Tax breaks that were extended in the House bill include –
• The option to deduct state and local general sales taxes,
• The additional standard deduction for real property taxes,
• The above-the-line deduction for qualified tuition and related expenses,
• The above-the-line deduction by educators for certain classroom expenses, and
• Direct tax-free transfer of IRA distributions to a charity.
Noticeably absent from the bill was the AMT patch.
Fellow tax blogger Professor Nellen tackles the basic extender issue in her post “Temporary or Permanent - Which Is Better?” at 21st CENTURY TAXATION.
This whole idea about having to extend a tax deduction every year or every other year is fairly new. And, if you ask me (and even if you don’t) it is ridiculous.
The 2010 “sunsetting” of Dubya’s tax cuts came about because the Republicans could not get the 60% majority in the Senate that was needed to make them permanent. The annual extension of the AMT patch and the various tax breaks is just an example of the utter laziness of Congress. Rather than sit still and give “the extenders” serious consideration they rush to pass an extension each year. A clear case of “manana” or “next year” disease.
According to the Professor the answer to her questions is, just like, as I have said, the answer to just about any tax question, “it depends” –
• “Some of these temporary items were for stimulus and should not be extended unless it is clear they worked.
• Any provision that has been extended more than 5 times should be seriously looked at to see if it should become a permanent provision. The research tax credit is a good example.
• Accountability measures should be created for new tax breaks and they should all likely start off as temporary.”
I agree that there can be a true temporary tax law that is intended to address a specific temporary situation, such as the mucking fess that our economy has become. Such a law can enact tax benefits for a targeted group to stimulate the economy, with the idea that the benefits will expire for good on a certain date.
As for other tax benefits, such as Dubya’s tax cuts and the subsequent “extenders” tax breaks, if Congress feels that a tax benefit or provision is a good and appropriate one it should be assumed permanent upon passage. There should be no “expiration date” or “sunsetting” on tax benefits (other than as mentioned in the previous paragraph). If in the future Congress feels that a benefit or provision is no longer good or appropriate it can always revise, replace or repeal it.
I do think there is some merit in the Professor’s call for accountability. Once a tax benefit is passed it should not be considered set in stone. Perhaps a special Congressional committee or, more appropriately and effectively, a blue-ribbon panel (like Dubya’s and BO’s tax reform panels) could be created to meet every 5 or so years to review the effectiveness of the Tax Code and make recommendations on reform, with the requirement that Congress must act upon the recommendation one way or another.
Let’s look at some of the items that have come to be known as “the extenders”.
• Obviously the dreaded Alternative Minimum Tax should be put to death. It is not a question of whether or not to make the AMT exemptions annually adjusted for inflation - there should be no AMT in existence in the first place. The true need for a “Minimum Tax” was done away with by Reagan’s passive activity limitation rules back in 1986.
• The above-the-line deduction for educators, limited to $250.00, is a gimmick. Dubya must have needed the support of teachers for something. It saves most educators probably no more than $70.00. Let’s forget about it. As an alternative perhaps Congress should revisit the issue of reducing deductions for employee business expenses via the AGI exclusion.
• The above-the-line deduction for tuition and fees is one of many options to help subsidize the cost of college education for dependents. Instead of a list of options, all with differing rules and phase-outs, there should be one basic deduction or credit. Why not make the American Opportunity Credit a permanent replacement for the HOPE and Lifetime Learning credits and the deduction for tuition and fees, extending the availability to all years of undergraduate and graduate studies and removing the “refundable” component. More better – make the AOC concept the only benefit and take it out of the Tax Code and make it a form of direct student financial aid.
• The option to deduct state and local sales taxes instead of state and local income taxes is a good thing – especially for those who live in states without state income taxes. It should be made permanent.
• I also think the direct tax-free transfer of IRA distributions to a charity is a good thing that should be permanent.
• As for Section 179 and bonus depreciation. I say let us do away altogether with the depreciation of real property (I have been suggesting this for some time now – as a general rule buildings do not lose value over the years), and also perhaps Section 179, but make 50% bonus depreciation permanent.
So what do you think?