Rate
• Treatment of Military Basic Housing Allowances under Low-Income Housing Creditj
• Three-Year Depreciation for Race Horses Two Years or Younger   

Energy Provisions 

• Construction Date for Eligible Facilities (Including Wind) to Claim the Production Tax Credit (PTC) or the Investment Tax Credit (ITC) in Lieu of the PTCn
• Special Rule to Implement Electric Transmission Restructuring Credit for Construction of Energy Efficient New Homes
• Energy Efficient Commercial Building Deduction

• Election to Expense Mine-Safety Equipment
• 
Credit for Energy Efficient Appliances
Credit for Nonbusiness Energy Property
• Alternative Fuel Vehicle Refueling Property
Incentives for Alternative Fuel
• Credit for Electric Drive Motorcycles and Three-Wheeled Vehicles

    Despite possible merit of any one of them, I do not think any of them should be extended. A taxpayer who has relied (or intends to rely) on Congress to extend the provisions to take advantage of any particular provision has taken a calculated risk and has failed to realize political fundamentals in Congress have changed.

• The revenue loss is great, needs to be made up or as they say “paid for”. There is no consensus on this point or just about anything in Congress these days.
• The federal fisk is a disaster. The federal deficit while a bit improved over the last year, is still enormous not to mention the cumulative e debt, now more than $17 trillion.
• The Tax Code is a mess. It needs fixed for so many reasons and the examination of each of these provisions should be done in a total review of the tax laws.
• There is a lack on political comity in Congress to allow almost anything to move forward. While there is support for a number of the provisions, some Democrats with the voracious appetite for taxes-any kind of taxes- do not want the provisions extended so more spending can be authorized and Republicans who loathe the deficit are reluctant to increase it without some sort of spending offsets.

Temporary tax provisions should be enacted very selectively and rarely. They mask the real costs and are not representative of an appropriate way to legislate.  Will these tax orphans be adopted again? Anything can happen, as it is Congress after all. My guess is extenders will be passed eventually, probably not this year but with retroactive effective dates, these guys never go away.

I say let these guys go for now. The expiring provisions can have a fair hearing, rise or fall on their own merits if and when tax reform moves forward.