It’s been a few years, but Congress is once again about to deal with a ‘tax extenders’ package.
The deadlines for temporary parts of the tax code are coming up soon, and Congress must deal with them.
I t’s been a few years, but Congress is once again about to deal with a “tax extenders” package. Once a common December exercise, tax-extender bills have faded from recent political memory. When Congress gets back from the midterm elections for the lame-duck session, however, it will quickly become the top legislative priority of substance. Many of the elements of the tax-extender package matter a lot to the economy as well as to kitchen-table budgeting, so it’s worth getting up to speed ahead of time.
Most of the tax code is permanent, which means it’s not scheduled to expire automatically. However, there are always some provisions with sunset dates attached to them. The most famous of these are the individual provisions of the Tax Cuts and Jobs Act (TCJA), whose last year in force is 2025. To create a year-end revenue vehicle, Congress extends these expiring provisions a year or so at a time. This “tax extenders” bill often serves as a kind of magnetic force which sucks in other must-pass legislation such as continuing resolutions, omnibus spending bills, and debt-ceiling raises.
This December, Congress will have to deal with tax extenders which expired at the end of 2021, and perhaps those which expire at the end of 2022. The reason it’s not too late to extend older provisions for another year is that tax returns are filed in the subsequent spring, so as long as Congress acts by the end of calendar year 2022, it can still impact the tax-year-2022 filing season.
At the top of the extender list this year is full business expensing. Under the TCJA, businesses are allowed to immediately deduct all tangible property investments the first year, except for most buildings which must still be deducted in pieces over many years. If Congress does nothing, businesses will have to subject more and more of their new purchases of business equipment to complex, multi-year piecemeal deductions called “depreciation.” A computer won’t be able to be written off in the year of purchase — it will have to be slowly deducted over five years.
This would be a minor disaster for several reasons. First, in a high-inflation environment, this lessens the real value of depreciation deductions later in the window. Second, the new corporate minimum tax in the so-called Inflation Reduction Act exempts full business expensing from its tax base, so it’s an essential escape hatch. Finally, in the consumption-tax base conservatives should want, full expensing is the proper treatment of capital purchases. If anything, Congress should make full expensing permanent and expand it to all business investments, including buildings.
The Democrats have their own extender priorities. They would like to see the $2000 child tax credit put back up to $3000 ($3600 for younger children), made fully refundable (you get the money even if you’ve zeroed out your income taxes), and/or advanced (you get the money every month from the IRS in anticipation of tax time). There are similar provisions making child- and dependent-care tax benefits more generous.
Then there are the politically popular extenders that make voting for the package easier. This year, this category includes: the ability for moderate-income homeowners to deduct private mortgage insurance; an “above the line” deduction for charitable contributions made by standard-deduction taxpayers; an increase in the cap on charitable deductions from 50 to 60 percent of adjusted gross income; and letting business meals be fully deductible instead of only halfway deductible. There’s a possibility the charitable provisions hitch a ride on a hurricane-relief bill.
The final category of extenders includes those that are neither first-tier K Street priorities, nor partisan goals, nor politically popular. These tend to be niche business provisions no one particularly likes except the businesses benefiting. A famous one here is the so-called “rum cover over.” Most extenders are grimy, but the rum cover over is fun to look at since it involves alcohol and tropical islands.
The United States imposes a $13.25-per-proof-gallon excise tax on rum, which is made almost exclusively in Puerto Rico and the U.S. Virgin Islands (USVI). To help out those territories, the rum excise tax is given over by the Treasury as a blank check subsidy to Puerto Rico and the USVI. But only $10.50 of the $13.25 tax is permanently authorized by Congress to be transferred — the rest requires a tax extender.
The issue is that once this money gets down to the territories, it tends to find its way back into the hands of the very same rum manufacturers who paid it in the first place. There’s no oversight of what happens to the money, and the whole thing is a rather tidy arrangement for everyone except the U.S. taxpayer.
Tax extenders are vehicles for other must-pass legislation, and there’s one up this year in the tax field. As part of Biden’s Covid-stimulus package, Congress changed the rules for when taxpayers must receive a “Form 1099-K” from their cash-app service such as Venmo, Square, PayPal, Zelle, Apple Pay, etc. Under prior law, a taxpayer only got such a form if he passed $20,000 or more through one of these services, and had at least 600 transactions. The new rule lowers those figures to $600 and one transaction.
The National Taxpayers Union estimates that tens of millions Americans will receive a 1099-K due to this policy. It will include every neighborhood babysitter, piano teacher, math tutor, dog walker, and lawn mower. It will entrap people who sell collectibles and other small items on eBay, Etsy, and Facebook Marketplace (most of these people actually owe no tax despite the form since they have basis and other expenses). The IRS, which recently admitted to burning tax forms they had no time to process, cannot handle this paperwork avalanche (not even with 87,000 new helpers). Congress should restore the old limits and do so before this upcoming tax season.
Tax extenders are back, and they will only get bigger from here. Before we know it, 2025, the final year of the Tax Cuts and Jobs Act, will be upon us, creating the mother of all tax-extender packages (the biggest since the old “extend the Bush tax cuts” fights). Like it or not, this deadline-tempting deal is the way business is done these days in Washington. Conservatives must prepare for the what’s coming in the next Congress, and tax extenders are a part of it — warts and all.