Extender Tax Provisions
Calvin H. Johnson
University of Texas at Austin - School of Law
January 31, 2012
U of Texas Law, Law and Econ Research Paper No. 221
U of Texas Law, Public Law Research Paper No. 211
This is testimony submitted at the invitation of the Senate Finance Committee for its hearings on January 31, 2012 on tax provisions that had expired at the end of 2011, but which the Finance Committee was considering for extension for two more years. For 13 of the provisions, worth about $18 billion over ten years, the testimony recommends that they be left expired. For nine of the provisions, worth $12 billion over ten years, there is a worthy cause, but the provisions need to be reworked to refocus with less waste and with greater efficiency.
The three most important provision on the “keep dead” list are
(1) Exception under Subpart F for active financing income. ($5.2 billion over 10 years). The testimony says that financing income can be sourced offshore without any economic substance. Subpart F which taxes mobile income to U.S. owners properly applies to this income.
(2) 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements. ($2.9 billion over 10 years). The expired provision allows a 15-year tax life for improvements to buildings for the lessee. The testimony says the normal 39 year life for nonresidential real property is more appropriate.
(3) Deduction for state and local general sales taxes. ($2.8 billion over 10 years if AMT is patched). The expired provision would allow an itemized deduction for state sales taxes. The testimony says that the deduction is inappropriate. The purchaser voluntarily pays the sales taxes by buying the product and we know that the product contributes to the purchaser’s standard of living by at least its cost including sales tax because the purchaser is willing to pay for it.
The most important issue on the list of provisions that should be re-enacted but only after better focus that cuts down government caused waste is the tax credit for research and experimentation expenses ($7.7 billion over 10 years). The expired provision would give a research tax credit equal to 20 percent of increases in research. The testimony says that moneys currently qualifying as “research” are not required to give benefit to the general public worth the cost of the credit. Games like Dead Zone 2 and Grand Theft Auto IV that are not good for the general public are considered to be research. When the credit is applied to benefits consumers pay for, the subsidy distorts real demand. The testimony recommends that product development not be eligible as research and that the benefit to the general public should be ascertained only after the fact by a reward administered by National Science Foundation.
Number of Pages in PDF File: 26working papers series
Date posted: February 23, 2012
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