Good catching up with you yesterday, Mike, and getting to meet and chat with you, Ed. Jake, sorry I missed your appearance at the Yale Club tonight.
The Shelby bill was included as a rider on the Financial Services appropriations bill approved at a Senate Appropriations Subcommittee markup this morning. The full committee votes tomorrow.
Christmas in July? Some observers were caught by surprise when Senate Finance Chair Hatch and ranking member Wyden announced a sweeping proposal on Monday to reinstate almost the entire portfolio of expired tax extenders to apply to 2016 and retroactively to 2015-to-date and then held a markup session on it yesterday. The bulk of the cost of the extenders — breaks too expensive or controversial to make permanent but too popular to eliminate — comes from a few large tax breaks such as the research and development tax credit. The proposal, a $95 billion package extending more than 50 breaks, cleared the Committee, 23-3.
If the timing is curious, it shouldn’t be. Finance has been quietly focused on discussions among its ongoing internal working groups on tax reform and on the trade promotion legislation. Last year, Finance took care of the extenders package in April. The When Congress finally voted to renew them on their way out the door in December of last year, Wyden, who was then the chair of Finance commented, “This tax bill doesn’t have the shelf life of a carton of eggs.”
There is probably consensus on the Committee to dispense with the short-term extensions. Most say they prefer permanent policy, achieved through a revamp of the U.S. tax code that has eluded them for years. “For the sake of making this markup less contentious and to ensure we can more quickly provide much-needed relief to taxpayers, I’ve agreed to defer litigating the issue of permanence until a later time,” Hatch said in his opening statement. The bill itself includes this language: It is the “sense of the Senate that Congress should pursue comprehensive tax reform that eliminates temporary provisions from the tax code, thus making permanent those provisions that merit such treatment and allowing others to expire.”
The bill extends 52 different provisions, 31 of which apply to business taxes, while 13 are energy-related and another eight affect individual income tax returns. Extenders include the mortgage insurance premium deductions on individual tax returns, businesses tax breaks for research and experimentation costs, and tax credits for energy efficient construction.
The biggest tax break for individuals allows people who live in states without an income tax to deduct state and local sales taxes on their federal returns. Another protects struggling homeowners who get their mortgages reduced from paying income taxes on the amount of debt that was forgiven. Outside of R&D, the most commercially significant extensions were of the bonus depreciation for capital investments, a rule that lets U.S.-based multinational banks such as Citigroup defer taxes on their overseas financing income, and the wind energy break. Some extensions, including faster write-offs for small businesses and a deduction for teachers’ out-of-pocket expenses, were adjusted for inflation.
Several of them are highly targeted tax breaks that are legitimately questionable. There’s a special allowance for Puerto Rican rum, a cut tailored specifically to the owners of NASCAR tracks, one for buying electric motorcycles, and possibly the most controversial, a cut for the mostly wealthy owners of racehorses. Turned away without votes at markup were two amendments, one from Sen. Warner to scale back bonus depreciation — it failed amid objections from manufacturing-state senators in both parties — and another from Sen. Toomey to stop the production tax credit for wind energy.
The package’s ultimate fate this year is unclear. Majority Leader Mitch McConnell hasn’t said when the full Senate will vote, and the House has moved in a different direction, voting serially to make some breaks permanent, including the research credit and a provision that makes it easier to donate balances from retirement accounts directly to charity; it excludes the wind tax credit. The White House has threatened to veto the House bills because they would add billions to the budget deficit. And the president will hold out for EITC and the Child Tax Credit.