The lame-duck Congress is poised to conclude by passing a $450 billion package of deficit-financed tax breaks that primarily benefit businesses. Democratic leader Sen. Harry Reid is negotiating a deal with House Republicans, according to news reports.
The bill would make permanent several temporary tax breaks for businesses and extend others for two years without offsetting the cost. This Congress, which has refused to provide measures such as emergency unemployment benefits or highway projects unless the costs were offset, should not make one of its final acts a package of special interest tax breaks that fail to achieve any desirable policy goals. President Barack Obama has wisely threatened to veto the emerging deal.
It is especially troubling that both Democratic and Republican members are supporting tax extenders yet continue to ignore two temporary tax measures that should be made permanent, provisions that boost the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) for low-income, working families. These expire at the end of 2017 under current law.
Bill Makes Permanent Problematic Temporary Tax Breaks
Earlier this year, the Senate Finance Committee approved a limited package of two-year tax breaks, which is the sort of tax extenders legislation Congress has enacted in the past. A CTJ report explained that even a more limited bill would provide $85 billion in tax cuts that mostly go to businesses and fail to achieve policy goals.
The House of Representatives took an approach that was even more irresponsible, approving bills that would make many of the most costly and least effective tax breaks permanent.
To be sure, some of the proposed permanent tax breaks cost relatively little and achieve a policy goal that is not entirely unreasonable, such as an increase in the break for people who take mass transit to work. But the vast majority of the provisions that would be made permanent are costly breaks that do not seem to accomplish any policy goal. Here is some of what we said in our report earlier this year about these breaks:
The Research Tax Credit
The research credit needs to be reformed dramatically or allowed to expire. Accounting firms are helping companies obtain the credit to subsidize redesigning food packaging and other activities that most Americans would see no reason to subsidize. These firms also approach businesses and tell them that they can identify activities the companies carried out in the past that qualify for the research credit, and then help the companies claim the credit on amended tax returns. When used this way, the credit does not accomplish the goal of increasing business research.
Deduction for State and Local Sales Taxes
Lower-income people pay a much higher percentage of their incomes in sales taxes than the wealthy, but lower-income people also are unlikely to itemize deductions and are thus less likely to enjoy this tax break. In fact, the higher your income, the more the deduction is worth, since the amount of tax savings depends on your tax bracket. People earning less than $60,000 a year who take the sales-tax deduction receive an average tax break of just $100, and receive less than a fifth of the total tax benefit. Those with incomes between $100,000 and $200,000 enjoy a break of almost $500 and receive a third of the deduction, while those with incomes exceeding $200,000 save $1,130 and receive just over a fourth of the total tax benefit.
Section 179 Small Business Expensing
Section 179 is an accelerated depreciation break for smaller businesses, allowing them to write off most of their capital investments immediately (up to certain limits). A report from the Congressional Research Service reviews efforts to quantify the impact of depreciation breaks and explains that “the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”
Bill Extends More Than 50 Special-Interest Tax Breaks for Two Years
As explained in CTJ’s report, many of the remaining more than 50 tax breaks that would be extended for two years under the deal are also bad policy. For example, two provisions encourage U.S. corporations to shift their profits offshore. 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.
EITC and CTC Expansions Not on the Table
Expansions in the EITC and CTC that were first enacted as part of the economic recovery act of 2009 were last extended in the “fiscal cliff” legislation of early 2013. That law maintains these provisions through the end of 2017. The changes make the refundable part of the CTC more accessible to parents with very low earnings and increase the EITC rate for families with three or more children and for some married families.
A report published by Citizens for Tax Justice during the fiscal cliff debate concluded that 13 million families with 26 million children would be affected in 2013 by these provisions. The report includes national and state-by-state figures.
Congress Should Not Pass a $450 Billion Business Giveaway
The 113th Congress has had two years to make its mark and pass important legislation that would benefit ordinary Americans. At so many turns—from expanding emergency unemployment benefits, to passing transportation funding—they chose gridlock. In fact, Republican members used the deficit as a scapegoat for not doing anything for ordinary working people. This Congress should not make deficit-financed tax breaks that primarily benefit businesses one of its final acts. If the lame-duck Congress insists on making its mark on the tax system by making temporary tax breaks permanent, the EITC and Child Tax Credit expansions should be their top priority.