WASHINGTON—It’s December, when Congress typically passes a last-minute package of temporary tax breaks, sparing millions of businesses and individuals from unwanted tax increases just weeks before the start of filing season.
This year, lawmakers will have to do it again if they want to avoid the wrath of angry taxpayers at holiday time.
Congress extends these tax breaks every year or two, usually in the final days, drawing complaints from business leaders tired of the uncertainty.
The Senate Finance Committee passed a package of 56 temporary tax breaks in July. The package would extend the tax breaks through the end of 2016, saving taxpayers $95 billion, which would be added to the budget deficit.
Expect the full Senate and House to take up the package—or a version of it—before leaving town for the year.
Things to know about the year-end tax package:
Who Benefits?
Businesses big and small, commuters who use public transportation, teachers who spend their own money on classroom supplies and people who live in states without state income taxes.
The package of 56 tax breaks is a collection of narrow provisions targeting specific groups and industries, held together by a few broad tax breaks that benefit millions.
In all, they affect about one in six taxpayers, according to the Tax Institute, the independent research arm at tax giant H&R Block.
Among the biggest breaks for businesses are a tax credit for research and development and an exemption that allows financial companies such as banks and investment firms to shield foreign profits from being taxed by the U.S. Several provisions allow retailers and other businesses to write off capital investments more quickly.
A popular tax break for individuals allows people who live in states without an income tax to deduct local sales taxes on their federal returns. Seven states don’t tax income: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two states—New Hampshire and Tennessee—tax investment income but not wages.
Other, narrower provisions include tax breaks for film and theater producers, NASCAR racetrack owners, racehorse owners, and rum producers in Puerto Rico and the Virgin Islands.
One protects struggling homeowners who get their mortgages reduced from paying income taxes on the amount of debt that was forgiven.
Didn’t the Tax Breaks Already Expire?
Yes, they expired at the beginning of the year. The Senate bill would retroactively extend them, enabling taxpayers to claim them on their 2015 and 2016 income tax returns.
Why Not Make Them Permanent?
Some of the tax breaks were originally intended to be temporary, but powerful interest groups keep them alive year after year. Others are popular but expensive, leaving some deficit-weary lawmakers reluctant to make them permanent.
For example, some conservatives say a generous tax credit for using wind farms and other renewable energy sources to produce electricity has outlived its purpose. The tax break was first enacted in the 1990s to help kick-start a fledgling industry. It has been renewed many times since.
One of the most popular tax credits rewards businesses for investing in research and development. Both Democrats and Republicans want to make it permanent, but congressional estimates say it would cost more than $150 billion in lost revenue over the next decade, so lawmakers simply renew it every year or two, masking the true long-term cost.
Good Policy?
Tax experts say it’s terrible policy to let these tax breaks expire repeatedly, only to renew them retroactively at a later date.
Consider this: The tax credit for research and development is supposed to provide an incentive for businesses to invest in R&D. The credit expired in January, and more than 11 months later, it hasn’t been renewed. How much incentive do you think the credit has been providing since it expired?
Also, business groups complain that companies can’t accurately project expenses from year to year because they don’t know for sure whether Congress will renew their tax breaks.
What Happens Next?
Lawmakers have been negotiating a package that would make some of the tax breaks permanent while extending others temporarily. However, Democrats and Republicans are once again struggling to agree on which ones to make permanent.
Last December, Congress was faced with the exact same scenario and lawmakers only extended the tax breaks through the end of 2014, allowing them to expire again just a few weeks later.
Lobbyists and business groups are working hard to avoid a repeat.
“I believe we'll get this done before the end of the year. I would love to see permanency in some of these,” House Majority Leader Kevin McCarthy (R-Calif.) told reporters. “In these situations, it’s always coming down to the last week or so to see what mix we’re able to get.”
Democratic Whip Steny Hoyer of Maryland complained Tuesday about the package not being paid for. But he praised several of the individual tax breaks, and most Democrats are likely to go along.
