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Senate Finance Committee members this week supported seemingly contradictory goals. They voted to extend narrow tax breaks even as they touted an overhaul of the tax code that would imperil some of those same benefits.
A $205.1 billion proposal, approved yesterday by the panel on a 19-5 bipartisan vote, would provide breaks for corporate research, wind energy producers and financial-services companies doing business outside the U.S. It also would prevent the expansion of the alternative minimum tax for 2012 and 2013.
“Tax reform is so monumental, is like the earth being hit by a huge asteroid,” said Senator Jay Rockefeller, a West Virginia Democrat who distinguished the bill from the trade-offs that would be part of an eventual tax overhaul. “We all know that we’re going to have to do some things that we don’t want to do at all, and I think people are kind of prepared to.”
During and after the panel’s discussions, committee members agreed that an overhaul of the U.S. tax code is necessary. They split on whether yesterday’s effort shows that the committee can tackle tax policy across party lines or that lawmakers weren’t bold enough in letting tax incentives lapse and confronting the entrenched interests that lobby for extensions.
“This was a pitiful effort at trying to reduce the number of credits that we had out there in a time of fiscal crisis in the country,” said Senator Richard Burr, a North Carolina Republican who voted against the proposal. “If it’s a practice round, it’s certainly not going to bode very well for tax reform.”
Senator Max Baucus, the committee’s chairman, wrote the proposal along with Senator Orrin Hatch, a Utah Republican. Baucus, a Montana Democrat, added several provisions before the vote, including a one-year extension of the production tax credit for wind energy through 2013 and an extension of a benefit for owners of motorsports tracks.
“By working together here today, we’re proving we still have the capacity to do what our bosses, that is the American people, sent us here to do,” Baucus said. “That is: Get things done.”
The committee’s effort was “pathetic but not surprising,” said Howard Gleckman, a resident fellow at the Urban Institute and a blogger for the nonpartisan Tax Policy Center in Washington.
If anything, he said, the risk of elimination and eventual rescue of some of the tax breaks fueled lobbying and campaign contributions around the lapsed provisions.
“All these guys work together and they support one another’s tax preferences,” he said. “And you somehow have to find a way to break that coalition and create an environment where it’s every industry for itself.”
Hatch, while saying he wanted to eliminate more breaks, emphasized that the committee had declined to extend many others. Among tax benefits that the measure would allow to lapse are those for investment in the District of Columbia, Gulf Coast incentives created after Hurricane Katrina in 2005 and a benefit for rehabilitating contaminated sites.
The committee continued some breaks for individuals, including a deduction for teachers’ out-of-pocket expenses and an optional deduction for state sales taxes.
Hatch said yesterday’s debate was a “dry run” for a tax overhaul. Other lawmakers called it a “beginning,” a “prelude,” the “prelims” and a “warm up.”
All of the Democrats on the committee voted for the proposal, along with Hatch and five other Republicans. Burr voted no, as did Jon Kyl of Arizona, Mike Enzi of Wyoming, John Cornyn of Texas and Tom Coburn of Oklahoma.
An overhaul of the tax code probably would include rate reductions as well as changes to tax breaks. The bill approved yesterday would extend the lapsed provisions through 2013, giving Congress time to pursue a rewrite without affecting businesses and households that rely on the breaks.
“If we’re looking at a reform which is hopefully a permanent change in the tax code, the short-term extenders is more of a short-term economic issue for stimulating business activity here in the United States,” Senator Mike Crapo, an Idaho Republican, said Aug. 1.
A proposal from Coburn to remove a tax credit for manufacturing energy-efficient appliances illustrated some of the difficulties that Congress will face if it tries to eliminate narrow provisions that have constituencies and detractors.
“Let’s call it what it is: a subsidy for appliance makers,” Coburn said, noting that the credit would cost $650 million for a two-year extension. “It’s the worst form of crony capitalism I know.”
Whirlpool Corp. (WHR) and General Electric Co. (GE) are among the beneficiaries of the tax break, which expired at the end of 2011. Because of the credit, Whirlpool has received a net tax benefit in several recent years.
Senator Debbie Stabenow, a Michigan Democrat, defended the break, maintaining that appliances qualify only if they exceed certain efficiency standards. Whirlpool is based in Benton Harbor, Michigan.
“It keeps those jobs in America,” she said before Coburn’s proposal failed on a 9-15 vote.
Turning the committee’s product into law won’t happen quickly. Lawmakers will be on their summer recess until Sept. 10.
The House of Representatives has been examining the list of expired breaks and doesn’t expect to consider extensions before the Nov. 6 election.
The parties are split on whether to extend refundable tax credits for college tuition and low-income families that were created in the 2009 stimulus law. Democrats want to keep those breaks while Republicans say they are failed spending programs.
That discussion is separate from the broader debate over whether to extend the George W. Bush-era income tax cuts for all taxpayers or allow the cuts on top earners to expire.
The Finance Committee didn’t consider broad issues that would have prevented lawmakers from reaching the bipartisan agreement. In a tax-code overhaul, politically divisive questions about the progressivity of the tax code and the amount of revenue it should raise can’t be avoided.
Lawmakers need to be practical and have the broader debate, said Senator Ron Wyden, an Oregon Democrat who has a plan that would lower rates and broaden the tax base.
“You can’t also sit in the corner with your arms crossed and say to your constituents: I’m not going to do anything until we have tax reform,” he said. “So you have to find a way to respond to your constituents that’s consistent with broader reforms.”
In one sense, Gleckman said, extending these provisions offers a bigger pot of revenue to trade for rate cuts later. Persuading companies and the lawmakers aligned with them to take that trade will be harder.
“The interests that have come to learn to use these tax preferences don’t care about a rate cut,” he said. “You can’t get rates low enough to offset the value of some of these tax subsidies.”
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