Republican Tax-Break Pruning Complicates Extension Plans

Senate Republicans are seeking to shut down some expired tax breaks while they revive others, complicating prospects for passing a package of miscellaneous tax provisions that typically advance together through Congress.

Republicans made the first effort this week as part of a proposal from Senator Pat Roberts that failed on the U.S. Senate floor. Roberts’s proposal wouldn’t have restarted several lapsed provisions, such as the deductibility of private mortgage insurance and tax breaks for some types of investment in American Samoa, Puerto Rico and the District of Columbia.

“We tried to take a look at ones where a tax increase would be especially damaging, primarily to families and middle- income folks,” said Roberts, a Kansas Republican, in a March 13 interview. “It’s a tough job to try to go down them and literally pick and choose, but I think we hit all the ones that involve families that could not afford a situation which would amount to a tax increase.”

The debate over more than $30 billion in so-called tax extenders affects breaks with wide corporate support that expired at the end of 2011. They include the research and development tax credit and the ability for financial services companies to defer taxation on income earned outside the U.S. Lawmakers disagree on whether and how the cost of the provisions should be offset to prevent expanding the budget deficit.

Closer Scrutiny

For several years, members of Congress have called for closer scrutiny of the extenders list. Those efforts have fallen short as lawmakers run up against deadlines and the combined lobbying effort behind dozens of tax breaks.

The Republican proposal is an “opening bid” that should prompt lobbyists to defend their tax breaks and encourage Democrats to offer their proposals, said Dean Zerbe, a former Republican aide on the Senate Finance Committee.

“It does not suggest that there’s an easy glide path,” said Zerbe, national managing director at Alliantgroup, a tax consulting firm.

In a dialogue entered into the Congressional Record, top Senate leaders and tax writers pledged to work on resolving the dispute. They disagreed on what the Senate should do.

Senate Majority Leader Harry Reid, a Nevada Democrat, said Congress should act “early in the year” so taxpayers can make decisions based on the incentives in the tax code.

No ‘Meaningful’ Review

“Congress has reflexively extended all of these measures without any meaningful review or oversight,” Mitch McConnell of Kentucky, the Republican leader in the Senate, said in the dialogue. He urged senators to study the provisions “carefully” before proceeding.

Senator Max Baucus, a Montana Democrat and chairman of the Finance Committee, said an overhaul of the tax code is the appropriate way to review the expired provisions.

“Tax reform, however, will take some time and these provisions have already expired,” said Baucus in the written dialogue. “We should provide certainty to taxpayers by extending them through this year as soon as possible.”

Democrats also want to revive tax provisions from the 2009 stimulus law that benefit the renewable energy industry. This includes a provision letting companies receive cash grants instead of tax credits.

Republicans typically don’t want to restart stimulus provisions. At the end of 2010, Republicans prevented many stimulus tax breaks from continuing, while also allowing some other tax provisions to lapse.

Energy Tax Breaks

Senate Democrats offered a piecemeal approach on the Senate floor this week. Senator Debbie Stabenow, a Michigan Democrat, failed in an attempt to extend a group of energy tax breaks that didn’t include other provisions such as the research credit.

Some lawmakers, including Republican Senator Charles Grassley of Iowa, want to extend the production tax credit for wind energy. Though that provision doesn’t expire until the end of 2012, he said companies are making investments now based on their expectation that it might not survive.

“As a practical matter, wind is going to expire really in the spring of this year, because they’re going to shut down all the component manufacturing,” Grassley said in an interview.

The package of tax breaks also includes provisions that benefit motor sports tracks, appliance makers, restaurants, teachers and residents of states without income taxes.

Senator John Thune of South Dakota, a member of the Republican leadership, said it would be “frustrating” if Democrats took a piecemeal approach to extending individual tax breaks.

Thune told reporters March 14 that he didn’t expect broader action on the tax breaks would occur until the post-election session, when Congress will be debating expiring individual income tax cuts.

Rather than an extension of tax credits, Thune said he has encouraged industry groups to consider a possible phase-out of tax breaks, similar to one that was discussed for the ethanol tax credit that also expired Dec. 31.

“Trying to get straight extensions of existing law is going to be challenging,” Thune said.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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