December 16, 2014;Accounting Today
It’s like the end-of-the-year charitable giving rush, except in this instance, the giver is the U.S. Congress. In the briefly extended December session of the U.S. Senate, the Senate passed legislation authoring a one-year renewal of the tax incentives that had been so eagerly sought by nonprofits and foundations—and many more that were strongly rooted in the lobbying agendas of corporate special interests.
The package is all but assured of getting President Obama’s signature, although he had previously expressed misgivings about the grab bag nature of the 55 tax incentives in the package, the lack of other tax or revenue increases to offset the revenues sacrificed in the extenders, and the disproportionate benefits going to corporations rather than families or individuals in need. Nonetheless, despite the President’s late discovery of presidential powers such as the executive order on immigration and the announcement of the normalization of diplomatic relations with Cuba, there are probably too many interests represented in the extenders bill with influence in some part of the White House so as to ensure Barack Obama’s John Hancock.
Now let’s take stock of what the extenders package really did and didn’t do and what it reveals about the cockamamie way that this nation crafts and enacts tax policy.
First, there was a good reason why some of the smartest tax-writing minds in the Senate, particularly the man who actually chaired the Senate Finance Committee, Senator Ron Wyden (D-OR), voted against the bill, and it wasn’t because of this tax incentive or that. Rather, it was the notion of waiting until the end of the calendar year to retroactively approve for 2014 these tax extenders for all of a couple of weeks. In frustration, Wyden said that the tax extender package had the shelf life of a carton of eggs, meaning that the nation starts 2015 once again with none of the extenders in place. If the country can’t figure out which incentives should be made permanent, at the very least it should be giving a timeframe for these policies longer than year-to-year, a minimum of at least two years. The U.S. proclivity of year-by-year determinations on tax policy makes tax planning a near impossibility for some people.
Second, there is little question that failing to act on the legislation until the last two weeks of the year means that most eligible taxpayers, unless they were equipped with magic eight balls to predict the future, were probably ill-prepared to take advantage of the tax incentives. Perhaps some retirees over 70½ were completely confident that Congress would act to extend the IRA rollovers and planned accordingly, but there were probably many more retired persons with possibly cautious tax advisors who might not be able to make charitable distributions from their IRAs with only two weeks left in the year or to make charitable distributions at the level they would have had they been confident of the extension. Incentives are supposed to, by definition, incentive behaviors. By approving two weeks before the end of the tax year, Congress has left some taxpayers—and some charitable donors—discombobulated for eleven-and-a-half months. As Senator Wyden put it, Congress’s action to approve the tax “cannot change anything taxpayers did six, eight or ten months ago” as “those decisions have already been made, and those actions have already been taken.”
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Third, for some charities and foundations that supported elements of this tax package such as the IRA rollover, the New Markets Tax Credit, and the Low Income Housing Tax Credit, the rest of the package contained plenty of hold-your-nose components. For nonprofits, it was a Hobson’s choice deal—take the entire package with a bunch of truly questionable tax incentives for corporations and special interests, or give up the IRA rollover, the charitable incentives for conservation easements, and the NMTC and LIHTC. Just think: to get the LIHTC and the NMTC, the package also includes tax breaks for NASCAR tracks, owners of thoroughbred race horses, and a bevy of incentives for corporations. According to Robert McIntyre of Citizens for Tax Justice, the tax incentive for research and development, for example, is defined “so loosely that it includes the development of machines by Chili’s to replace staff in their kitchens and the development of new flavors by Pepsi.” Some of the corporate incentives McIntyre describes were simply the product of corporate lobbyists looking for special tax breaks for their clients with no discernable public value.
No one should assume that these are tax incentives that benefit in a major way working families or the poor, except perhaps the LIHTC and the NMTC—and even there, remember that big corporations purchase 90 percent of the housing tax credits. Even the IRA rollover, as experience in the past has shown, primarily benefits “universities, colleges, hospitals, and other large institutions” and not organizations that are directly addressing the needs of low-income communities. The IRA rollover may be a valuable addition to the charitable giving toolbox, but it shouldn’t be considered in this tax extender package as a low-income counterweight to the legislation’s corporate and high income giveaways.
Fourth, the $42 to $45 billion a year in lost tax revenues due to these tax extenders has to be made up somehow. You know that in the next overall budget battle, Congressional Republicans are unlikely, to put it mildly, to support tax increases to pay for these lost revenues. At a time when corporations and wealthy taxpayers should be providing more revenues for hard-pressed government programs, the tax extenders, both good and bad, give up revenues and reduce the availability of revenues for social programs. Given that the next Congress will be dominate by Republicans in the House and the Senate who are not particularly keen for expanding federal support for human service programs, the likelihood of Congress finding new tax revenues to avoid even deeper cuts in social programs is unlikely. Remember that if Congress continues the practice of annual bulk approvals of tax extenders, the 10-year cost won’t be $450 billion, but more like $700 billion.
So the nonprofit and foundation sectors got the incentives they wanted—for one year, approved at the very end of the year, tied to other tax incentives of mostly questionable relevance to incentivizing taxpayer behaviors for broad public good. There has to be a better way of doing tax policy than this.—Rick Cohen