Daily Tax Update - January 31, 2012: Tax Extenders Focus Of Finance Tax Reform Hearing

TAX EXTENDERS FOCUS OF FINANCE TAX REFORM HEARING:   Today, the Senate Finance Committee convened a tax reform hearing to discuss finding a long-term solution for the tax provisions that require frequent renewal, commonly called "ax extenders." The witnesses also evaluated "ax extenders through the lens of tax reform, evaluating what role tax extenders should play in a reform process aimed at broadening the tax base, lowering rates and making the tax code more fair, efficient and simple."

  • The witnesses were:
    • Dr. Rosanne Altshuler, Professor and Chair of the Economics Department, Rutgers University
    • Dr. Jason J. Fichtner, Senior Research Fellow, Mercatus Center, George Mason University
    • Calvin H. Johnson, Andrews & Kurth Centennial Professor of Law, The University of Texas School of Law
    • Caroline L. Harris, Chief Tax Counsel and Director of Tax Policy, US Chamber of Commerce.
  • In his opening statement, Chairman Max Baucus said, "T]oday not even our taxes are certain.  There are currently 132 expiring provisions in the code. . . . These policies, commonly-known as 'ax extenders,'expire every year or every two years.  The lack of certainty about these tax incentives is bad for American families, it’s bad for businesses looking to create jobs and it’s bad for our economy.  It leaves businesses unable to plan ahead and invest, because year-to-year incentives are ineffective." Baucus continued, "We need to address these tax extenders to provide long-term certainty.  And through tax reform, we should evaluate each and every extender and determine whether it should be allowed to expire or be made permanent. We should either address each incentive’s shortcomings and fix them, or we should let the incentive expire. This process, however, will take time – time that our recovering economy doesn’t have. Each day that businesses do not know whether tax extenders will be in place this year means less American manufacturing, less production and fewer jobs." 
  • In his opening remarks, Ranking Member Orrin Hatch said, "It is difficult to find many people who will argue that Congress can, or should, continue dealing with tax extenders in a business as usual manner. The explosion of temporary tax provisions in recent years is a very notable and problematic trend. The number of temporary tax provisions has grown from 42 in 1998 to 154 in 2011. Even those tax extenders that are sound tax policy lose much of their power due to their temporary character."  Hatch added, "Certainty in the Tax Code is a very important factor in allowing businesses to plan their affairs, make investments, and create jobs. And these job creators don’t want bad certainty — they don’t want to hear that their taxes are going up. Congress should provide this certainty by making permanent the provisions that are worthy of remaining in the law, and eliminating those that are not. Chairman Baucus and I agree, along with many of our colleagues, that the current tax code demands comprehensive reform. In the meantime, before tax reform is accomplished, Congress needs to decide what to do about the tax extender provisions that have expired."
  • Dr. Altshuler testified, "The vast majority of extenders we are considering today were originally enacted to provide specifically limited incentives for certain activities or investments. Unlike other tax provisions that provide targeted tax benefits, however, extenders have a limited shelf life. Much like the items in the meat section of the grocery store, our tax code is littered with expiration dates. As we will hear today, the past-due inventory is quite large. I believe these extenders must be considered within the context of fundamental tax reform." She added, "In deciding whether to let the traditional extenders expire, I suggest we take the following two steps. First, isolate provisions that are fundamental policies of our current tax system and make them permanent. It does not make sense for provisions that are more properly considered structural features of our tax system, like the active finance exception, to be temporary in nature. If the tax system provides deferral for active business income earned abroad of US corporations in controlled foreign corporations (as it does), it should not single out certain types of active business income and subject it to current taxation. Second, admit that the remaining provisions, however well-intended, should be evaluated along with similar permanent provisions in the context of fundamental tax reform."
  • Dr. Fichtner stated, "The United States has an infamously dense and complicated tax code that is in dire need of simplification. Temporary tax provisions only further the day of reckoning and postpone the tough choices that need to be made. Systemic problems exist not only in loopholes and tax havens, but also in the uncompetitive high corporate income tax rate and the worldwide-based tax system that encourages businesses to move jobs and investment overseas and to lobby for more loopholes. High corporate taxes lead to lower wages and investment and hinder long-term economic growth. To protect American jobs and secure future fiscal stability, the United States must slash its corporate tax rate. Absent sweeping corporate tax reforms, US competitiveness will continue to languish. Inaction will create troublesome results: the foreign outsourcing of economic activity, a further loss of American jobs, the sale of US companies to foreign multinational companies, a further erosion of the corporate tax base, and the continuation of harmful tax policies that are biased against saving, investment, job creation, and economic growth."
  • Professor Johnson testified, "I have gone through the [extenders] list and conclude that 13 of the provisions, worth about $18 billion over ten years, need to be left expired. They expired at the end of 2011 and good riddance. Rejoice in the news that they are dead.  For 9 of the provisions, worth $12 billion over ten years, there is a worthy cause, but the provisions need to be reworked to cut out the fat in the program and government-caused waste. The provisions need to be refocused on their worthy goal with greater efficiency. For 3 of the provisions, worth $2 billion over ten years, the government does not know enough to know whether the government is getting its money’s worth for its costs. Indeed, there are $6 billion over ten years in the provisions I did not know enough about to talk about them, and there might be junk in the group that I cannot talk about." 
  • Ms. Harris stated, "[W]e believe that the extension of these annual extender provisions cannot be delayed until work on comprehensive tax reform is complete. Taxpayers need stable and predictable rules they can rely upon while that important process is completed. We strongly urge the Committee and Congress to act quickly to extend these longstanding policies and prevent unnecessary damage to the economy and job creators."
  • Testimony can be accessed here.
  • The Joint Committee on Taxation’s description of the expiring tax provisions can be accessed here.
  • For additional information, contact Philip R. West - pwest@steptoe.com or  Amanda Varma - avarma@steptoe.com

OBAMA PROPOSES "STARTUP AMERICA" INITIATIVE AIMED AT SMALL BUSINESSES:  Today, President Obama sent a "Startup America Legislative Agenda" to Congress aimed at “expanding tax relief and unlocking capital for startups and small businesses that are creating jobs.”  The President said, "As I mentioned at the State of the Union that there have been discussions, bipartisan discussions between Republicans and Democrats, about a whole set of measures that can accelerate financing to startup companies; can provide tax breaks to startups and small businesses that are interested in either hiring more workers or increasing their wages; that looks at innovative ways for them to raise capital.  And my expectation and hope is, is that they will get a bill together quickly, that they will pass it and get it on my desk.  I will sign it right away, and I would like to see that bill signed this year."

  • The tax provisions include:
    • "Cutting taxes for small businesses:  The President is proposing to build on the 17 small business tax cuts he has already signed into law with four new tax cuts to encourage growth and investment:
    • Expand and Make Permanent Zero Capital Gains on Small Business Investments:  The President is proposing to make permanent a tax cut he put forward and signed into law in 2010 that eliminates taxes on capital gains in key investments in small businesses.
    • Reward Job Creation with a New Jobs and Wages Tax Credit:  The President is proposing a new tax credit for 2012 that would provide a 10 percent income tax credit on new payroll for small businesses—through either hiring or increased wages—added in 2012.
    • Double Deductions for Startup Expenses:  The President is proposing to permanently double the amount of start-up expenses entrepreneurs can deduct from their taxes from $5,000 to $10,000.
    • Extend 100 Percent Depreciation: The President is proposing to extend 100-percent first-year depreciation for one year, effective for qualified property acquired and placed in service before January 1, 2013."
  • Additional information can be accessed here.

As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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