There are two types of tax legislation Congress may enact after it returns to Washington for its lame duck session in November: bad policy and extremely bad policy.
The Least Bad Scenario
Let’s start with the least terrible scenario, which would involve Congress enacting the Expire Act, the “tax extender” legislation approved by the Senate Finance committee in April. This bill would extend for two years a list of tax breaks so long that almost no one understands them all. (Except us, of course, see our report explaining them.)
The bill is an $85 billion deficit-financed handout to businesses at a time when lawmakers refuse to provide any help to working people hit hard by the recession unless the costs are somehow offset.
You want to extend emergency unemployment insurance? That must be paid for. Want to undo the automatic spending cuts that slashed Head Start and medical research before Congress curbed them last year? Savings were found elsewhere to prevent an increase in the deficit. But businesses get a free pass as Congress shovels another $85 billion in deficit-financed tax cuts at them. If Congress continues this tradition of extending these breaks every couple of years, the cost over the next decade will be around $700 billion.
The tax extenders are also mostly bad policy. Some provide subsidies to businesses for doing certain things, like investing in research or equipment, that they would have done anyway, resulting in a windfall for companies and no clear benefit to the rest of the taxpayers. As our report explains, some of the extenders even encourage offshore tax avoidance by corporations.
However, the damage of this bill pales in comparison to what the House of Representatives has pursued this year.
The Very Bad Scenario
Not satisfied with the Senate’s approach, the House voted to make several of these provisions permanent, which of course has a much bigger price tag and eliminates the possibility of ever getting rid of them, or at least reforming them. The question on everyone’s mind is whether or not House Republicans will demand that tax legislation enacted during the lame duck session must include at least some of these permanent provisions.
One tax break the House has voted to make permanent is the research credit, at a cost of $155 billion over a decade. CTJ has assailed the research credit for subsidizing activities that most Americans would not consider “research.”
“In fact, the definition of ‘research’ is so vague that Congress seems to be inviting companies to push the boundaries of the law and often cross it. The result is the type of trouble associated with accounting firms like Alliantgroup, which is managed by a former high-level staffer of Senator Chuck Grassley of Iowa and has former IRS commissioner Mark Everson serving as its vice chairman. Alliantgroup’s clients range from a hair care products maker who claimed its executives were doing ‘research,’ to a software company who was advised to claim that its purchasing manager was doing ‘research.’”
Another tax break the House has voted to make permanent is “bonus depreciation,” which is a significant expansion of existing breaks for business investment, at a cost of $269 billion over a decade. The Congressional Research Service's (CRS) review of the research on bonus depreciation found that it does not affect the overwhelming majority of firms’ investment decisions and is an ineffective way to stimulate the economy.
Members of the House majority might clamor for some other tax cuts that they also approved this year.
Repeal of the Medical Device Tax
Enacted as part of healthcare reform, the medical device tax raises a critically needed $26 billion over the next ten years to help pay for the costs of expanding healthcare to millions of Americans. It’s interesting that the House is so eager to award the medical device company Medtronic, which has lobbied for repeal of the tax, even while the same corporation plans to “invert,” and claim to the IRS that it is a foreign company that is mostly not subject to U.S. corporate income taxes.
Ban on State Taxes on Internet Access
While the argument for restricting state and local governments from placing any tax on internet access was weak back in 1998, it makes zero sense in 2014 to continue to coddle the goliath internet companies by allowing them to escape the kinds of taxes that states impose on other services.
Before leaving Washington, the House voted to combine these provisions into a staggering half-trillion-dollar giveaway as part of the so-called Jobs for America Act.
If Congress is going to throw $85 billion in tax cuts at corporations, it would seem logical to at least attach one of the proposals that would end the worst tax dodging we have seen in years: corporate inversions. Corporations are basically claiming to be foreign companies to avoid taxes. In a spectacular failure to take responsibility, Congress went home to campaign without closing the loopholes that make inversions possible. The chairman of the Senate Finance Committee, Sen. Ron Wyden, is said to be negotiating with the committee’s ranking Republican, Sen. Orrin Hatch. Sen. Hatch has declared that he could not agree to any anti-inversion legislation unless it met a list of impossible and bizarre conditions, including absolutely no revenue raised and steps taken towards a territorial tax system. A deal between Wyden and Hatch seems unlikely, but it could happen.
Two Offshore Corporate Tax Breaks
The House has not voted to make permanent the two tax extenders that provide breaks for corporations’ offshore profits — but there is reason to wonder if they will try before this Congress ends. One of these breaks is the active financing exception (the G.E. loophole), which provides an exception to the general rule that corporations cannot defer paying U.S. taxes on offshore income when it takes the form of interest (which is easy to manipulate for tax avoidance purposes). Another is the seemingly arcane “CFC look-through rule” which aided Apple’s infamous tax avoidance schemes.