Temporary or Permanent - Which Is Better?

The Joint Committee on Taxation notes that 73 provisions in the federal tax law expire at 12/31/09 (JCX-20-09). These include:

• Personal tax credits allowable against AMT
• Increased personal exemption amount for AMT
• Additional standard deduction for state and local real property taxes
• Above-the-line deduction for qualified tuition and related expenses (§222)
• Exclusion of unemployment compensation benefits from gross income
• Refundable credit for government retirees
• Increased §179 expensing to $250,000/$800,000
• New markets tax credit
• R&D credit
• Add’l 50% first year depreciation
• Credit for construction of new energy efficient homes (§45L)
• FUTA surtax of 0.2 percent
• 65% subsidy for payment of COBRA health care coverage continuation premiums

While there have been numerous bills introduced that extend just one expiring provision, such as the research tax credit or the special deduction for teacher supplies, we only just yesterday, saw a bill that extends many of the provisions and is promoted as revenue neutral. That bill, H.R. 4213, introduced by House Ways & Means Chairman Rangel, is projected to cost about $30 billion but has offsets. The bill is 110 pages long! The offsets:

• Foreign Account Tax Compliance Act of 2009 (H.R. 3933 & S.1934)
• Tax carried interest as ordinary income

The bill also calls for the Joint Committee on Taxation to submit report on each extended provision by 11/30/10.

The bill does NOT include a "patch" for the individual AMT for 2010. If such a patch is not enacted, millions of individuals for whom the AMT was not intended, will owe it in 2010. It is likely that the patch will be enacted, but perhaps was omitted from H.R. 4213 due to the cost and the desire to get something passed by year end. Unfortunately, the longer it takes to enact the "patch" the more complicated taxes become for millions of individuals because they won't know what their estimated 2010 taxes will be.

Most of the extended provisions in H.R. 4213 are extended for just a year. Several have been extended many times before. So, this all begs the question - is it best to keep special rules in a temporary form so they DO get reviewed by Congress regularly or is it best to not waste the effort and problems of delayed extension and just make these provisions permanent?

The answer depends.

• Some of these temporary items were for stimulus and should not be extended unless it is clear they worked and stimulus is still needed.
• Any provision that has been extended more than 5 times should be seriously looked at to see if it should become a permanent provision. The research tax credit is a good example. Yet, since it is an incentive provision rather than a provision that defines "taxable income" it should still be reviewed regularly. But, moving it beyond repeated one-year lifes would enable the credit to be better utilized because businesses could better factor it into future R&D plans.
• Accountability measures should be created for new tax breaks and they should all likely start off as temporary. When a deduction or credit is permanently enacted, it becomes "off budget" in that Congress has no obligation to review it ever (unlike line item budget items). When new provisions are enacted as temporary measures, they need attention when the expiration date comes up. THE PROBLEM with our current federal system is that there is no accountability measure designed with new provisions that would ensure that Congress has DATA it can use to determine if the provision should be extended, modified or left to expire. States have similar problems, but some do enact accountability measures to ensure that they have DATA before it is time to consider renewal of the provision.

Here is an example of an accountability measure. The State of Washington’s reduced B&O tax rate incentive available to certain manufacturers of solar energy systems sunsets on 6/30/14. The enacting legislation included a requirement that by 12/1/13, the Department of Revenue provide the legislature with a report that notes the number of solar energy system manufacturers in Washington, the change in number, and the effect on job creation from the reduced tax rate. [Washington, SB 5111, Chapter 301, Laws of 2005 (7/1/05)]

So, Congress should include some type of data reporting mechanism for incentive provisions and they should be enacted on a temporary basis. Renewal should then depend on whether the incentive is having the intended effect. This would ensure that provisions are not extended just for expediency.

Provisions that are design features, such as the AMT patch (an inflation adjustment should have been part of the original provision), should be permanently enacted.

For more information on H.R. 4213:

• Ways & Means summary
• Text of the bill
• Joint Committee on Taxation revenue estimates (JCX-59-09)

What do you think?