I. Intro: This is DC Dynamics, a podcast about what’s coming up in tax policy, with a look to the past as our guide. I’m Ray Beeman and I lead a great group of colleagues here at Washington Council EY. The past is really going to be our guide this time, as we take a walk down memory lane with the mostly 21st century phenomenon known as the tax extenders. These are a diverse group of tax provisions that are extended only temporarily because of cost, evolving industries and other reasons, and they generally travel as a package to appeal to the broadest swath of lawmakers possible. Extenders are kind of like a horror movie with monsters where some get killed; some are made permanent and live on forever; and still others resurface again and again like zombies. We mostly just refer to these provisions by one name – extenders – and assume everyone knows what we’re talking about, but the shape and momentum of this roving pack have changed over time, and at times has been used as a bargaining chip paired with more controversial items. It is well-known that it’s easier to extend tax provisions and most other things in Congress a year or two at a time, rather than baking them into permanent policy. And there are legitimate reasons to keep provisions temporary in the event technologies change – for example, emerging industries mature and no longer need a tax incentive. And extenders really came alive during the Bush 43 Administration that, by any measure, passed a lot of tax bills. So, what is the origin story of tax extenders? This Frankenstein creature that has become as much a part of DC culture as Ben’s Chili Bowl, the Metro, and cherry blossoms.
II. Cue the R&D tax credit, which was one of the first provisions to be dubbed a tax extender and was the provision that drove the extenders train for years because it affected every member’s district. The credit dates back to 1981 when it was designed to spur US innovation and increase competitiveness with other nations. It went through several iterations and was eventually extended for five years from 1999 to 2004. The Working Families Tax Relief Act addressing the tax credit and other family issues, which was one of several tax bills enacted under President George W. Bush, extended the credit through 2005. That bill included another major driver of the extenders: the fact that the alternative minimum tax exemption for individuals wasn’t automatically indexed for inflation, requiring congressional intervention, which occurred eight times between 1999 and 2010, often in conjunction with other extenders. Around the same time, in 2004, the American Jobs Creation Act (or AJCA), while not its main intent, really got the ball rolling in terms of temporary provisions for businesses that would cement the name extenders. The primary purpose of AJCA was to repeal the FSC-ETI export tax incentive, which had been challenged in the WTO by the EU, and replace the FSC-ETI with the 9% domestic production activities deduction under section 199. There were several other international tax provisions that became extenders, including the CFC look-through rule and active financing exception. The bill also established the biodiesel tax credit extender and included some mainstays of future extenders packages, including special rules for certain film and television productions and the credit for short line railroad track maintenance. AJCA also gave taxpayers the option of claiming a deduction for either state and local income taxes or state and local general sales taxes, which was an attempt to provide parity for residents of states without state and local income taxes and became a priority for members from such states, including some heavy hitters in the congressional ranks representing states like Texas and Florida. That provision also would become a major driver of the extenders package in future years.
III. The Energy Policy Act of 2005 extended some of the clean energy tax provisions that had already been made law and established several of the provisions that would become mainstays of extenders packages, including the renewable electricity production credit, energy efficient commercial buildings deduction, credit for construction of new energy efficient homes, alternative fuels credits, and alternative motor vehicle credits for hybrid vehicles. The year 2006 was pivotal for the extenders, as the R&D tax credit, state and local sales tax deduction, the deduction for out-of-pocket teacher expenses, and other widely supported extenders were all expiring that year as Republicans considered using them as a driver for more controversial proposals. First, the provisions were pushed out of a tax reconciliation package due to the revenue limitations that famously limit those types of bills, amid promises that a quote “trailer bill” would follow to carry unaddressed issues. Remember, this was a tough midterm election year, and Democrats criticized Republicans for passing over more populist tax break extensions for college tuition and R&D that had expired at the end of 2005 in favor of the capital gains and dividend breaks that didn’t expire until 2009. Then, the extenders were broken off from the Pension Protection Act along with an effort to provide estate tax relief, which was deemed to imperil the long-negotiated pension bill. In a nod to their ability to move other measures and the Rubik’s cube nature of tax legislation, extenders were combined with an estate tax cut and a minimum wage increase in what was deemed the “trifecta” bill, which cratered. Some lawmakers continued to pursue the package as a vehicle for health and trade measures, and the Tax Relief and Health Care Act of 2006 was born, which ultimately carried tax extenders and also included a rollback of Medicare physician payment cuts and new Health Savings Account provisions that House Republicans secured by supporting abandoned mine land modifications that were a priority for some senators. “It’s called symmetry,” Ways & Means Chairman Bill Thomas said at the time, reflecting the horse-trading nature of tax bills.
IV. OK, so fast-forward to 2008. Tax extenders bills had already been introduced before the financial crisis but ended up riding on a very large and urgent legislative vehicle, the Emergency Economic Stabilization Act that established the Trouble Assets Relief Program (or famously, TARP) as the financial markets flailed. It’s easy to make the case for tax relief in that context. And the next two extenders packages rode along with the supercharged extenders bills addressing the fiscal cliffs that were created by the Bush tax cuts. There was a two-year extension of the Bush tax cuts at the end of 2010 followed by a permanent solution at the end of 2012, reached as the clock passed midnight on New Year’s Eve heading into 2013. A one-year extenders package followed in 2014, and then the PATH Act in 2015 sought to bring more stability and certainty to the extenders as some – including the R&D credit and state and local sales tax deductions, which were hallmarks of extenders packages for years – were actually made permanent. Some provisions were extended through 2019, and others only through 2016. The monumental Tax Cuts and Jobs Act (TCJA) in 2017 largely bypassed the tax extenders, leaving several of the policies in place but not extending them, and amid the tax community hangover from that bill an extenders package was passed in 2018. This is really the only example of extenders riding with a short-term continuing resolution, which is the situation Congress faces now, except then the bill had a lot more heft by virtue of also settling spending levels for two years above those prescribed by the Budget Control Act. A bill enacted in the lame-duck session following the 2020 elections took the same approach as the PATH Act, making some provisions permanent, aligning the expiration of others with the end-of-2025 TJCA expirations, and leaving others to expire in 2021 and 2022. Taking cues from a bill produced by the Senate Finance Committee, the 2022 Inflation Reduction Act set many of the energy tax provisions in the extenders package on a much longer course of extension, but some were still left behind.
V. So where are we now? Well, we’re still looking for a path forward for some extenders and a whole new batch of temporary provisions have come online — specifically: the TCJA pre-cliffs that changed after 2021 and 2022. These relate to the five-year amortization for R&D expenses rather than expensing under Section 174 and the Section 163(j) interest deduction limitation based on EBIT rather than EBITDA, both changes unfavorable to businesses which took effect in 2022; third is the 100% expensing, which is phased down in increments after 2022. I think the general assumption is that the Republicans who wrote these changes into law in 2017 to make the numbers look better for the TCJA thought there was no way future Congresses would not fix them, or at least not allow them to take hold for very long. But that gamble is now being severely tested. Extension of these provisions is complicated now by Democrats insisting that an expansion of the Child Tax Credit (CTC) be part of any tax bill. Fixing the business provisions through 2025 costs about $50 billion dollars, the 2021 version of the Child Tax Credit is about $100 billion dollars, but Democrats will likely accept a less-generous version, and somehow matching up the costs of the two priorities is probably the key to a deal. That deal did not happen at the end of 2022 as the impasse blew up any hopes for a package. And that is just one layer of the story. Tax-writers are also challenged to find a suitable vehicle for a tax package amidst unprecedented resistance, especially in the House, against continuing resolutions and a bruising three-week election to pick the next Speaker. Congress has just passed a new two-tiered CR with deadlines in January and February, which House Republicans hope will help deter potential Senate efforts to impose an omnibus appropriations bill on the House. It’s unclear how the new CR will scramble efforts to move tax and other outstanding items by the end of the year, which are seen as most likely to move with some future government funding bill. Tax packages usually ride along on a year-end omnibus appropriations bill, but the new CR through early next year complicates tax package prospects as these stopgap spending bills tend not to be used as a vehicle for costly tax cut packages.
There is some irony in the fact that the R&D credit drove the extenders train for many years and now a fix to R&D deductions is arguably the marquee issue in the cliffs facing Congress now. I won’t even mention the treatment of nonrefundable credits like the US R&D credit under the OECD-led tax agreement because that’s its own podcast episode.
Just around the corner? Another supercharged fiscal cliff in 2025, with expiration of the TCJA individual provisions. That could be a backstop for action on the provisions hanging out there now if they can’t get done sooner and will be a time when a number of tax issues could get renegotiated. We have seen it all before. Suffice to say that in Washington, everything is cyclical, and everything that’s old is new again. Which is why references to the movie Groundhog Day are a regular fixture of members’ floor speeches.
I hope this trip down extenders memory lane has lent the past as a useful guide to the future, or at least has put things in perspective.
And that’s all for now. For Washington Council EY, I’m Ray Beeman and this has been DC Dynamics.
