Concurrent with the House-Senate conference on extending the payroll tax cut, the Senate Committee on Finance held a special hearing on the expired tax extenders (Extenders and Tax Reform: Seeking Long-Term Solutions).
Lead by Senate Finance Committee Chairman Max Baucus (D-MT) and ranking Republican member Orrin Hatch (R-UT), the Senate Committee on Finance discussed the need to create certainty in the tax code, without which confidence in business investment and the creation of jobs is threatened. Witnesses who testified were Rutgers University economics department chair Rosanne Altshuler, George Mason University senior research fellow Jason J. Fichtner, and U.S Chamber of Commerce chief tax counsel Caroline L. Harris.
All three panelists pointed to the negative consequences of the uncertainty created by the current tax code. Dr. Altshuler pointed out that the repeated extension of these tax credits, often for only one or two years, has made “…it hard to argue that they are not fixtures of our tax code.” She argued for the extenders to be considered within the context of fundamental federal tax reform. Atshuler argued that “the ritual of being on tax code death watch”, having these provisions expire, renewed, and sometimes resurrected with retroactive renewal, creates tremendous volatility, creates uncertainty, and reinforces the view that the legislative process is dysfunctional. Additionally, by making these provisions temporary, Congress reduces their benefit. She noted that businesses are unlikely to make long term investments based on subsidies likely to disappear. These tax provisions instead serve as windfalls. Finally, she argued that the traditional tax extenders should not be carried forward year to year, but rather Congress should either make the traditional extenders a permanent fixture of US tax code or be allowed to expire. And, should Congress decide to let them expire, isolate provisions that are fundamental structural policies of our current tax code and make them permanent and then evaluate the remaining provisions along with similar permanent provisions within the context of fundamental tax reform. Similarly, Dr. Fichtner noted that the U.S. tax code hampers job creation and tax revenue. He argued that the U.S. tax code’s complex and temporary nature “increase uncertainty and cost for American businesses.” Fichtner stated that the tax code should be permanent and predictable; temporary tax provisions should be avoided. He further noted that the focus should not be on ways to increase revenue, but rather on ways to increase economic growth, savings, and investment. Fichtner argued for the promotion of provisions that level the playing field and also those provisions that move toward fundamental reform over those that discriminate.
Ms. Harris, from the U.S. Chamber of Commerce, argued for the extension of all the tax extender provisions immediately since, while on the road to fundamental tax reform, Congress is “simply not there yet”. Harris stated that, “Business’s reliance on these provisions is both rational and reasonable. Many of these are longstanding pieces of the code…Despite their expiration dates, they are not construed as temporary. Inaction on these provisions has real consequences. Businesses need certainty and predictability. Retroactive tax policy simply does not achieve these goals. At times the failure to extend these provisions hurts the very purpose for which they were enacted. This is particularly apparent with provisions that are intended to incentivize certain behaviors…”
Following the panelists statements, Senator Baucus noted the general agreement among the panelists and in general for broadening the tax base and simplifying the tax code, but that it would mean that Congress would have to eliminate some of the tax expenditures. He posed the question to the panelists as to whether a framework makes sense in which “we should look at each of these extenders and try to determine whether they are worth retaining.” Baucus stated that “some are probably worth more than others; that is, probably worth retaining if their value to the economy is greater than the increase in the marginal rates necessary to pay for them.” While all panelists agreed that a review of these programs was important and ideal, Atshuler argued that a cost-benefit analysis and review was unrealistic given time constraints and cost, Fichtner focused on the need for fundamental reform that broadened the base by reducing the overall corporate tax rate should be a greater focus, and Harris argued for the across-the-board, immediate renewal of all tax credits.
When confronted with the question as to whether it made sense to extend some or all of these provisions ahead of fundamental tax reform posed by Senator Hatch, only Altshuler argued for nonrenewal. Additionally, Altshuler argued that the retroactive renewal is the equivalent of giving windfalls as the decisions on investment and hiring have already taken place. Fichnter and Harris both argued for immediate renewal given the damage to investment and job creation being real and unrecoverable. Hatch asked whether businesses may have become so accustomed to the expiration and renewal of these provisions that it has created a built-in expectation that the credit is going to be available, therefore, does incentivize.
Several other senators focused on the negative consequences of non-renewal of certain tax provisions in their questions and statements. Senators Caron and Schumer argued about the inability of retroactive renewal to address the losses created by nonrenewal of certain tax credit provisions (e.g., commuter tax) and, therefore, the need for Congress to act and as soon as possible. Senator Cantwell lamented the degree to which the extenders are being held hostage by fundamental tax reform, particularly as it comes to parity among states that rely on a sales tax versus an income tax for revenue generation. Both Senators Cantwell and Thune focused on the negative economic effect of the uncertainty created by non-renewal, in particular, for Cantwell, on manufacturing and consumer purchasing decisions.
Inevitably, the question of off-sets was raised. Senator Nelson asked the panelists whether they thought that the tax extenders should be off-set. Harris indicated that the extenders should be extended, but not be paid for. Atshuler stated not only should the extenders be paid for, but that it was imperative “to stop kicking the can down the road.”
Of particular significance was what was not covered in detail, but was touched upon by Senator Grassley. Grassley argued that, while there is general agreement that all of the extenders need to be reviewed in the context of comprehensive tax reform, it is important to discuss any goals and objectives other than revenue collection that the tax code should accomplish. As Grassley noted, “The provisions that expired at the end of last year have various objectives. The non-revenue policy objectives vary from energy independence to job creation from encouraging donations to charity to incentivizing capital investment and research…” Until an honest discussion of the non-revenue objectives of the tax code occurs – whether there should be non-revenue objectives (the use of tax code to promote certain behaviors) and what those are, the conflict among the various groups, individuals, and Congressional members regarding the various tax provisions, including those in the tax extenders, will likely continue as it removes the decision from the realm of a simple cost-benefit analysis.