Congress is letting 55 popular tax breaks expire at the end of the year, repeating a practice that creates uncertainty for millions.
The lawmakers eventually renew the breaks almost every year, retroactively. But only after having let the provisions lapse in the first place. The tax breaks save billions of dollars for those who are eligible for them.
The widely varying breaks affect both big businesses and individuals. They range from deductions for part of college tuition and mortgage insurance premiums to targeted tax breaks for certain industries such as railroads, and filmmakers.
Georgia Republican U.S. Sen. Johnny Isakson says even if Congress decides to renew these tax breaks retroactively, it’s still doing harm to the economy by making businesses skittish about spending money in certain ways.
Isakson said the expiring tax break he hears most about from his constituents is for bonus depreciation on farm equipment, a boost for agriculture, Georgia’s largest industry.
“It’s a bad, bad, bad idea to finish the end of the year without having a conclusive answer one way or the other on tax extenders,” said Isakson, who serves on the Senate Finance Committee, which oversees tax policy. He added that given Congress’ recent unpredictability, he would not predict whether both chambers will act swiftly on a fix.
Taxpayers technically won’t be hit for the expiring provisions until 2015, when they file returns for next year. Not so far.
Trade groups and tax experts complain about the practice. “It’s a totally ridiculous way to run our tax system,” said Rachelle Bernstein, vice president and tax counsel for the National Retail Federation. “It’s impossible to plan when every year this happens, but yet business has gotten used to that.”
Some of the tax breaks are big, including billions in research and development credits, exemptions for financial institutions doing business overseas, and several breaks that let businesses write off capital investments faster.
A deduction for state and local sales taxes benefits residents of the nine states without state income taxes. Smaller tax breaks benefit college students and commuters who use public transportation. More obscure ones benefit racetrack owners, makers of electric motorcycles and teachers who buy classroom supplies with their own money.
James Robertson, a tax adviser at H&R Block in Marietta, said lower-income people are more likely to claim the deduction for state and local sales taxes than clients who claim the state income tax deduction.
For those people who are worried that that the sales tax deduction is about to go away permanently, he added, “today would be a good day to go out and buy.”
The annual pattern is a symptom a divided, dysfunctional Congress that struggles to pass routine legislation, said Rep. John Lewis of Atlanta, a senior Democrat on the tax-writing House Ways and Means Committee.
“It’s not fair, it’s very hard, it’s very difficult for a business person, a company, to plan, not just for the short term but to do long-term planning,” Lewis said. “It’s shameful.”
With Congress on vacation until January, there is no chance the tax breaks will be renewed before they expire. And there is plenty of precedent for Congress to let them expire for months without addressing them. Most recently, they expired at the end of 2011, and Congress didn’t renew them until New Year’s Day 2013 — just in time for taxpayers to claim them on their 2012 returns.
But Congress only renewed the package though the end of 2013.
Why such a short extension? Washington accounting is partly to blame. The two-year extension Congress passed in January cost $76 billion in reduced revenue for the government, according to the nonpartisan Joint Committee on Taxation. Making those tax breaks permanent could add $400 billion or more to the deficit over the next decade.
This year, the package of tax breaks has been caught up in a debate about overhauling the entire tax code. The two top tax writers in Congress — House Ways and Means Committee Chairman Dave Camp, R-Mich., and Senate Finance Committee Chairman Max Baucus, D-Mont. — have been pushing to simplify the code by reducing tax breaks to lower overall tax rates.
Their efforts have not borne fruit, leaving tax reform and the package of temporary breaks in limbo. When asked how businesses should prepare, given the uncertainty, Camp said: “They need to get on board with tax reform, that’s what they need to do.”
Further complicating the issue, President Barack Obama has nominated Baucus to become U.S. ambassador to China, meaning he will soon leave the Senate, if he is confirmed by his colleagues.
Isakson is in favor of overhauling the tax code, but said it will take a “catalytic agent from the outside” to spur action. He said he’s not confident in a big reform coming together in 2014, given that it’s an election year.
