The House Ways and Means Committee approved a bill (H.R. 6049) on Thursday that includes extensions of several temporary tax cuts targeting various interests (commonly referred to as "extenders") as well renewable energy tax incentives and a few new tax cuts. Unlike similar bills passed during the Bush years, this extenders package includes revenue-raising provisions to offset the costs.
Republicans Demand Increase in the Budget Deficit
Ranking member Jim McCrery (R-LA) and other Republicans on the committee argued that Congress should not have to offset the costs of extending tax cuts because these extensions amount to a continuation of current policy. But the tax cuts in question were never enacted as permanent tax cuts, so Congress never budgeted for the costs that they would present in future years if they were permanent (meaning the revenue "baseline" used by the Congressional Budget Office assumes that these tax breaks will expire). McCrery's logic implies that Congress should be able to enact any tax cut for a single year and then at the end of that year make it permanent without offsetting the costs.
The Tax Cuts in the Bill
The renewable energy tax incentives cost a total of $17 billion and the largest is the 3-year extension of the "section 45 tax credit" for the production of energy from renewable resources, at a cost of $7 billion.
The new tax cuts cost a total of $10 billion, and include a change in the AMT related to the treatment of stock options, a deduction for property taxes for non-itemizers which was also included in the housing legislation the House passed last week, and an expansion in eligibility for the Child Tax Credit for low-income people. The change in the credit is the biggest of this group, with a cost of about $3 billion.
First enacted during the Clinton administration, the Child Tax Credit was significantly expanded as part of the Bush tax cuts. It is now worth up to $1,000 for each child under age 17. But many low-income families do not benefit at all from the child credit, and many others get only partial credits. That's because the credit is unavailable to families with earnings below $12,050 (indexed for inflation), and the credit is limited to 15 percent of earnings above that amount. In other words, a working family making less than $12,050 this year is too poor to get any child credit. The bill would lower the child credit's earnings threshold from the current $11,750 to $8,500 and would no longer increase the threshold every year for inflation. The Center on Budget and Policy Priorities points out that 13 million children would be helped by this provision and describes some of the characteristics of the families likely to be affected.
The one-year "extenders" cost a total of $27 billion and include extensions of several tax breaks that have been criticized in the past by Citizens for Tax Justice, like the research and development credit, the deduction for state and local sales taxes, and the above-the-line deduction for tuition.
Despite these provisions, this bill is an important step forward because it improves the Child Tax Credit and maintains lawmakers' commitment to the pay-as-you-go (PAYGO) rules that require new tax cuts and entitlement spending to be paid for.
Revenue-Raising Provisions to Comply with PAYGO
The revenue-raising provisions are borrowed from a bill that the House approved last year. One would delay a law that has not even gone into effect yet and which will make it easier for multinational corporations to take deductions for interest payments that should really be considered expenses of foreign operations and therefore not deductible. Implementation of the new "worldwide allocation" rules would be delayed until 2019, raising about $30 billion over ten years.
The second revenue-raising provision would crack down on the use of offshore schemes that private equity fund managers use to avoid taxes on deferred compensation.
The tax code allows employees to defer paying taxes on money that they or their employers put into "qualified" retirement savings plans, such as 401(k)'s, until they take money out during retirement. But contributions to such "qualified" plans are limited, to no more than $30,000 a year depending on the type of plan. That's the sort of plan most Americans can get... if they're lucky.
Highly-paid corporate executives, however, often get to go a giant step farther. They can set up "non-qualified" deferred compensation plans, which are not taxable to the executives until they take the money out, but which are not deductible by companies until then either. Currently, there is no limit on how much money executives can defer taxes on through these plans. But the corporations who pay them also have to defer the deduction they take for whatever they pay into the deferred compensation plan, so in theory there is only a small loss to the Treasury (and to the rest of the taxpayers).
But private equity fund managers have managed to create an approach to deferred compensation that goes even farther, and does impose a substantial cost on the rest of the taxpayers. Private equity fund managers often have an "unqualified" plan into which is paid an unlimited amount of deferred compensation. But they arrange the payments to be technically made by an offshore corporation in a tax haven country that has no corporate tax, or a very low one, so the loss of the deduction is not an issue. Of course, this is done with paper transactions. No one is actually working in the tax haven country, so this is really just a scheme to increase the amount of deferred compensation that can be paid to these already highly-compensated fund managers without being taxed right away.
The bill approved by the Ways and Means Committee Thursday would close this loophole, raising about $24 billion over ten years.
These provisions are good policy based on fairness grounds alone. The need to raise revenue to prevent an increase in the budget deficit only makes them more important.
It is unclear whether these offsets will be included in the Senate version of the bill, which the Senate Finance Committee will likely mark up after the Memorial Day recess.