Although attributed to various individuals (Ben Franklin, Mark Twain, Albert Einstein, and Rita Mae Brown, to name a few), the definition of insanity is constant: doing the same thing over and over and expecting different results. As a small child, I was enthralled with the merry-go-round at the local amusement park. The stoic horses and whimsical zoo creatures provided a musical adventure that was always good for a five-minute mystical journey. Despite the loud music, the flashing lights, and the up-and-down movement of my animal of choice, at the end of each ride, I returned to the place of origin having made no real progress. Insanity? Perhaps. But the real design of the merry-go-round is to entertain, not to make progress. In that, the ride was always consistent and true to its design.
Since 1981, Congress has annually put itself on a merry-go-round adventure almost by default. Turning to a move that was originally popularized as a mechanism to secure support for the research and development (R&D) tax credit, Congress often passes tax bills that expire in one or two years. These near-annual expiring tax laws are the so-called extenders. These extenders have grown from just a few items in 1981 to 57 tax benefits that expired at the end of 2013 and six more set to expire at the end of 2014. In fact, the original 1981 R&D tax credit has been extended 15 times since its initial passage.
The majority of today's extenders were created with the passage of President George W. Bush's tax cuts of 2001 and 2003 (Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16, and Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27, respectively). For the federal budget to balance within approved limits, several of the tax cut provisions could not be made permanent but, rather, were given a finite life so that the provisions would be effective for the decade but the ultimate financial impact of the provisions, if otherwise made permanent, could be kept out of the scoring for the bill.
Many of the extenders have been constructed as short-term by design, such as the bonus depreciation deduction allowing businesses to deduct up to 50% or 100% of the cost of certain new tangible property purchases in certain years. The bonus depreciation provisions were intended to stimulate economic growth and job creation in recessions by providing current-year cash flow incentives for U.S. companies for buying new property, and they were designed to expire once the economy recovered. But somewhat predictably, U.S. businesses have become accustomed and even addicted to this particular provision's being extended about every two years. Yet, there is still a chance that this provision will not be extended and the existing tax law that contains no bonus depreciation for 2014 will apply in the end. Thus, U.S. businesses in the fall of 2014 were left to simply outguess what Congress might do with this provision.
One might rightfully ask why Congress has created such a system or at least allowed it to perpetuate. Reviewing tax incentives to validate their usefulness is sound policy practice, and eliminating a tax provision that has outlived its purpose has some appeal. However, the critics claim that the extenders system that is currently in place is a function of Congress's reluctance to report the true costs of these provisions on an otherwise deteriorating federal budget. Either way, the extenders system exists, and taxpayers must anticipate it annually as they structure their business affairs. The reality of the political system in Washington is that in an election year, tax legislation is rarely debated or addressed before voting day, out of political caution by both sides.
On Jan. 2, 2013, Congress passed the American Taxpayer Relief Act of 2012, P.L. 112-240, enacting over 50 extenders retroactively with many provisions becoming effective Jan. 1, 2012 (more than a year before the passage date). Illustrating the implications of this delay is that bonus depreciation for 2012 and an increased Sec. 179 expensing election were passed on Jan. 2, 2013, two days after the 2012 tax year had closed. How effective are tax deductions provided in 2013 to encourage 2012 purchases of tangible personal property after the time to buy those targeted purchases has already passed?
In 2001, the AICPA published Guiding Principles of Good Tax Policy: A Framework for Evaluating Tax Proposals to aid in creating tax laws. Item two of that framework provides that tax policy should be certain, meaning that the tax should be clear as to timing, how it is to be paid, and how the amount is to be calculated. The main challenge with extenders from a tax practitioner and taxpayer perspective is that their very existence introduces uncertainty into the tax system. Further, taxpayers and tax practitioners are forced to anticipate possible retroactive application of various tax provisions because the passage of extenders has traditionally occurred late in the tax year. This inaction has a paralyzing effect on taxpayers. In short, uncertainty does not encourage taxpayers to act, but rather it fosters a wait-and-see attitude. This predicted behavior is not a new concept.
In 1788, in Federalist No. 62, James Madison wrote:
In another point of view, great injury results from an unstable government. The want of confidence in the public councils damps every useful undertaking, the success and profit of which may depend on a continuance of existing arrangements. What prudent merchant will hazard his fortunes in any new branch of commerce when he knows not but that his plans may be rendered unlawful before they can be executed? What farmer or manufacturer will lay himself out for the encouragement given to any particular cultivation or establishment, when he can have no assurance that his preparatory labors and advances will not render him a victim to an inconstant government? In a word, no great improvement or laudable enterprise can go forward which requires the auspices of a steady system of national policy.
The AICPA has been active for several years in working with Congress and its offices to encourage a permanent resolution to these otherwise temporary problems. On Sept. 15, the AICPA sent a letter to the leadership of both parties of the tax writing committees encouraging both houses of Congress to quickly address the soon-to-be or recently expired tax provisions that are part of the 2014 extenders tax laws. (The letter is available at www.aicpa.org .)
In that letter, the AICPA reminded Congress that failure to quickly address these expiring provisions could lead to negative, yet avoidable, consequences for taxpayers and other stakeholders. Failure to act timely will mean companies will lose their ability to report favorable tax law benefits in their current-year audited financial statements. The IRS will once again be burdened with implementing tax law changes into its reporting systems and forms, which will delay the tax filing season again and thus put undue time pressure on tax practitioners and taxpayers alike. Another key concern is that taxpayers will not have enough time to avail themselves of the intended benefits of the extenders provisions since the uncertainty about the provisions hinders the ability to plan for purchases of equipment and other tax-motivated spending during the current tax year.
The leadership in both houses of Congress has struggled this past session with the extenders. Both the Senate and the House expressed a desire to resolve the extenders dilemma by incorporating those provisions into a larger comprehensive tax reform package. As of this writing, Congress had not resolved the issue, although it was hoped lawmakers would pass some sort of extenders legislation during their lame-duck session in December.
Editor's note: Congress did pass tax extender legislation in December 2014. Click here for coverage.
By addressing the extenders on a stand-alone basis, Congress will be yet again failing to act on broader, much-needed comprehensive tax reforms. Despite this misgiving, in the spring of 2014, the Senate Finance Committee, on a bipartisan vote, produced the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act, S. 2260, to address the extenders on an exclusive basis. The House Ways and Means Committee also publicly stated its desire to see the extenders legislation passed during 2014. But to be clear, both proposed solutions would simply extend the provisions for yet another finite period, at the end of which taxpayers and tax practitioners will be back where they started.
As a result, even if an extenders bill has been passed to apply to tax year 2014, when those same provisions expire in a future tax year, taxpayers in the not-so-distant future will once again be left wondering if and/or when a particular provision that has expired might be retroactively extended back to a prior tax year. The issue will come full circle yet again.
In this way, all taxpayers will continue to ride the congressional merry-go-round annually, but, unlike the popular childhood ride, this particular journey has serious fiscal and economic consequences.
|Troy K. Lewis is a vice president at Heritage Bank in St. George, Utah, an adjunct professor of accounting and taxation at Brigham Young University in Provo, Utah, and chair of the AICPA Tax Executive Committee.|