The Congressional Research Service (CRS) published a whitepaper addressing the tax provisions that lapsed at the end of 2013. The whitepaper is available here. Of particular interest to the renewable energy industry is the extension of the production tax credit (PTC) and the ability to elect the investment tax credit in lieu thereof. The whitepaper also touches on the new market tax credit (NMTC) for economically disadvantaged communities that lapsed at the end of 2013 and the Section 1603 Treasury Cash Grant Program which lapsed in earlier years.
In general, the whitepaper paints the concept of extenders (i.e., tax provisions that are enacted with a sunset and then regularly extended in subsequent legislation) as poor tax policy. For this and other reasons, the Obama administration has proposed to make the PTC permanent as did Senator Baucus’s tax reform proposal for energy. That proposal is discussed in my blog post available here.
Below are some key excerpts from the whitepaper:
- Dozens of temporary tax provisions are scheduled to expire at the end of 2013 under current law. Most of the provisions set to expire in 2013 have been part of past temporary tax extension legislation. … Collectively, temporary tax provisions that are regularly extended by Congress—often for one to two years—rather than being allowed to expire as scheduled are often referred to as “tax extenders.”
- The President’s FY2014 Budget identifies several expiring provisions that should be permanently extended (and in some cases substantially modified), including the research and experimentation tax credit, enhanced expensing for small businesses, the renewable energy PTC, the NMTC, the work opportunity tax credit, the deduction for state and local sales taxes, the exclusion of discharge of principal residence indebtedness, and the tax deduction for energy efficient commercial buildings.
- There are several reasons why Congress may choose to enact tax provisions on a temporary basis. Enacting provisions on a temporary basis provides legislators with an opportunity to evaluate the effectiveness of tax policies prior to expiration or extension. Temporary tax provisions may also be used to provide temporary economic stimulus or disaster relief. Congress may also choose to enact tax provisions on a temporary rather than permanent basis due to budgetary considerations, as the foregone revenue from a temporary provision will generally be less than if it was permanent.
- The renewable energy PTC is set to expire at the end of 2013, along with a number of other incentives for energy efficiency and renewable and alternative fuels. The new markets tax credit, a community assistance program, is also scheduled to expire at the end of 2013.
- Moving forward, Congress may choose to address expiring tax provisions as part of tax reform, deciding at that time which temporary provisions should become a permanent part of the tax code. Alternatively, Congress may choose to develop a tax extender package, extending some or all of the provisions that have previously been extended in “tax extender” legislation. S. 1859, introduced by Senator Reid on December 19, 2013, would provide a one-year extension for nearly all of the provisions scheduled to expire at the end of 2013.
- Enacting provisions on a temporary basis provides an opportunity to evaluate effectiveness before expiration or extension. However, this rationale for enacting temporary tax provisions is undermined if expiring provisions are regularly extended without systematic review, as is the case in practice.
- For example, tax incentives for alcohol fuels (e.g., ethanol), which can be traced back to policies first enacted in 1978, were not extended beyond 2011. The Government Accountability Office had previously found that with the renewable fuel standard mandate, tax credits for ethanol were duplicative and did not increase consumption.
- Recent examples of other temporary provisions that have been enacted to address special economic circumstances include the exclusion of mortgage forgiveness from taxable income during the recent housing crisis, the payroll tax cut, and the Section 1603 grants in lieu of tax credits to compensate for weak tax-equity markets during the economic downturn.1 It has been argued that provisions that were enacted to address a temporary situation should be allowed to expire once the situation is resolved.
- Congress may also choose to enact tax policies on a temporary basis for budgetary reasons. If policymakers decide that legislation that reduces revenues must be paid for, it is easier to find resources to offset short-term extensions rather than long-term or permanent extensions. Additionally, by definition the Congressional Budget Office (CBO) assumes under the current law baseline that temporary tax cuts expire as scheduled. Thus, the current law baseline does not assume that temporary tax provisions are regularly extended. Hence, if temporary expiring tax provisions are routinely extended in practice, the CBO current law baseline would tend to overstate projected revenues, making the long-term revenue outlook stronger. Thus, by making tax provisions temporary rather than permanent, these provisions have a smaller effect on the long-term fiscal outlook.
- Like all tax benefits, economic theory suggests every extender can be evaluated by looking at the impact on economic efficiency, equity, and simplicity. Temporary tax provisions may be efficient and effective in accomplishing their intended purpose, though not equitable. Alternatively, an extender may be equitable but not efficient. Policymakers may have to choose the economic objectives that matter most.
- Extenders often provide subsidies to encourage more of an activity than would otherwise be undertaken. According to economic theory, in most cases an economy best satisfies the wants and needs of its participants if markets allocate resources free of distortions from taxes and other factors. Market failures, however, may occur in some instances, and economic efficiency may actually be improved by tax distortions. Thus, the ability of extenders to improve economic welfare depends in part on whether or not the extender is remedying a market failure. According to theory, a tax extender reduces economic efficiency if it is not addressing a specific market failure.
- An extender is also considered relatively effective if it stimulates the desired activity better than a direct subsidy. Direct spending programs, however, can often be more successful at targeting resources than indirect subsidies made through the tax system such as tax extenders.
- Most extenders are considered inequitable because they benefit those who have a greater ability to pay taxes. Those individuals with relatively less income and thus a reduced ability to pay taxes may not have the same opportunity to benefit from extenders as those with higher income.
- Extenders contribute to the complexity of the tax code and raise the cost of administering the tax system. Those costs, which can be difficult to isolate and measure, are rarely included in the cost benefit analysis of temporary tax provisions.
- The longest-standing energy-related provision set to expire in 2013 is the renewable energy PTC. This provision was first enacted in 1992.2 Several of the temporary energy-related tax provisions that are scheduled to expire at the end of 2011 were first enacted as part of the Energy Policy Act of 2005 (EPACT05; P.L. 109-58). These include the credit for construction of energy efficient new homes, the credit for energy efficient appliances, the deduction for energy-efficient commercial buildings, and the credit for nonbusiness energy property (also known as the tax credit for energy efficiency improvements for existing homes). Certain tax incentives for alternative technology vehicles and alternative fuel vehicle refueling property were also first included in EPACT05.
- Several provisions that might have been considered “traditional extenders”—that is, they had been extended multiple times in the past—were not extended under ATRA. … Energy-related provisions, including the suspension of 100%-of-net- income limitation on percentage depletion for oil and gas from marginal wells, first enacted in 1997, and the production tax credit for refined coal, first enacted in 2004, were also allowed to expire. Tax incentives for ethanol, which were first enacted in 1978, were also not extended in ATRA, nor were provisions first enacted in 1997 that allowed for expensing of “brownfield” environmental remediation costs.
- A number of other provisions were allowed to expire at the end of 2012. Some of these provisions, such as the Section 1603 grants in lieu of tax credits program and 100% bonus depreciation, might have been classified as having been temporary stimulus measures.
1 For more information, see CRS Report R41635, ARRA Section 1603 Grants in Lieu of Tax Credits for Renewable Energy: Overview, Analysis, and Policy Options, by Phillip Brown and Molly F. Sherlock.
2 When first enacted, the PTC was only available for wind and closed-loop biomass technologies. Over time, Congress has expanded the list of qualifying technologies.