Some U.S. lawmakers are exploring a post-election deal that would lock in permanent tax cuts for major corporations and low-income families.
The potential trade is one way Congress could break a logjam over reviving dozens of popular tax breaks that lapsed at the end of 2013, said a Senate Democratic tax aide who sought anonymity because the idea is still in early discussion stages. It would follow a time-honored Washington tradition: If you can’t figure out which tax cuts to give, give more.
If House Republicans insist on making some lapsed business tax cuts permanent, Senate Democrats will want to make something permanent for middle- and lower-income households, the aide said. They’ll start with expansions of the child tax credit, earned income tax credit and higher education tax credit, all of which expire at the end of 2017, the aide said.
The result may please Republicans and companies such as Intel Corp. (INTC) that have sought a permanent tax break for corporate research and development. It also could satisfy Democrats, who have been trying to bolster tax credits for families and low-income workers.
The losers would be anyone worried mostly about the U.S. budget deficit; such a bill would cost the government more than $200 billion over 10 years.
There’s a chance that lawmakers will revert to past practice and extend most of the breaks for a year or two. They may find another path or simply deadlock and leave the issue unresolved for the Congress that takes office in January.
Senate Democrats want to extend dozens of lapsed tax breaks through 2015, offering benefits for wind energy, teachers and multinational banks, and they have support from some Senate Republicans. A straightforward extension is still their default position.
House Republicans’ insistence on making some tax breaks permanent may alter the usual order when serious talks start after the Nov. 4 election. The House has voted to lock in several breaks, including the research tax credit and rules that allow small businesses to deduct more equipment costs.
The Senate hasn’t acted, so there’s not a clear Senate position that can be reconciled with the House, said a House Republican aide who spoke on condition of anonymity.
The bipartisan support for making the research credit permanent is giving encouragement to its backers.
“Without a doubt, this is the most unique opportunity that the R-and-D tax credit has had for years,” said Christina Crooks, director of tax policy at the National Association of Manufacturers. “It’s a very good outlook for our purposes and our members.”
Nothing will be decided until after next week’s election sets the political landscape for the rest of 2014 and beyond. A post-election session will start in mid-November.
A senior Senate Democratic aide who spoke on condition of anonymity said a bipartisan bill from the Finance Committee – which extends almost all of the tax breaks through 2015 without making anything permanent – is the one that ought to be passed.
Still, the prospect of adding more tax breaks – particularly with the budget deficit shrinking – may be less contentious than other add-ons such as tax increases, spending cuts or limits on U.S. companies seeking foreign tax addresses.
The research tax credit is an opportunity for House Republicans to score a political victory. Lawmakers in both parties want to make it permanent, and so does President Barack Obama.
A coalition of companies including Johnson & Johnson (JNJ), Xerox Corp. (XRX) and Corning Inc. has been lobbying for the credit.
In May, the House voted 274-131 on a $155.5 billion bill to make the credit permanent. Only one Republican voted no, and 32 percent of House Democrats supported the bill.
The White House threatened to veto that bill because it would increase the deficit.
“Making traditional tax extenders permanent without offsets represents the wrong approach,” the White House said in a May 6 statement.
That’s a tough position to take, because the credit has been around since 1981 and Congress has repeatedly signaled its intent to continue the break without budgetary offsets.
Making the credit permanent also helps Republicans as they plan for a future revamp of the U.S. tax code. Locking in the tax cut now would mean they could use the proceeds from curbing other tax breaks to pay for deeper rate cuts, while keeping the research credit even in a revised tax code.
For their part, Democrats are focused on a set of tax credit expansions first enacted as part of the 2009 stimulus law and last extended as part of the 2013 fiscal cliff deal.
The breaks include an expansion of the child tax credit that makes it easier for the lowest-income families to qualify, as well as earned income tax credit revisions that reduce a marriage penalty and allow bigger benefits for larger families. Also expiring is a refundable tax credit for college tuition.
The child credit changes would cost the government $72 billion over the next decade, according to the congressional Joint Committee on Taxation. The earned income credit changes would cost $25 billion and the tuition credit would cost $78 billion.
If the child credit expansion expires, 12 million people, including 6 million children, would fall into poverty or deeper into poverty, according to the Center on Budget and Policy Priorities, a Washington group that advocates policies to benefit low-income households.
Among those focused on these tax credits is Senator Sherrod Brown, an Ohio Democrat, who prefers the Senate bill and is looking ahead to post-election negotiations.
“If House Republicans are seeking to add permanent extensions, Senator Brown believes that negotiation must start with extending” those expiring credits, said Meghan Dubyak, a Brown spokeswoman, in an e-mailed statement.
Even if lawmakers coalesce around a deal that adds permanent tax breaks on top of the temporary ones, there are plenty of details to figure out.
Among them is whether other House-backed breaks should be made permanent, including a rule that encourages people to make charitable contributions from retirement accounts. Lawmakers also must decide whether to extend the current research credit or expand it, as Ways and Means Chairman Dave Camp, a Michigan Republican, proposed this year.
Then there’s the issue that stalled the bipartisan Senate bill to extend breaks through 2015 – a fight over what amendments to allow that has kept the U.S. Senate from advancing much legislation all year.