Now that the tax extenders legislation has died, what’s next? At least some of the provisions (e.g., the new tax regime for “carried interests”) are likely to find their way into future legislation. But what about the tax extenders themselves, such as the look-through rule of section 954(c)(6) and the section 41 research credit? Although many of the extensions involve tax expenditures (i.e., provisions that cost the Treasury money), they would almost certainly be offset by the bill’s revenue raisers, which were themselves styled as anti-abuse and loophole-closing provisions. As a result, we probably have not seen the last of these measures.
Nevertheless, Congress’ failure to pass the extenders bill illuminates a broader, and more troubling, issue with tax legislation – namely, the use of temporary provisions that “sunset” after a specified period. Although such provisions may be popular with Congress, which often wants to limit the “cost” of tax expenditures for purposes of scoring the deficit impact of legislation, they create unnecessary costs and perverse incentives for taxpayers.
The use, and year-by-year extension, of temporary provisions forces taxpayers to examine annually the potential impact of renewal (or non-renewal, as the case may be) and leaves taxpayers with little certainty about the future tax efficiency of transactions and corporate structures. Although the government would like to believe that tax efficiency should not drive business planning, real-world executives will affirm that tax costs rank highly among the factors that can affect the consideration of a business proposal.
Indeed, in the case of tax credits – e.g., section 41 – that are specifically intended to encourage certain activity, Congress should expect taxpayers to take into account the tax implications of the activity. Yet, when there is regime uncertainty – i.e., an inability to discern the likely path of rules in the future – taxpayers may be unwilling to engage in the very activity that Congress intends. (Of course, thinking cynically, perhaps that disincentive is not unintentional, as it allows legislators to take credit for enacting ostensibly “helpful” legislation while, in reality, minimizing the impact and, perhaps more importantly, the cost of that legislation.)
Temporary legislation might make for good tax politics; but, absent some compelling justification, it makes for lousy tax policy. Unfortunately, as deficit-scoring will remain a key legislative consideration for the foreseeable future, and the use of “sunset” provisions is an accepted way of gaming the deficit-scoring system, it is unlikely that this practice will end any time soon.