Tax extenders -- the term given to provisions in the tax code that, if not renewed every year or two, will expire -- were the subject of a recent hearing of the U.S. Senate Finance Committee.
More than 130 extenders, from the R&D credit to deductions for state and local taxes, currently clutter the tax code, Senator Max Baucus (D-Mont.), ranking member of the Committee, said at the hearing. The uncertainty they create causes hassles for both homeowners and businesses. "For businesses to succeed, Congress must provide a stable and certain tax code," Baucus said.
Moreover, deciding whether to renew the extenders, and if so, how to cover the income foregone, takes Congress away from other issues. And, giving deductions or credits to certain groups of taxpayers means that taxes elsewhere have to go up, or expenditures down. Then, there’s a philosophical argument: "If a provision is worthy of being in the tax code, then it generally should be made permanent," Senator Orrin Hatch (R-Utah), also a ranking member, stated.
The upshot? Eliminating extenders and moving to a more stable tax code would offer many benefits.
Among those speaking at the Hearing was Dr. Rosanne Altshuler, professor and chair of the department of economics at Rutgers University. Altshuler also has served as special advisor to the Joint Committee on Taxation. She pointed out that what she called "the frequent ritual of being on tax code death watch only to be saved by last-minute clemency" creates tremendous volatility, as well as the perception that the tax code is unfair.
While a theoretical case can be made for temporary changes to the tax code -- that the expiration dates force policymakers to periodically evaluate a provision’s effectiveness -- "this reasoning is compelling in theory, but has been an absolute failure in practice as no real systematic review ever occurs," Altshuler notes. Instead, the extenders typically pass without an honest, thorough assessment.
Altshuler recommended two steps to fix the issue: One is isolating provisions that are fundamental policies of the tax system and making them permanent. The other is to evaluate the remaining provisions in the context of fundamental tax reform that broadens the tax base, simplifies the system and boosts its transparency and fairness, she said.
Jason Fichtner, a senior research fellow at George Mason University, also spoke, advocating a simpler tax code along with lower corporate tax rates. "High corporate taxes lead to lower wages and investment and hinder long-term economic growth. To protect American jobs and secure future fiscal stability, the United States must slash its corporate tax rate," he said.
Calvin Johnson, professor of law, The University of Texas School of Law in Austin, said he had identified 13 provisions that should be left expired. Among them: the deduction for state and local general sales taxes. His rationale: when a taxpayer gets a quid pro quo in the form of goods or government services, the expenditure should not be deducted. Sales taxes are especially likely to be an expense in which the taxpayer gets goods in return for the taxes paid, he said.
Johnson also listed nine provisions that could remain but needed work. One is the R&D credit. It should be revamped, he said, so that the provision would strictly define research to focus the provision on investments that give benefits to society at large beyond customers. As examples of research that fit this criteria, he points to the work that led to penicillin and lasers. "The current subsidies, however, waste money because the [tax provision] cost is spent for costs in which the customer is the only beneficiary, or for costs where the benefits beyond the customer are very modest," Johnson said.
Caroline L. Harris, chief tax counsel and director of tax policy, U.S. Chamber of Commerce, argued for the extension of many extenders as a means of helping the economy recover. "Leaving income in the hands of businesses is the best way to spur investment and job creation. Thus, to help drive the economic recovery, these annual provisions should be extended immediately." Harris also noted that many extender provisions have been in the tax code for many years, transforming them into long-standing deductions and credits that taxpayers have come to rely on when making business decisions.