Tax Extenders: where the Senate stands

Today (August 28), the Senate Finance committee provided an updated revenue estimate and text for the bill –the so-called “Family and Business Tax Cut Certainty Act of 2012″–that it had approved on August 2 to extend $205 billion-worth of “temporary” tax cuts through 2013.  Most of these provisions are further extensions of the Bush cuts put in place going back to 2001, such as the annual “AMT patch” that comes about because the Bush tax cuts reduced the regular tax so much that the AMT does capture somewhat more taxpayers than it otherwise would have.  This is expected to be brought to the Senate floor in September.

Here’s what the Senate Finance extenders bill would do, with a cost of 143.221 billion for FY 2013.:

A. Main Individual Provisions

1. AMT exemption:  increase the exemption amount for the AMT (see table below:  the first amounts shown are post-2011 without the bill, the first increased amounts are for 2012 with the extender bill and the second increased amount is for 2013 with the extender bill) and allow the entire regular and AMT liability to be offset by nonrefundable personal credits during 2012 and 2013.

• married filing jointly and surviving spouses:  45,000 increased to 78,750 and then to 79,850
• other single individuals:                                33,750 increased to 50,600 and then to 51,150
• married filing separately:                              22,500 increased to 39,375 and then to 39,925

Note that the AMT would only affect .9 million taxpayers in 2013 under this schema.  The cost of this provision for increasing the exemption amount and allowing 100% of tax liability to be offset with credits is slightly more than 104 billion for FY 2013

2. Above the line deduction for classroom expenses of $250, at a cost of 273 million

3. Exclusion of income from discharge of indebtedness on principal residence (up to $2 million of discharged debt), at a cost of 199 million

4. parity for mass transit and parking benefits (extended retroactively to Jan 1, 2012), at a cost of 218 million 

5. extend deductibility of mortgage insurance premiums as qualified residence interest (rationalized as a way to encourage home ownership), at a cost of 791 million

6. deduction for state and local sales taxes, at a cost of 1.64 billion

7. deduction for qualified tuition expenses, at a cost of 2.32 billion

8. tax free distributions from IRAs to public charities up to $100,00 per year per taxpayer, at a cost of 594 million

B. Main business provisions (nothing less than 5 million covered here)

1. Extend and modify R&D credit (applying it retroactively back to 12/31/11), at a cost of 6.2 billion

2.  Indian employment tax credit, at a cost of 69 million

3.  50% tax credit for expenditures to maintain tracks, at a cost of 232 million

4.  work opportunity tax credit, at a cost of 947 million

5. special, shorter depreciation recovery for restaurants, leaseholds, motorsports racing facilities and businesses on Indian reservations, at a cost of 335 million

6. enhanced charitable deduction for food inventory, at a cost of 218 million

7. Increase in section 179 expensing amounts, with thresholds of 500,000 and 2 million, at a cost of 8.088 billion

8. election to expense mine safety equipment, at a cost of 27 million

9. special expensing rules for film

9. special deduction for income attributable to Puerto Rican production activities, at a cost of 236 million

10. modification of payments under existing arrangements to controlling exempt organizations, at a cost of 35 million

11. treatment of RIC dividends, at a cost of 124 million

12. extension of treatment of RICs as qualified for FIRPTA purposes, at a cost of 48 million

13. active financing exception to subpart F (for big banks with foreign subsidiaries), at a cost of 9.399 billion

14. look-through rules for CFCs, at a cost of 1.199 billioin

15. S corporation stock basis adjustment for charitable contributions of property, at a cost of 93 million

16. shorter period during which S corporations have to recognize built-in gains tax, at a cost of 184 million

17. empowerment zone tax incentives, at a cost of 360 million

18. Increase in excise taxes paid to Puerto Rico and the Virgin Islands, at a cost of 199 million

19. Extension and modification of credit for American Samoa, at a cost of 38 million

C. Main Energy provisions

1. Section 25C nonbusiness energy property extension/modification, at a cost of 1.456 billion

2. Alternative fueld vehicle refueling property provision, at a cost of 34 million

3. Cellulosic biofuel credit, and special depreciation for celluslosic biofuel plant properties and other items at a cost of 44 million

4. extension of numerous credits for biodieself and renewable diesel, at a cost of 1.881 billion

5. extension of various credits for renewable energy, at a cost of 122 million

6. energy-efficient home construction credits, at a cost of 74 million

7. energy-efficient appliances credits, at a cost of 155 million

8. Cost of “special rule for sales or dispositions” to implement FERC or state electric restructuring, at a cost of 596 million

9. excise tax creidts and outlays for alternative fuels, at a cost of 305 million

 The IRS made available an analysis of the difficulties in responding to potential changes to the AMT in time for filing of returns; that report is available at IRS Complexity Analysis (Aug. 13, 2012).  Links to pdfs of the Senate Finance Committee Report on the Family and Business Tax Cut Certainty Act of 2012 (Aug. 28, 2012); Estimated Revenue Effects; and text of the proposed legislation are available at the Senate Finance Committee website.

Many of these provisions–including the chartiable contribution deductions for value rather than actual investment, the R&D credit extension and the active financing exception extension for businesses, as well as the accelerated depreciation and expensing provisions, don’t appear to contribute to growth in the way that the proponents of the provisions claim.   The Finance Committee hasn’t made a strong case for continuing to include so many of these tax expenditure subsidies in the Internal Revenue Code.

Two of the business provisions are particularly unjustifiable.  There is no indiciation that businesses will not do research without getting a credit (instead of a deduction) for research expenses.  The Finance Committee justifies allowing this partly retroactive extension of the credit based on the benefit of research itself.  But the Committee hasn’t answered the right question–is it essential to research that businesses get a credit, rather than the deduction otherwise available, for research?  The Committee just states that research is important and the Committee “believes it is appropirate to extend the present-law research credit” [that's the TEMPORARY credit that was created more than a decade ago!] and the Committee has enhanced the credit by permitting someone who is selling the business to use the credit for expenses incurred before the sale and by making it easier for a controlled group to manipulate their income by allocating research expenses among the controlled businesses.

The norm in Congress is that all of these temporary provisions will be renewed year after year, no matter what the cost, while a significant faction in the House and Senate continue to push the idea that it is necessary to cut spending on health care and other social safety net costs, cut taxes for the wealthiest amongst us, and increase spending on our already bloated military.