Tax_Provisions_Expiring_in_2012

Tax Provisions Expiring in 2012 Introduction The pending expiration of a number of tax provisions has generated a great deal of attention as reflected by editorials and opinion pieces in national newspapers, and Congressional hearings. The tax provisions that are scheduled to expire at the end of 2012 include: • What is commonly referred to as the Bush tax cuts, which reduced income taxes by reducing tax rates, reducing certain penalties and limitations on personal exemptions and itemized deductions and reduced estate tax liabilities. • The alternative minimum tax (AMT) patch, which prevents an estimated 26 million additional taxpayers from owing the AMT. • The payroll tax cut, which reduced an employee’s share of Social Security taxes by two percentage points. • A variety of previously extended temporary tax provisions commonly referred to as “tax extenders,” which affect individuals, businesses, charitable giving, energy, community development, and disaster relief. On one extreme, allowing these tax provisions to expire as scheduled will somewhat improve the fiscal condition, but could stifle an economic recovery. At the other extreme, permanently extending all of these tax provisions could worsen the longer-term fiscal outlook and possibly signal a lack of progress in dealing with the long-term fiscal situation. The Obama Administration has proposed allowing the Bush tax cuts to expire for upper income taxpayers and permanently extending the tax provisions for middle class taxpayers. Compared to permanently extending all of the tax provisions, this proposal would increase tax revenues, but still leaves federal debt on an unsustainable path. As Congress and the Obama Administration decide whether to extend these provisions, they must consider the estimated revenue loss associated with their extension, the impact to the business sector and the impact to the overall economic outlook as these tax cuts are implemented along with mandatory spending cuts. A cursory analysis indicates that the expiring tax provisions are transitioning from “legislative passage” to “regulatory rulemaking” and that a firm’s ability to influence the public policy is very small and waning fast (Keim, 2012, p. 7). However, as the impacts of the FY2013 Federal Budget, the expiring tax provisions and the Federal Budget cuts, are better understood and brought to light in the public arena, the policy is gaining interest as a political issue and has, in an influential sense, moved back to the “expanding interest among media, opinion leaders and politicians” phase (Keim, 2012, p. 7). Lifecycle Background To fully understand the current tax provision (and to some extent the federal budget deficit) situation, one must look back to 1999 and George W. Bush’s Presidential Campaign. On December 1, 1999, candidate Bush was leading the race for the Republican presidential nomination, looking over his shoulder at Steve Forbes’s promise of a 17 percent flat tax, which was popular with conservatives. At a campaign event in Des Moines, Iowa, Bush vowed that, as president, he would cut taxes for all Americans. According to a widely circulated report prepared by Citizens for Tax Justice at the time, his plan would cost $1.7 trillion over 10 years. (Greeley, 2012, para. 7) This then set the path for the eventual passage of a number of tax provisions under the Bush Administration that continue today. The Bush Tax Cuts The phrase “the Bush tax cuts” refers to changes to the United States tax code passed originally during the presidency of George W. Bush, through the “Economic Growth and Tax Relief Reconciliation Act of 2001” (EGTRRA) and through the “Jobs and Growth Tax Relief Reconciliation Act of 2003” (JGTRRA). While each act has its own legislative history and effect on the tax code, suffice it to say that the JGTRRA of 2003 amplified and accelerated aspects of the EGTRRA of 2001. The two acts have been spoken of together as the Bush tax cuts, specifically in terms of analyzing their effect on the economy and in discussing their political ramifications. Both laws were passed using controversial Congressional reconciliation procedures. The Bush tax cuts had sunset provisions that made them expire at the end of 2010, but were extended through the 2010 Tax Relief Act. (Crandall-Hollick, 2012) 2010 Tax Relief Act President Obama signed a multi-billion dollar tax cut package, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 on December 17. The new law follows through on the framework agreed to December 6 2010 by President Obama and GOP leaders in Congress. The 2010 Tax Relief Act extends the Bush-era individual and capital gains/dividend tax cuts for all taxpayers for two years. The bill also provides for an AMT “patch,” a one-year payroll tax cut, 100 percent bonus depreciation through 2011 and 50 percent bonus depreciation for 2012, a top federal estate tax rate of 35 percent with a $5 million exclusion, and more, which was resolved during the presidency of Barack Obama by a two-year extension that was part of a larger tax and economic package. (Crandall-Hollick, 2012) Economic Impact The Congressional Budget Office (CBO) estimates “the combination of policies under current law will reduce the federal budget deficit by $607 billion, or 4.0 percent of gross domestic product (GDP), between fiscal years 2012 and 2013” (Elmendorf, 2012, para. 3). The CBO also projects a weakened economy that will lower taxable incomes and raise unemployment rates, resulting in a reduction in tax revenues and increased spending in entitlement programs, such items as unemployment insurance. Under those fiscal conditions, which will occur under current law, growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent, CBO expects—with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession. (Elmendorf, 2012, para. 5) This leaves policymakers with difficult decisions on how quickly to implement policies to reduce budget deficits. On the one hand, cutting spending or increasing taxes slowly would lead to a greater accumulation of government debt and might raise doubts about whether longer-term deficit reduction would ultimately take effect. On the other hand, implementing spending cuts or tax increases abruptly would give families, businesses, and state and local governments little time to plan and adjust. In addition, and particularly important given the current state of the economy, immediate spending cuts or tax increases would represent an added drag on the weak economic expansion. (Elmendorf, 2012, para. 2) The resulting weakening of the economy will lower taxable incomes and raise unemployment, generating a reduction in tax revenues and an increase in spending on such items as unemployment insurance. References Crandall-Hollick, M., (2012, April). An Overview of Taz Provisions Expiring in 2012. Report for Congress. Congressional Research Service. Retrieved August 6, 2012 from http://www.crs.gov Elmendorf, D., (2012, May). Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013. Report for Congress. Congressional Budget Office. Retrieved June 10, 2012, from http://www.cbo.gov . Greeley, B., (2012, August). Fiscal Cliff Crisis Rooted in Senate Ploy to Pass Bush Tax Cuts. Business Week. Retrieved 6 Aug 2012 from: http://www.businessweek.com/printer/articles/300080'type=bloomberg Keim, G., (2012, April). Managing Business Political Advocacy in the USA: Opportunities for Improved Effectiveness. Teaching Note. W.P. Carey School of Business, Arizona State University, Tempe AZ.