Revenue & Spending
Expiring Help for the Unemployed or Expiring Tax Breaks: What Will Congress Extend?
by Scott Klinger, 1/14/2014
December was a tough month for those down on their luck. More than a million long-term unemployed workers, having already been out of work for at least six months, saw their unemployment insurance abruptly cut off. Just weeks before this happened, federal food assistance for children, seniors, and people with disabilities was reduced. Job growth was anemic, and the unemployment rate fell because many people simply stopped looking for work (and so moved from "unemployed" to "out of the labor market").
But as Congress returns in the new year, members will face an army of corporate lobbyists clamoring for the renewal of recently expired tax breaks that boost corporate profits but deliver little to the broader economy. Congress should allow the tax breaks to expire and use the savings to extend programs like unemployment insurance and the Supplemental Nutrition Assistance Program (SNAP) – programs that boost the economy, preserve jobs, and help those facing the greatest economic uncertainty.
Fifty-Five Tax Breaks Expired on New Year's Eve
Dec. 31 marked the expiration of 55 tax breaks collectively known as "extenders." Extending these provisions through the rest of 2014 would cost $54 billion, according to the Congressional Research Service.
The "tax extenders" are a rather disparate package of tax breaks that benefit a broad range of interests. Common among them is that all were adopted as "temporary" measures but have been repeatedly extended. For example, the research and development tax credit that allows businesses to deduct qualified research expenses was first adopted in 1981 and has been extended 14 times since.
By pretending that these seemingly permanent fixtures of the tax code are temporary and having them technically expire every year or two, Congress has been able to mask their true impacts on the budget. If these tax breaks were all made permanent, their combined ten-year cost (FY 2014-2023) would be $938 billion.
The extenders package is usually attached to a "must-pass" piece of urgent legislation, often as the part of a backroom deal, to avoid significant public debate. The most recent extension of these tax breaks came in early 2013 as a part of the American Taxpayer Relief Act (ATRA), which resolved the "fiscal cliff" crisis.
In addition to extending the Bush tax cuts for all but the very wealthiest Americans, ATRA provided a permanent fix for one of the most important tax extenders: the flawed alternative minimum tax. The alternative minimum tax (AMT) was established in 1969 to ensure that wealthy families paid some tax, but as more families became affluent and hit the non-inflation adjusted rate, increasing numbers of middle-class taxpayers were subject to the tax. To repeal the tax would balloon deficit estimates; to allow the AMT to be charged to more and more families would subject hundreds of thousands of middle-class taxpayers to large additional tax bills and was politically explosive. Because of this, Congress regularly passed a "patch" that provided exemptions to the large number of affected families in order to keep them from having to pay this tax. ATRA finally indexed the AMT to inflation. With the alternative minimum tax now out of the equation, Congress will face strong pressure to adopt "pay-fors" for any of the 55 tax breaks that expired in December.
This creates a climate for a more robust debate of the merit of each tax extender. Sen. Orrin Hatch (R-UT), ranking member of the Senate Finance Committee, recently told Bloomberg BNA, "The extender package is a very difficult thing to do. I am going to insist that we cut back rather than just keep all of them. We should only do the ones we really should do."
Don't Extend Tax Breaks with Limited Social and Economic Value
The nearly five dozen extenders benefit both individuals and businesses. Some are widely used by middle-class families – the ability to deduct state and local taxes on federal tax returns being one example. Others – such as the controlled foreign corporation offshore loophole – allow prosperous firms like Apple to establish foreign subsidiaries that report income and pay taxes to no nation.
Many extenders serve a positive social function, such as the one that allows elementary and secondary school teachers to deduct up to $250 of the cost of classroom supplies that they buy for their classes out of their own pockets (2013 cost: $240 million) or the one that allows homeowners to deduct the cost of energy-efficiency improvements made to their homes (2013 cost: $1 billion).
Other tax extenders provide limited economic and social value, subsidize business activities that would have been undertaken anyway, or provide taxpayer support for profitable entities already doing quite well.
Here is our list of candidates fitting the above criteria, and that Congress should either significantly reform or eliminate entirely:
- Extension of Active Financing Exception: The tax code requires that certain types of income, including income from financing activities, be recognized when earned. The Active Financing Exception creates an exception that allows corporations to set up foreign finance subsidiaries and then to defer taxes on income these subsidiaries earn, allowing those who use it to save on their tax bills. This was a long-standing provision in the federal tax code but was eliminated during the sweeping 1986 reforms of the corporate tax code under President Ronald Reagan. It was reinstated in 1996 following an intense lobbying campaign by General Electric, which, along with J.P. Morgan, Citigroup, and other banks, are the biggest beneficiaries of this tax break. The Active Financing Exception is one of the primary reasons General Electric pays so little in corporate income taxes, according to Citizens for Tax Justice. (2013 cost: $9 billion)
- Extension of Controlled Foreign Corporation Look-Through Rules: This provision allows multinational corporations to create what Edward Kleinbard, former Chief of Staff for Congress's Joint Committee on Taxation, calls "stateless income." Profits earned in one nation are shifted to another – usually with low or no taxes – through paper transactions whose principle purpose is tax avoidance. The Senate Permanent Subcommittee on Investigations reported last year that Apple had used this provision to shift $30 billion of profits to an Irish subsidiary, which neither reported income nor paid taxes in Ireland, the United States, or any other nation. (2013 cost: $1 billion)
- Extension of bonus depreciation: First established during the 2002 stimulus bill, this provision allows businesses to write down the cost of new equipment purchases more quickly. This tax break often subsidizes purchases that businesses would make anyway, and each dollar spent on this policy generates just 20 cents in economic activity. Because there is no stipulation that materials purchased have any domestic content, this subsidy does not necessarily stimulate U.S. job creation. In fact, if equipment purchased allows businesses to automate, replacing labor with machines, it may in fact be subsidizing the loss of American jobs. (2013 cost: $34 billion)
- Extension of the research and experimentation tax credit: This provision allows businesses to receive a direct tax subsidy for certain research aimed at developing new products or improving existing ones. While there is undoubtedly some value in taxpayer support for research that otherwise would not be done, there is also a strong case to be made that this tax break does not always support the sort of innovation that Congress intended. Critics such as Citizens for Tax Justice have called for reforming and refocusing this credit and have pointed out examples like companies taking advantage of this credit simply by redesigning food packaging. With 82 percent of this credit going to corporations with more than $250 million in sales, it is not primarily being used by start-up businesses where capital is scarce. In addition, the IRS reports that the R&E Tax Credit is often claimed on amended tax returns by businesses that did not realize they were entitled to it. This raises the question about providing a subsidy for work that a for-profit business was perfectly willing to undertake without a subsidy from taxpayers. (2013 cost: $6 billion)
- Provisions that benefit the already prosperous: Subsidies for NASCAR track owners (cost: $50 million in 2013), extra tax breaks for TV and movie producers ($270 million in 2013), subsidies for Puerto Rican rum producers ($240 million in 2013), and tax breaks for race horse owners (less than $50 million in 2013) should all be candidates for reduction or elimination.
(For a complete list of extenders and their 2013 cost, click here.)
Extend Programs That Create Jobs and Protect Vulnerable People
Programs like unemployment insurance and SNAP have a demonstrated positive value for those who receive benefits. The modest $300-a-week average unemployment check allows a jobless worker and his or her family to stay in a home and pay the utility bills and for gas or transit costs so that job searching may continue. SNAP helps millions of children, elderly, and disabled people, as well as low-wage workers, buy food.
SNAP and unemployment insurance also create jobs and stimulate the economy. Americans receiving unemployment benefits and nutritional support almost always spend those funds as soon as they receive them, immediately circulating cash into their communities. Unemployed workers' weekly checks help sustain the jobs of those working in neighborhood stores, gas stations, power plants, banks, and doctors' offices. In fact, each dollar spent on unemployment insurance generates $1.55 in economic activity. By refusing to extend unemployment insurance, Congress is taking $600 million out of the nation's economy every week and risking the jobs of many who are currently employed.
SNAP benefits have an even more powerful economic impact. Each dollar spent on SNAP benefits generates $1.79 in economic activity, according to the U.S. Department of Agriculture (USDA), which oversees the SNAP program. Each billion dollars invested in SNAP creates or preserves 8,900 jobs for grocery workers, truck drivers, food plant workers, and farmers, according to USDA. The $9 billion in SNAP cuts currently being considered by Congress puts 80,000 jobs in jeopardy.
Yet federal emergency unemployment benefits lapsed for 1.3 million long-term unemployed three days after Christmas. Another estimated 3.8 million jobless Americans who have been unemployed for at least six months will lose their benefits over the course of the next year unless Congress extends this lifeline program. In November, Supplemental Nutrition Assistance Program (SNAP) benefits were reduced after an increase provided in the 2009 Recovery Act was allowed to expire. The average family of three saw their nutrition assistance drop $29 a month, reducing the per-meal subsidy to just $1.40 per person.
Recent polling shows that the American people want Washington to do more to address the economy, job growth, and inequality. A majority want corporations and the wealthy to pay more in taxes. With corporate profits and stock market prices both at record levels, and the wealth of the world's billionaires increasing steadily, we need to close the loopholes that provide public subsidies to those who need them the least, and support those who need it the most. Doing so protects jobs, stimulates economic activity, and is simply the decent thing to do. Let's hope those elected to "the people's House" agree.