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Industries in limbo as Congress mulls expired tax breaks

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House-Senate Conference Committee Chairman, Rep. Dave Camp listens to U.S. Sen. John Barrasso during a committee meeting to discuss the Temporary Payroll Tax Cut Continuation Act on Capitol Hill Feb. 1, 2012 in Washington.

Updated 12:45pm Thursday

Dozens of American industries and businesses, from biodiesel producers to stock car racing facilities, are urging Congress to quickly revive 60 targeted tax breaks that expired on Dec. 31.

One option would be to include the tax breaks -- called “tax extenders” in Washington lingo – in the bill that continues the payroll tax cut, extends unemployment benefits, and postpones a cut in Medicare payments to doctors. 

At a House-Senate conference committee meeting Thursday to try to figure out how to continue those three provisions, which expire on Feb. 29, Senate Finance Committee chairman Max Baucus, D- Mont., made a strong pitch for taking action to revive the tax breaks.

He urged his colleagues to revive the research and development tax credit and the tax provision that allows people living in states with stateincome taxes, such as Florida, to deduct those payments on their federal tax return.

"It's just fairness," Baucus told the conference committee. He did concede that some of the expired tax breaks were "a little shady." But he said most were worthy of being revived.

And Sen. Ben Cardin, D- Md., made an appeal for energy and R&D tax credits, citing a steel company in Baltimore and a planned energy-from-trash facility, also in Baltimore, that depend on the tax incentives.

But House Ways and Means Committee chairman Dave Camp, R- Mich., said "My view is these are outside the scope of the conference." Camp got some support from two House Democrats on the committee, Rep. Chris Van Hollen of Maryland and Sen. Sander Levin of Michigan who said the panel should focus on the big three issues: unemployment insurance, the payroll tax cut, and the Medicare physicians payments. 

If you're an employee of one of the affected industries that lost its tax break on Dec. 31, the congressional inaction could mean that you lose your job. If you’re an investor in one of those industries, your assets could lose their value. But if you're an advocate of a simpler, flatter tax code – as many members of Congress claim to be – then it might be time to let the expired tax breaks rest in peace – or at least make a few of them permanent and let the others remain dead. 

That, at least, was the argument made Tuesday to the Senate Finance Committee by Rutgers University economist Rosanne Altshuler who gave a damning picture of the tax extenders, saying they “create complexity, generate enormous compliance costs, breed perceptions of unfairness, (and) create opportunities for manipulation of rules to avoid tax ... .”  

The fairness question is inevitable. Because one particular industry’s tax burden is made a bit lighter by its tax credit, your tax burden, or your neighbor’s, must be made a bit heavier -- or the national debt must be bit bigger. 

One reason that dozens of tax breaks live for only a year at a time is that under Congress’s budget estimating rules, assuming that tax breaks expire at the end of every year makes projected budget deficits look smaller than they’d otherwise look.

The $38 billion in annual tax revenue that would be lost if all 60 tax extenders were revived is less than the revenue that is lost due to just one of the popular “permanent” tax breaks, the home mortgage interest deduction, which will cost nearly $85 billion in 2012, according to the staff of the Joint Committee on Taxation. 

“I think there are too many extenders. I think we should get rid of a good number of them,” said Baucus Tuesday. He noted that the grand total of temporary tax breaks isn’t just the 60 that expired on Dec. 31 but 132 of them, a total that has more than tripled since 1998. (Some last for two years or more.) But Baucus also put in a good word for the small wind turbine tax credit which benefits Pine Ridge Products in Belt, Montana, as well as other wind firms.

Other committee members -- while saying they favored tax reform -- made pitches for their favorite tax breaks. Cardin made an impassioned pitch for the tax benefit for employer-provided transit passes and vanpooling that helps his Maryland constituents in the suburbs of Washington, D.C.

When Cardin asked Altshuler for her view of this tax incentive, she candidly said, “It’s all just very depressing. I was depressed about the tax code before coming to this hearing. And in preparing for this hearing, and looking at all the temporary tax provisions that we have, I got even more depressed -- which I thought was impossible.”

She said that she wasn’t convinced there ought to be any commuter tax breaks -- for those who drive and have employer-provided parking, or for those who take the subway or train. “This is not how we do a fair, simple tax code that Americans can understand and have faith in,” she said.

Pressed again a few minutes later by Sen. Charles Schumer, D-N.Y., to agree there’s a need for the tax incentive for mass transit commuters, to make them equal to car commuters, Altshuler replied, “I hate to say that, but ... ”  

“Come on, you could,” Schumer interrupted, wryly. “It won’t hurt as much as you think.”

As one listened to the arguments from Schumer, Cardin, and other committee members, it was a reminder of why senators might want to serve on the tax-writing Finance Committee: so that they can create and preserve tax provisions that help their constituents and their states.

In the audience watching the hearing were representatives of some of the affected industries. Ben Evans, spokesman for the National Biodiesel Board, said his industry doesn’t want its $1-per-gallon tax incentive, which took effect in 2005, to be made permanent, but it does want a three-year extension. 

“That will provide the industry enough time and a little more maturity to step back and take a look and see if then the industry can stand on its own without the incentive,” he said. “In three more years, the industry will have grown a lot more, we’ll be a good bit more efficient, and we’ll have economies of scale.”

Producing biodiesel -- gathering up all that beef fat, chicken fat, and used cooking oil -- is more expensive than making diesel from crude oil, but the oil drillers have long enjoyed tax benefits, such as the tax break for drilling costs, so the biodiesel industry sees its tax credit as a matter of equity, leveling the playing field. 

The National Biodiesel Board cites an economic study that showed the industry supported nearly 40,000 jobs and added $3.8 billion to the national income last year.

If the biodiesel credit remains dead, Evans said, “At best, our industry’s production would be flat, and at worst, we would see a significant drop-off, maybe 20 to 25 percent. We had a record year of production last year with the tax incentive in place."

Likewise the motorsports industry-- the people who run the tracks where you can watch Dale Earnhardt Jr. and other NASCAR drivers -- says it needs the provision in tax law that allows it to depreciate assets over seven years, the same period theme parks parts use. In 2000 the Internal Revenue Service questioned whether motorsports facilities should come under that depreciation schedule.

Congress clarified in 2004 and again in 2010 that the seven-year rule applied to the motorsports industry, but its “fix” was temporary and expired on Dec. 31.