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Some Breaks for Industries Are Retained in Fiscal Deal

January 2, 2013 by Leave a Comment

While taxes are expected to increase for most Americans as a result of the deal between the White House and Congress to end the fiscal impasse in Washington, corporate America was more fortunate. A bevy of tax breaks and credits that had been scheduled to expire at the end of 2012 will be extended for another year, costing taxpayers $46.1 billion over the next decade, according to Congress’s Joint Committee on Taxation.

The preservation of these subsidies and deductions has become a perennial Washington ritual in recent years, with lobbyists and companies and their allies on Capitol Hill securing their survival in the fine print of the tax code. Washington’s inability to close many of these loopholes is a sign of just how reluctant business is to sacrifice prized subsidies despite loud calls from many chief executives in recent months to raise taxes, cut spending and deal with huge budget deficits.

“Except for the people who like it, it’s a giveaway,” said Eric Toder, co-director of the Urban-Brookings Tax Policy Center. “It’s hard to mobilize opposition, but the people who benefit from it benefit a lot.”

Many of the provisions survive because they are so obscure. A $62 million tax credit for employers in American Samoa benefits StarKist, which is the largest private employer in the South Pacific island chain, with nearly 2,000 workers there. The tax break was supported by Jeff Bingaman, Democrat of New Mexico, who as former chairman of the Senate Energy and Natural Resources Committee was an advocate for American territories that lack formal Senate representation.

“We support the development credit, and it’s a key factor in our ability to maintain competitive operations in American Samoa,” said Mary Sestric, a spokeswoman for StarKist. “This is a big priority for us.”

Corporations were keenly sensitive to changes in broader tax policy, in addition to benefiting from direct tax breaks. For example, Goldman Sachs distributed $65 million in stock to 10 senior executives in December instead of January, when the firm typically makes such awards. That move helped them avoid the higher tax rates that will now be imposed on income of $400,000 or more.

The chief executive of Goldman, Lloyd C. Blankfein, was among the most prominent corporate executives who backed higher taxes as part of a broader deficit-reduction package. He and other business leaders also met with President Obama late last year as the White House sought support from corporate America during negotiations with Republicans in Congress.

Some subsidies, like a break for research by companies, can actually have long-term benefits for the economy, defenders argue.

Others, like the one that allows filmmakers to deduct the first $15 million in production expenses for movies made in the United States, are much more narrowly focused but have loyal supporters that manage to keep them alive year after year. Another beneficiary of Congressional largess is Nascar, which will enjoy a $78 million subsidy for racetrack construction over the next 10 years.

“Once they get in, they tend to stay in,” said Alan Auerbach, director of the Robert D. Burch Center for Tax Policy and Public Finance at the University of California, Berkeley.

Besides the $46.1 billion in corporate incentives over the next 10 years, there is another $18.1 billion in breaks for alternative energy, much of that going to companies as well. Producers of biodiesel, for example, will reap more than $2 billion in tax breaks. And while it may not exactly be an alternative source of energy, producers of coal on Indian lands retained $1 million in tax breaks — a provision backed by Max Baucus, the Montana Democrat who is chairman of the Finance Committee.

The wind industry, a chief beneficiary of support from Washington, will get $12 billion in subsidies over the next decade. In fact, the benefits that were included for the wind sector are slightly broader now than in previous years.

Under the new rules, contained in the legislation that Mr. Obama signed on Wednesday, new wind farms will be covered by a production tax credit or an investment tax credit similar to the ones that just expired, but the projects will not need to be finished by the end of this year to qualify; they simply must have been started in 2013.

The American Wind Energy Association, a trade group, said in an e-mail to its members that the change was made by Congress “specifically in order to accommodate the business timelines of our industry.” The business has been in a tax-driven boom-and-bust cycle.

The renewal of the tax benefits was pushed strongly by Mr. Bingaman, Mr. Baucus and Charles E. Grassley, Republican of Iowa. When the Senate began considering “tax extenders,” or continuations of various tax breaks, wind advocates pushed to have all of them included.

“There always seemed to be some bipartisan support for this,” said Philip D. Tingle, a lawyer who specializes in energy taxes. “The element, the issue was, how they were going to pay for it.” The renewal will probably cost the Treasury about $12 billion, although the wind industry insists that it will generate so much taxable activity that total tax revenue, including those at the state and local level, will exceed the tax expenditure.

The industry undertook a large lobbying campaign and says it generated more than 750,000 letters, e-mails and other communications with Congress. It took nearly 100 members of Congress on tours of wind farms and factories where components are built. The issue may be more regional than partisan; according to the American Wind Energy Association, 80 percent of wind farms are in Congressional districts represented by Republicans, as are 67 percent of the factories.

The tax credits were also extended to cover electricity made from biomass, tides and ocean waves, landfill methane and improvements to hydroelectric stations.

Article source: http://www.nytimes.com/2013/01/03/business/some-breaks-for-industries-are-retained-in-fiscal-deal.html?partner=rss&emc=rss

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Economix Blog: Bruce Bartlett:How Politics Came to Dominate Payroll Tax Debate

December 27, 2011 by Leave a Comment

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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the coming book “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Virtually all of the coverage of the debate over extending the temporary cut in the payroll tax has centered on the politics. Almost none has examined the economics of the issue. Indeed, it is nearly impossible to tell exactly why Republicans were so adamantly opposed to extending the tax cut. I’m still not sure.

Today’s Economist

Perspectives from expert contributors.

The first thing to know is that the payroll tax cut was not originally part of the $787 billion stimulus bill enacted in February 2009. Another tax cut, the Making Work Pay credit, was the principal tax cut in the legislation. It provided a $400 to $800 tax cut for every person or family with a positive tax liability and an income below $75,000 for individuals and $150,000 for couples.

The stimulus legislation also contained a number of other tax cuts for individuals and families that consumed 30 percent of the budgetary cost of the legislation. All tax provisions taken together, including those for businesses, added up to $326 billion – more than 40 percent of the total cost of the stimulus package, according to the Joint Committee on Taxation.

At the end of 2010, all of the tax cuts enacted during the George W. Bush administration were scheduled to expire, as well as the Making Work Pay credit. Although President Obama wanted the tax cuts for the rich to expire on schedule, Republicans insisted on an all-or-nothing strategy. Republicans also asked that the Making Work Pay credit be replaced by a temporary two-percentage-point cut in the employees’ share of the payroll tax.

Cutting the payroll tax fit better with Republican economic theory, because the rate of taxation would be reduced. Tax credits, by contrast, which are subtracted directly from one’s tax liability, generally don’t affect economic decisions at the margin because tax rates are unchanged.

(Of course, the phasing in and phasing out of tax credits such as the earned income tax credit can have marginal rate effects. But Republican economic policy tends to ignore such effects and focuses almost exclusively on statutory tax rates.)

Since the beginning of the economic crisis, many Republican economists had insisted that a temporary payroll tax cut was the best possible stimulus, including the former chairmen of the Council of Economic Advisers, Michael J. Boskin and N. Gregory Mankiw, and the former director of the National Economic Council, Lawrence B. Lindsey.

Economists at Morgan Stanley predicted that the payroll tax cut would help power the economy to 4 percent growth in 2011. (Real gross domestic product growth has actually been less than half that rate.)

The following distribution table from the Tax Policy Center, on Dec. 14, 2010, shows more clearly why Republicans favored the payroll tax cut over the Making Work Pay credit – the benefits are much more skewed toward those with upper incomes.

It also shows why the Obama administration went along – the average tax saving was almost doubled, thus increasing the aggregate fiscal stimulus. The administration also thought the payroll tax cut would be more apparent to workers than the largely invisible Making Work Pay credit.

Tax Policy Center

When the legislation was debated in the House of Representatives on Dec. 16, 2010, the House majority leader, Eric Cantor, pointed to the abolition of the Making Work Pay credit as a key reason why Republicans should support it.

In short, the payroll tax cut was a Republican initiative. So why did they turn against it? The answer is unclear.

To be sure, some Republicans were unenthusiastic about the payroll tax cut in the first place, as were some Democrats who feared damage to the Social Security trust fund. (The Treasury has reimbursed the trust fund for the lost payroll tax revenue.)

As early as last summer, Republican leaders began trashing the payroll tax holiday. House Speaker John Boehner called it a short-term gimmick and Paul D. Ryan, chairman of the House Budget Committee, branded it “sugar-high economics.”

In August, The Wall Street Journal editorial page came out against extending the payroll tax cut. A Heritage Foundation study in September argued that it was ineffective because it was oriented toward average workers rather than wealthy job creators.

Yet, there is precious little evidence that the payroll tax holiday did much, if anything, to stimulate growth or job creation. The Congressional Budget Office rated it as among the least stimulative fiscal policies. Some economists have argued that the Making Work Pay credit provided more bang for the buck.

In the end, economic arguments had little to do with how the payroll tax cut extension played out.

Republicans were in a weak position arguing against it because, historically, they have never opposed any tax cut, no matter how ill-designed or costly. And it was too easy for Democrats to press their political advantage, even though many had doubts about the efficacy of the payroll tax cut.

Sadly, we will probably go through the same exercise this time next year.

Article source: http://feeds.nytimes.com/click.phdo?i=4aefc03ce4240d2f93165b267e58d393

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Gift to M.I.T. from Bose Founder Raises Tax Questions

April 30, 2011 by Leave a Comment

But Amar G. Bose, who received his bachelor’s, master’s and doctoral degrees from M.I.T. and was a professor there from 1956 to 2001, placed some unusual restrictions on the Bose shares he donated to the university.

While the shares give the university majority ownership, they are nonvoting and thus confer no control over the company and its operations. Nor can M.I.T. sell the shares. It will receive dividends from Bose, which Nathaniel W. Nickerson, a spokesman for the university, said in an e-mail would be “used broadly to sustain and advance M.I.T.’s education and research mission.”

While Mr. Nickerson said it was “a very significant gift,” he would not discuss the financial details, including the potential value, saying that Dr. Bose and the Bose Corporation want to “keep details of financial matters confidential.”

M.I.T. officials, in announcing the donation, praised Dr. Bose’s teaching and research. “Amar Bose gives us a great gift today, but he also serves as a superb example for M.I.T. graduates who yearn to cut their own path,” Susan Hockfield, the university’s president, said in an article on its Web site.

Dr. Bose could not be reached for comment.

But some tax experts said the gift and the lack of detail about it raised questions. “We don’t know much about the terms of this gift, but it seems like it clearly falls into a gray area that has been of concern to Congress,” said Dean Zerbe, national managing director of the tax consulting firm Alliantgroup. “The university needs to be more forthcoming about the arrangements behind this donation so we can get a clear picture of what’s going on.”

Roger Colinvaux, an associate law professor at Catholic University and previously a staff member of the Congressional Joint Committee on Taxation, also said the gift raised questions for him. “If the shares truly can’t be sold so that there is some restriction on the university’s ability to transfer stock, then it would suggest it is a contribution of partial interest only, which would not be deductible as a charitable contribution,” said Mr. Colinvaux, who recently published an article in The Florida Tax Review that argues that the laws governing charity are outdated and inadequate. But Erik Dryburgh, a nonprofit lawyer, said he did not see a problem with the gift. “On its face, I don’t see the abuse or potential abuses that were present in some of the more abusive gift transactions we saw in the past,” Mr. Dryburgh said.

Mr. Zerbe and Mr. Colinvaux, though, said the gift brought to mind various tax shelters involving charities that came under scrutiny during the time they worked in Congress.

Mr. Nickerson, however, denied that Dr. Bose’s gift was similar to those tax strategies. “Further, it would not be appropriate for us to discuss the taxes of any of M.I.T.’s donors,” he said.

Most of the tax shelters cited by Mr. Zerbe and Mr. Colinvaux involved an elaborate strategy where privately held companies gave nonvoting shares to a charity and then, after a period of time, bought them back. The transactions attracted the attention of regulators puzzled by why donors would give nonprofit groups nonvoting shares, whose value — and thus potential for tax deduction — is limited by their nonvoting nature.

In 2003, the Senate Permanent Subcommittee on Investigations looked into such transactions and found that in some cases, they were an elaborate way of using a charity’s tax-exempt status to erase tax liabilities for the other shareholders of the company involved.

A charity involved in such a tax strategy would receive income from the company in proportion to the size of its holdings of nonvoting stock. But while that income was taxable, it was not distributed to the charity and stayed at the company to be reinvested.

The charity did not owe taxes on the income, anyway, because it was tax-exempt.

Later, the charity would sell the nonvoting shares back to the company at fair market value, and the company would distribute the income, tax-free, that had been associated with those shares among its other shareholders.

In other, similar cases, charities that received nonvoting stakes in privately held companies through gifts of stock used large losses they had incurred on unrelated businesses to offset taxes for other shareholders. Mr. Dryburgh wrote a paper on that type of tax shelter.

In 2004, the I.R.S. listed as “restricted” such transactions and denied deductions associated with them.

Article source: http://feeds.nytimes.com/click.phdo?i=70141d05588b0aa01bb182e62dc56b71

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