CHN: Tax Extenders Bill Serves As Vehicle For Other Provisions

Shortly before adjourning, Congress passed The Tax Relief and Health Care Act of 2006, H.R. 6111, a wide-ranging package of tax, health care and trade measures.  Central to the bill is the extension of a series of existing tax credits and tax deductions benefiting corporations and mostly upper income individuals costing $38 billion over five years.
The “tax extenders package” which enjoyed bipartisan support, was deleted from the tax reconciliation bill in May, limited to $70 billion in cost, to leave more room for less popular tax cuts that would have needed 60 votes to pass the Senate without reconciliation protection.  This summer the extenders were coupled with legislation to increase the minimum wage and gut the estate tax.  Passage failed in the Senate due to opposition to the costly estate tax provision.

The biggest of the tax extenders in H.R. 6111 is the research credit with a 5-year price tag of $16.5 billion.  Companies claim to need this tax break to provide incentives for research.  However, research is already a profitable investment for most companies, and the products produced are often protected with patents and copyrights.

The next largest tax break continues the deduction for state and local sales taxes, costing $5.5 billion over two years.  The deduction can be taken in lieu of the deduction for state income taxes.  This provision helps people in the nine states that have no broad-based income taxes and rely more on regressive sales taxes to fund services.  Because many lower-income people do not itemize on their tax returns, people making more than $100,000 receive 60 percent of the benefits of this provision.

The third largest tax break is a deduction for college tuition and related expenses, costing $3.3 billion over two years.  Tax law also provides tax credits for college expenses, but these are phased out for those with incomes above $100,000.  This deduction is targeted at people making more than $100,000 and up to $160,000.

H.R. 6111 also contains several health-related provisions. One would delay for one year a scheduled January 1 pay cut for physicians who are reimbursed for treating Medicare patients.  The cut was dictated by a reimbursement formula in the Medicare system put in place in 1997 as a cost-controlling measure.  This one-year fix postpones a fuller resolution of this issue until next year.

Another health-related provision in the bill expands the amount of money that can be contributed tax-free to controversial health savings accounts (HSAs).  HSAs were created to encourage people to choose high-deductible insurance plans. They are popular among many employers because they are less expensive.  Others are concerned that over time they will lead to erosion of traditional plans and make health care less affordable for those least able to afford it.  Current law limits HSA contributions to the amount of a person’s insurance deductible and cannot exceed $2,700 for an individual or $5,450 for a family.  Under this law, contributions of up to $5,450 can be made even if the deductible is less than that.  Contributions are not taxable when withdrawn to pay for out-of-pocket health costs.  This provision will cost $1 billion over ten years.

A third health care provision important to low-income families included in H.R. 6111 was a 6-month extension of Transitional Medical Assistance (TMA), which would have expired at the end of the year.  The TMA program provides temporary health care coverage to families who have become ineligible for Medicaid because of increased income, in many cases because they have left welfare for work.

H.R. 6111 also contains a number of credits promoting alternative energy sources, and opens more areas to offshore oil drilling. Resolving a prolonged controversy, Congress opted for the narrower expansion of offshore drilling proposed by the Senate, with the new royalties from oil companies funneled not to the U.S. Treasury but directly to Gulf Coast states, to help pay for post-hurricane rebuilding.

The bill also renews incentives for employers to hire former welfare recipients, provides a benefit to mining companies to reclaim abandoned coal mines, includes trade provisions favorable to poorer countries when they export products to the United States, and contains 520 tariff suspensions worth tens of millions of dollars to U.S. corporations.  Finally, it authorizes the president to grant permanent normal trade status to Vietnam.

tax policy