Last December, Congress approved, and President Obama signed, an extension of over 50 tax incentives that expired at the end of 2013. Although the extension of the incentives was retroactive to the beginning of 2014, critics of the current ad hoc approach point out that making tax incentives retroactive does relatively little to influence decisions made by consumers and businesses throughout the year.
This summer, perhaps sensitive to the criticism leveled against Congress for its approach to tax policy in recent years, the Senate Finance Committee approved a two-year extension of the 50-plus tax incentives through the end of 2016. The legislation commonly referred to inside the beltway as “tax extenders,” costs $95 billion and was approved overwhelmingly by the committee in a 23 to 3 vote.
It is the first time in 20 years that a new Congress began with tax extenders already expired. “All of these tax provisions are meant to be incentives – they are meant to encourage and promote certain activities,” said Sen. Orrin Hatch (R-Utah), Chairman of the Senate Finance Committee. “If they are expired, they aren’t doing much good.”
The Senate legislation includes tax incentives of interest to lumber and building material dealers such as the tax credit for consumers making energy efficient improvements to existing homes (25C), tax credit for builders making energy efficient improvements to new homes (45L), a commercial deduction for energy efficient improvements to public and commercial buildings (179D), accelerated bonus depreciation for businesses making capital investments (bonus depreciation) and enhanced first-year depreciation write-offs for small businesses (Section 179 depreciation deduction).
It is not clear though how quickly Congress will be able to send a tax extenders bill to President Obama for his signature. Rep. Paul Ryan (R-WI), Chairman of the House and Ways Means Committee, has spent most of the year focusing on an overhaul of international tax rules. Perhaps acknowledging that broad international tax reform is unlikely in this Congress, Rep. Ryan recently said, “It’s pretty clear to us in this administration, we’re not going to get the kind of tax reform we want to get.”
To their credit, House Republicans have passed several bills this year that would make some of the tax extenders items permanent in an attempt to spark negotiations with the Senate. In February, the House of Representatives approved legislation that would make higher Section 179 expensing levels for small business owners permanent and allow them to deduct up to $500,000 in qualifying expenses with a phase-out threshold of $2 million.
The White House has threatened to veto the House tax bills because they would add billions to the budget deficit. Making all the tax breaks permanent would add more than $1 trillion to the budget deficit over the next decade, according to the Joint Committee on Taxation.