Wind farms, motorsports tracks, global banks and other businesses won revived tax breaks in a $75.3 billion package included in a last-minute budget deal passed by Congress and signed by President Barack Obama yesterday.
The tax-break extensions, mostly for companies, made it into the bill past Republican demands for spending cuts and Democratic resistance to business benefits. Both parties have complained for years about some of the special-interest provisions.
The package of tax extensions survived attempts to curb them to reduce the U.S. budget deficit that has exceeded $1 trillion for four years. Their beneficiaries and lobbyists received a reprieve and a chance to bargain for another extension this year.
The breaks are “generally economically useless or harmful,” lowering General Electric Co. (GE:US)’s tax bill, padding accounting firms’ research-credit business and letting lawmakers repeatedly tap lobbyists and companies for donations, said Bob McIntyre, director of Citizens for Tax Justice. The Washington group favors higher taxes on companies.
“If you make them permanent, you get the campaign contribution once,” McIntyre said. “You do it every year or two, they have to ante up again and again.”
Most of the tax breaks had expired at the end of 2011 and will be continued through 2013. The companies that benefit say the on-again, off-again breaks are important though the uncertainty makes it almost impossible to use them to plan business investments.
Although they are lumped together, the miscellaneous tax breaks include a variety of items, from multibillion-dollar benefits for big companies to much smaller changes designed to increase Native American employment.
In a statement, Senator John McCain called the addition of the tax breaks an example of “shameful conduct” that feeds public cynicism about Congress.
“I reluctantly supported the flawed ‘fiscal cliff’ agreement because I could not stand by and watch taxes go up on all Americans, but these provisions obviously make that vote harder to justify today,” said McCain, an Arizona Republican.
Some are broad, such as the credit for corporate research, which is supported by a coalition of technology companies, manufacturers and lawmakers including Representative Kevin Brady, a Texas Republican, and Senator Max Baucus, a Montana Democrat who is chairman of the Finance Committee. The two-year extension of the research credit would cost the government $14.3 billion in forgone revenue.
Some of the tax benefits are specialized, such as a $11.2 billion, two-year extension of the active financing exception, which lets GE, Caterpillar Inc. (CAT:US) and Citigroup Inc. (C:US), among others, defer taxes on financing income they earn outside the U.S. That allows their earnings to be treated like the income of non-financial companies with non-U.S. operations.
The congressional supporters of this provision include Pat Tiberi, an Ohio Republican, and Richard Neal, a Massachusetts Democrat, senior members of the House Ways and Means Committee.
Other breaks are narrow and often ridiculed by lawmakers. They include $78 million worth of accelerated depreciation for motorsports tracks, $248 million in special expensing rules for films and television programs, and a $222 million provision that directs excise taxes on imported rum to Puerto Rico and the U.S. Virgin Islands.
Heart and Soul
“You can see where Congress’s heart is, perhaps its soul as well,” McIntyre said.
Alex Brill, a former aide to Republicans on the House Ways and Means Committee, said tax breaks that some consider questionable -- such as the motorsports benefit backed by International Speedway Corp. (ISCA:US) and Senator Debbie Stabenow, a Michigan Democrat -- are often made temporary as a compromise.
Whirlpool Corp. (WHR:US) benefits from a $650 million tax credit extension for manufacturing energy-efficient appliances. JPMorgan Chase & Co. (JPM:US) and other financial institutions are aided by the $1.8 billion extension of the New Markets Tax Credit for investments in low-income areas. That is supported by Representative Jim Gerlach, a Pennsylvania Republican, and Senator Jay Rockefeller, a West Virginia Democrat.
Restaurants such as Cracker Barrel Old Country Store Inc. (CBRL:US) and McDonald’s Corp. (MCD:US) benefit from the $1.9 billion extension of the Work Opportunity Tax Credit for hiring workers from disadvantaged groups.
The bill includes a one-year extension through 2013 of the production tax credit for wind power, at a cost of $12.2 billion. That will save as many as 37,000 jobs in an industry that’s expected to stall this year, the American Wind Energy Association said.
Matthew Kaplan, an associate director at the energy research group IHS Inc., said developers raced to complete projects in 2012 to claim the credit. The projects that are left over probably aren’t far enough along to be completed in 2013, even with the extension of the credit, he said.
“We still anticipate a significant drop-off in wind build” this year, Kaplan said in an interview.
By changing the rules to let companies claim the credit at the start of construction instead of when a project begins producing electricity, Congress ensured that some development will continue this year.
The budget agreement also includes a $1.3 billion, one-year extension of a tax break on write-offs of mortgage debt, a tactic becoming increasingly common as banks seek to move beyond the housing crisis. Borrowers won’t have to pay income taxes on the principal forgiven as part of a loan modification or during a short sale in which they sell their homes for less than they owe.
Real estate agents, homebuilders and consumer advocates pushed for the extension, saying it was needed to avert a wave of foreclosures that could depress home prices.
The bill includes 50 percent bonus depreciation on capital investments, letting companies recoup their costs more quickly. Taxpayers will continue to be allowed to deduct states sales taxes instead of income taxes from their federal returns, a benefit to people in states such as Texas that lack a state income tax.
The tax breaks have a history of last-minute or retroactive inclusion in legislation. They were one of the sweeteners the Senate added in 2008 to win support for the Troubled Asset Relief Program. Their last extension came in 2010, as part of the agreement to extend the income tax cuts that are largely being made permanent now.
House Republicans, including Ways and Means Chairman Dave Camp, had talked throughout 2012 about dropping some of the extensions. In the end, Camp, of Michigan, never produced a bill and will address the provisions as part of a tax overhaul he is drafting this year.
Instead, a bipartisan Senate Finance Committee measure from August that kept most of the provisions intact was inserted into the final deal passed by Congress.
“Those tax extenders continue to be our No. 1 example of why we need fundamental tax reform,” Representative Kevin Brady, a Texas Republican and member of the Ways and Means Committee, told reporters yesterday. “Often it is easier just to maintain the status quo.”
‘No Logical Basis’
Brill, a research fellow at the American Enterprise Institute in Washington, which advocates a smaller government, said there is “no logical basis for any temporary tax policy, basically, and yet here we are, and they’re all extended again.”
“Not including those provisions would have caused a firestorm from the business community and elsewhere at the 11th hour,” he said.
Unrelated to the tax extensions, the bill raises $12 billion by allowing holders of pretax 401(k) retirement accounts to transfer some of their balances into post-tax Roth-style accounts. Those who convert the accounts must pay the taxes up- front.
Not in the bill are tax rises Obama wants, including higher taxes for private equity managers’ carried-interest income, multinational companies’ offshore profits, and oil and gas companies. Those industries remain potential targets as the president searches for revenue to pair with future spending cuts.
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