Chris HopkinsResponding to voter outrage, Congress ended the practice of earmarking in 2010. In its place, members have expanded their use of a more problematic approach: temporary tax breaks.
Called "tax extenders," these special-interest credits are included in appropriations bills with specific expiration dates, after which the perk theoretically disappears. However, it is becoming increasingly common for Congress to incorporate blanket continuances into its 11th-hour scramble to fund the government. Within the panoply of budget gimmicks, this one is a beaut, since the "temporary" nature of tax extenders precludes the Congressional Budget Office from including them in its long-term deficit projections.
Dozens of temporary giveaways are scheduled to expire at year-end unless renewed by Congress. Most of these provisions have expired at least once, but were retroactively restored during previous budget showdowns. The business research and development credit, for example, first appeared in 1981 and has been extended 15 times. Sort of like a 30-year mortgage renewed every two years.
Naturally, given the epic level of federal debt and unsustainable deficits, only the most essential programs receive consideration for special favors. Like horse racing. One provision awaiting renewal allows accelerated tax write-off of race horses. Or the special tax break to finance luxury boxes at NASCAR racetracks. And while the EPA is aggressively penalizing coal users, another law risibly reclassifies coal produced on Indian reservations as a "renewable" source so as to qualify for green energy tax credits. (Aside: coal is technically renewable; it just requires 300 million years).
Many examples would be amusing if taxpayers were not footing the bill. Former Senator Christopher Dodd, now head of the Motion Picture Association of America, secured a $430 million tax break for movie producers. Michigan Senator Debbie Stabenow supported subsidies for manufacturers of energy efficient appliances. The primary beneficiary, Whirlpool, is headquartered in Benton Harbor, Michigan.
Ron Wyden of Oregon pushed through a temporary tax subsidy for producers of electric motorcycles. Guess which state is home to the largest producer of electric bikes.
Lest someone detect a partisan slant, be it duly noted that the appetite for pork is bipartisan. Representative Steve King of Iowa, a Tea Party favorite who proudly voted against aid for victims of hurricane Katrina as a budget buster, is a fierce defender of the "temporary" (21 year old) $12 billion production tax credit for wind energy, as well as the federal ethanol mandate. His district is the nation's largest ethanol producer and one of the biggest generators of wind power.
The abuse of temporary tax breaks has reached epidemic proportions, and their number has tripled since the late 1990s. The Congressional Budget Office estimates the total cost of extending all expiring provisions through 2023 at nearly $1 trillion, but may not factor them into baseline budget projections. And as it turns out, the practice has made it significantly more difficult to achieve fundamental tax reform, since doing so would require either the expiry or permanent ratification of most of the temporary provisions.
One small glimmer of hope is the joint effort of House Ways and Means committee chairman Dave Camp, a Republican, and Senate finance chairman Max Baucus, a Democrat, to enact comprehensive tax reform legislation. While impossible this year, it is at least imaginable that significant changes to the tax code will be taken up in 2014. The current budget negotiations will likely yield yet another temporary extension of present breaks, but next year could be a different story. In that case, the temporary tax subsidy for Puerto Rican rum just might be history.
Christopher A. Hopkins, CFA, is vice president at Barnett & Co. Investment Advisors.