Congress isn't great at getting things done. But when it comes to a host of tax breaks—ones that tend to benefit big businesses and wealthy individuals—it always manages to find a way.
When the Senate comes back after its April recess, it's slated to take up legislation that would extend $85 billion in tax breaks that would benefit everyone from NASCAR track owners and Hollywood studios to corporate multinationals. The bill includes more than 50 provisions known as "tax extenders"—tax breaks that were originally intended to be temporary, but which Congress has extended annually. It's poised to go through the motions again and pass yet another extenders bill with strong bipartisan support, without offsetting any of the cost.
Before its April recess, the Senate Finance Committee passed a two-year bill that revived nearly every tax extender that expired on December 31. The biggest items in the legislation include popular provisions like the $16 billion tax credit for research and experimentation, which both parties have supported for decades. Democrats also pushed to include provisions like the $13 billion credit for renewable energy production, one for energy-efficient commercial buildings, and a tax break for commuters who take mass transit—including bike-sharing programs—to work.
But this year, as always, the tax extenders bill also includes a slew of special-interest giveaways. There's a $71 million tax break to help racecar track-builders; a $336 million excise tax on rum imported to the U.S. from Puerto Rico and the Virgin Islands that goes back help their rum industries; and a $27 million film production credit for movie studios that make their films in the U.S.
The legislation also benefits some of the biggest multinational corporations and individuals. It continues what's known as the "active financing" exemption, which lets Wall Street firms and multinationals defer taxes on financial activities conducted overseas, at a cost of $10.4 billion over two years. Its biggest giveaway to individuals is a $6.5 billion deduction for state and local sales taxes that disproportionately benefits high-income taxpayers.
"Because sales taxes are already highly regressive, the deduction makes them more so because federal income tax filers on the lower end of the income distribution do not itemize and hence cannot claim the benefit," Josh Bivens of the Economic Policy Institute explained in February. "Further, the provision (like all tax deductions) is worth more the higher a filer’s marginal tax rate, and this skews the benefits to high-income taxpayers." In other words, high-income earners benefit more from the credit as they are more likely to itemize their taxes and the provision is worth more at higher marginal rates.
Howard Gleckman, a fellow at the Urban Institute, believes there's little difference between the tax breaks and direct government handouts to, say, the unemployed. "Just as the unemployment program transfers cash to a specific group, so do the scores of tax credits and other subsidies that some are hot to renew. Only the beneficiaries are different," Gleckman writes. "Instead of the long-term unemployed, they are Manhattan real estate developers, auto racetrack owners, movie studios, distillers of Puerto Rican rum, multinational corporations, makers of alternative fuel vehicles, etc."
Congress has continued to preserve this grab bag of loopholes in part because such special-interest giveaways are lumped together with provisions that few in Congress oppose: The research and development tax credit, for instance, and a fix to the Alternative Minimum Tax Credit to keep taxes from rising on millions of American households—one of the few tax extenders that was fixed permanently last year.
Tax extenders have also been thrown quietly into big pieces of legislation; the last package passed as part of the January 2013 fiscal cliff deal. And even those who hate some of the tax breaks have been willing to accept them to keep the parts they do like -- whether it's to let teachers write off school supplies they buy for their classrooms or prevent strapped homeowners from having to pay taxes on cancelled mortgage debt. An army of industry lobbyists have also pushed legislators to protect their parochial interests and claim getting rid of any number of them would be "job-killing."
Finally, Congress has not traditionally offset the cost of the legislation, which allows legislators to avoid having to make the difficult decisions that have often fueled political gridlock on Capitol Hill. And Republicans aren't insisting that they do so now, despite the $85 billion price tag of the legislation.
"Given that Congress is preventing a tax hike, tax extenders historically have not been offset," says Julia Lawless, a spokesman for Sen. Orrin Hatch, the ranking GOP member on the Finance Committee. "At times in the past, new policy, including expansions to currently expired or expiring provisions, have been offset. That precedent would most likely not be changed in this environment."
An earlier version of the bill had actually axed a few more provisions than usual, leaving out the so-called "NASCAR loophole," the film/TV production credit, and many of the energy-efficiency write-offs. "The mark we released earlier this week continued in that same fashion by further reducing the number of extended tax provisions. That is the direction I believe we should be moving," Hatch said in early April. But all but two of the tax breaks—one for energy-efficient appliances and another for expensing certain refinery property—made their way back into the Senate bill during the amendment process for the legislation.
No one in Congress really likes doing things this way, agreeing that the better approach would be to evaluate each tax break on its merits, decide which would become a permanent part of the tax code, and junk the rest. That's the basic logic behind comprehensive tax reform. But Congress has already given up on any hope of that any time soon. In fact, the major driving forces behind tax reform have already left Congress (former Senate Finance Chair Max Baucus) or are headed for the exits (retiring House Ways and Means Chair Dave Camp).
The new Senate Finance Committee Chair Ron Wyden promises this will be the very last time that Congress goes through this exercise. "This is a bi-partisan product and the Chairman has made it clear this will be the final extension," Wyden's office said in a statement after the bill passed out of committee. "We need to create certainty now for business and families while we work on the bigger goal of comprehensive reform—which will include putting a spotlight on each provision before deciding which deserve a permanent spot in a modern tax code."
But there's anger on both left and right that Congress will inevitably find a way to continue these tax breaks, as it's done so many times before, despite Congress’ seeming inability to get anything else done.
The Club for Growth has vowed to defeat the legislation, denouncing it as an "annual special-interest orgy" and lobbying lawmakers to vote it down. "Many tax extenders are government spending disguised as tax breaks, such as a three-year depreciation for racehorses," the group's president Chris Chocola wrote in the Wall Street Journal.
Liberal activists are also angry about the giveaways. “It is also troubling how quickly senators appear to be able to work out a deal on tax extenders that are unpaid for and largely benefit corporations while spending months crafting an emergency unemployment benefits package that is paid for by cutting other spending," Frank Clemente, executive director of Americans for Tax Fairness.