The Senate should alter the House tax extenders package that
contains tax increases and budget gimmicks. These tax credits will
only complicate the tax code, increase the burden on businesses,
and increase energy prices. In a sluggish economy, tax increases
will only slow the economy more as the costs to business and
Increased Costs to Businesses
In order to meet PAYGO standards, the bill contains over $60
billion in tax requirements. Tax increases for businesses account
for half of the total tax hikes, with the other half coming from
tax increases on deferred compensation and attempts to close the
tax gap. Energy and companies with assets in foreign countries will
bear most of the tax increases.
Companies that have investments that generate income and assets
abroad will pay $18.6 billion more in taxes over the next 10 years.
The current legislation postpones the worldwide interest tax credit
for another six years. Originally the credit was to take effect in
2009, but due to earlier legislation the tax credit could be
postponed to 2016. The continual postponement of this tax provision
is bad policy, as businesses need stability in tax policy to enable
smooth planning for the future.
Another provision in the bill is a timing trick that is scored
by the Joint Tax Committee as not having a long-term revenue
effect. But in reality this provision will affect many businesses.
The tax extender bill forces businesses to pay a larger share of
their yearly tax in the third quarter of 2013 and less in taxes in
2014. While this zeroes out because of fewer taxes in 2014, this
provision is still a cost to businesses. Businesses will be forced
to recalculate their taxes as well as lose the time value of $30
billion for the three months. This provision serves no purpose
other than forcing businesses to pay for other tax credits and to
keep the bill compliant with PAYGO.
Oil Taxes Hurt Consumers
The bill increases taxes on oil and gas in three ways: (1)
freezing the corporate tax deduction rate for manufacturing at 6
percent instead of a scheduled increase to 9 percent for all other
domestic manufacturers, (2) placing more stringent rules on the way
in which oil and gas companies calculate their foreign tax credits,
and (3) increasing the amount producers must pay into the Oil Spill
Liability Trust Fund. According to the Joint Committee on Taxation,
the increased taxes on energy would sum to $8.85 billion over 10
And these tax increases are for all oil companies, not just the
larger ones. Unfortunately, the unintended consequences of higher
taxes on oil and gas will result in restricted supply and increased
prices by discouraging investment in domestic drilling for oil and
natural gas. When Congress raises the cost of capital for
exploration and production, it is the consumers that suffer,
because oil companies do not pursue these resources as they are no
longer economically viable.
Congress should be creating incentives that result in increased
supplies of oil and gas, especially in these times of high gasoline
and home heating costs. Congress's tax proposal places domestic oil
producers at a disadvantage when competing with foreign oil
producers. In the end, as the global demand for oil and natural gas
continues to grow and Congress confines domestic supply, American
consumers will be the ones paying the higher price.
Incentives for Unsuccessful Energy
The bill also includes extended tax credits for renewable
sources of energy such as solar, biomass, biodiesel, and
geothermal. In addition, the bill provides refueling property
credits for ethanol and biodiesel gas pump stations as well as tax
credits for plug-in hybrids and more energy-efficient homes,
buildings, and appliances. These energy sources have been receiving
federal assistance through tax incentives, subsidies, and mandates
for decades with very little success.
The reason these sources need handouts is that they would simply
not be able to stay afloat in a free market. Even after over 30
years of special tax breaks, alternative energy still provides only
a small fraction of America's energy needs. For example, wind and
solar energy account for less than 3 percent of America's
electricity because of their high costs and unreliability.
Increased Refundability of the Child
The bill has a provision that will increase the refundable
portion of the child tax credit for 2009, and the Joint Tax
Committee has scored that provision at $3.4 billion. This is a
dangerous provision, because once it is enacted it becomes very
easy to continue extending the provision. The small upfront cost is
just a small portion of the cost of the bill if it is extended
against next year. This provision is using the tax code as a
vehicle for social spending, since these families pay no income
tax. This tax provision does not promote economic growth and will
actually slow the economy as money to pay for this provision is
being taken from productive businesses and individuals.
Beware of Hidden Costs
The tax extenders legislation that passed the House 257-166 on
September 26 has significant problems. The tax cuts and increased
spending in the bill are being offset by tax increases on
businesses. There are also hidden costs in the bill that will
likely increase deficits in future years. Elements of the bill that
raise taxes, increase the deficit, or complicate the tax code
should be eliminated.
Rea S. Hederman, Jr., is
Assistant Director of and a Senior Policy Analyst in the Center for
Data Analysis, and Nicolas D. Loris is a Research Assistant in the
Thomas A. Roe Institute for Economic Policy Studies at The Heritage
Joint Committee on Taxation, "Estimated Budget
Effects of H.R. 7060, the "Renewable Energy and Job Creation Tax
Act of 2008,'" JCX-76-08, September 25, 2008.