Tax loophole or policy fix? It can be in the eye of the beholder
When John Boehner affirmed last month that Republicans would be willing to close tax carve-outs and loopholes—even if it raised rates for some—to come to a grand bargain on taxes and the deficit, it seemed to suggest a path to compromise. The problem is that what constitutes a tax loophole is can be in the eye of the beholder.
Take the so-called NASCAR loophole, which gives racetrack owners a tax break by accelerating the depreciation of their tracks. Seems like a clear case of lobbying run amok. But supporters like Rep. Mike Thompson (D-Ca.) believe that provision--which was first introduced in 2004--corrects part of the tax code that “treats one theme park differently from other theme parks,” as the California Democrat told a House Ways and Means subcommittee the morning.
In other words, one man’s special-interest giveaway is another man’s attempt to level the playing field. And the stage is already set for a big showdown over the issue this year.
The early debate on the fiscal cliff has mostly focused on the two biggest changes that are set to take effect on Jan. 1: the Bush tax cuts and the automatic spending cuts under the sequester. But yet another major piece will be in play: dozens of temporary tax provisions that make up one-eighth of the $450 billion of the fiscal cliff’s deficit reduction, according to the Tax Policy Center’s Donald Marron, who testified at the House hearing.
They run the entire gamut of domestic policy, spanning energy (e.g., production tax credits for wind power), business (e.g. a tax credit to spur investment in low-income communities), housing, transportation, charity, and disaster relief. Technically speaking, many of the tax extenders—like the NASCAR tax break—have already expired: Congress, consumed by the payroll tax debate, didn’t renew them at the end of 2011. But most of their revenue impact won’t happen until Fiscal Year 2013, when people start doing their taxes for 2012. So the real debate over the extenders has been deferred to the end of the year.
There’s bipartisan consensus that this isn’t the best way to make policy: having short-term tax provisions that are constantly sunsetting but are often renewed (and applied retroactively) creates a huge amount of uncertainty, and the current political gridlock has makes the situation even worse.
Instead, both parties say they’d really prefer to include the extenders as part of a comprehensive tax overhaul, to determine which provisions should actually be made permanent, reformed, or eliminated altogether. But that kind of deal is not likely to happen any time soon, so another short-term fix is expected
Some of these nominally “temporary” tax extensions have been around for so long that they’re unlikely to go away entirely: the “research and experimentation” tax credit for driving innovative businesses has been renewed 14 times since it was first introduced as a temporary credit in 1981, according to the Tax Policy Center. But others could end up being targeted as lawmakers try to face down “taxmaggedon”-- particularly those that could be characterized as counterproductive loopholes for special interests.
Republicans, for instance, have criticized the production tax credits for clean energy as giveaways that distort the market. “Industry can grow to become dependent on these,” the American Enterprise Institute’s Alex Brill told House lawmakers this morning. “We need to think about a phase out.” And both parties may decide that eliminating smaller tax breaks is the lesser of two evils in terms of avoiding the fiscal cliff.