CHN: Ways and Means Committee Passes Expensive Corporate Tax Break; Three More Tax (Cut) Extenders Pass the House
On May 29, House Ways and Means Committee Chairman Dave Camp (R-MI) brought to the Committee legislation (H.R. 4718) to make permanent the ‘bonus depreciation’ tax cut. Depreciation allows companies to take a tax deduction for the cost of new equipment, software, and buildings as they lose value over time; bonus depreciation allows the deduction to be taken more quickly. Coveted by businesses, bonus depreciation was first enacted during the 2002 economic downturn as a temporary incentive to spur investment. It was allowed to expire in 2004 as the economy strengthened and was then reenacted in 2008. It was extended several times since then until it expired at the end of 2013. The most recent version of bonus depreciation allowed companies to deduct 50 percent of allowable expenses immediately. The 10-year cost of making permanent bonus depreciation has a huge price tag of $276 billion according to the Joint Committee on Taxation. There is no timeline for bringing the bill to the floor.
H.R. 4718 was packaged with five tax extender bills, so-called because Congress regularly extends these tax cuts for a year or two. Those bills would extend the IRA charitable rollover, make permanent charitable deductions for food inventory and property donated for conservation, and modify the excise tax on investment income of private foundations. All six of the bills passed the Committee on party line votes with all Democrats opposing and all Republicans favoring passage.
While some classify bonus depreciation as an ‘extender’, in a recent paper the Center on Budget and Policy Priorities makes the case that it is not an extender because it was always meant to be temporary. It further argues that it is an ineffective incentive for businesses to invest in the near-term if they believe it will continue to be extended. Analysis cited in the paper makes the case that very little economic activity is generated from bonus depreciation compared to the enormous loss of tax revenue. By bringing the bill up for a vote, Chairman Camp reversed his position in his comprehensive tax reform plan made public in February to let bonus depreciation expire.
Extenders Pass the House: The Ways and Means Committee passed an initial package of 6 tax extenders on April 29. On May 9, perhaps the most popular bill in the group, the tax credit for corporate research (H.R. 4438) was taken up on the House floor and passed with a veto-proof majority of 274-131. (See May 12 Human Needs Report.)
On June 12, the House voted to make permanent two small business-related extenders from the package. H.R. 4457 allows small businesses to immediately deduct the entire cost of purchases in capital investments up to $500,000 rather than as they depreciate over time. The bill also calls for adjusting that amount for inflation beginning in 2014, and eliminating the exclusion of air conditioning and heating units as property eligible for the expensing allowance. The measure passed 272-144 with 53 Democrats joining 219 Republicans in support of the bill. The 10-year cost of the bill is $73 billion.
The House also passed H.R. 4453, which combines two of the extenders relating to S corporations that passed Ways and Means as separate bills – H.R. 4453 and H.R. 4454. (S corporations are corporations whose profits are not subject to the corporate income tax, but are instead included in the income of their owners.) The bill would make permanent a reduction from 10 to 5 years the period gains of the corporation prior to becoming an S corporation are subject to tax, and the rule adjusting the value of shareholder’s stock when the S corporation makes a tax deductible charitable contribution. The bill passed 263-155 with 42 Democrats supporting passage. The 10-year cost of the bill is $2 billion.
While these bills enjoy strong bipartisan support, many Democrats argued that their cost should be paid for by closing other tax loopholes. Further, they contend that it is wrong to make these tax cuts permanent while Emergency Unemployment Compensation has not been extended and important improvements to the Earned Income Tax Credit and Child Tax Credit are scheduled to expire in 2017. The Administration made a similar case against passage of the bills, citing the double standard in its Administration’s Statement of Policy.
As the House passes more permanent tax reduction bills, advocates are concerned that their cost is eroding the $770 billion in tax savings in the American Taxpayer Relief Act of 2012, the so-called ‘Fiscal Cliff” deal. If all the bills approved by the House Ways and Means Committee were to be enacted, the ten-year cost would be $590 billion, according to the Center on Budget and Policy Priorities.
Action in the Senate has stalled since April 3 when it passed a retroactive two-year extension of nearly 55 tax extenders costing $85 billion. Republicans continue to insist on a wide open amendment process in exchange for floor action. Senate Leader Harry Reid (D-NV) is unwilling to allow divisive non-germane issues to threaten passage. (See April 14 Human Needs Report.)
Most still believe that the House and Senate will not come to agreement on the tax extenders until after the November midterm election.