The House of Representatives recently passed the Tax Extenders Act of 2009. The act extends over 30 tax breaks to individuals and businesses, $31 billion of tax relief a year.
Congressman Ron Kind said of this bill, “This bill will provide much?needed relief to families and businesses who are struggling in the current economic downturn and in a way that is fiscally responsible.”
Congressman Steve Kagen was even more enthusiastic. “This legislation helps to keep your money in your own pockets and extends tax credits for businesses, encouraging them create to higher wage jobs,” he said.
The bill extends the following for another year: the taxpayer election to deduct state and local general sales taxes in lieu of state and local income taxes, the tax deduction from gross income for qualified tuition and related expenses, the tax credit for increasing research activities, and accelerated depreciation for qualified leasehold, restaurant, and retail property, for motorsports entertainment complexes, and for farming business machinery and equipment.
Of course, this is Congress, so there are always a few interesting favors for special interests. The bill also extends the following: the tax deduction from gross income for certain expenses of elementary and secondary school teachers, the tax credit for railroad track maintenance expenditures, the enhanced expensing allowance for certain film and television production costs, and accelerated depreciation of property used for business purposes on an Indian reservation.
My personal favorite is the limitation on the amount of distilled spirits tax covered (paid over) into the treasuries of Puerto Rico and the Virgin Islands. Yo, ho, ho, and a bottle of cheap rum.
However, even though the tax breaks were pre-existing, Congress has decided that the tax breaks must be “paid for” through higher taxes elsewhere. The Congressional Budget Office does not score existing tax breaks the same way it scores spending. It presupposes spending will continue as before even after the program expires, but expiring tax breaks need to be paid for under “pay as you go” rules even though Congress was not collecting that tax revenue in the first place.
As a result, while Kagen and Kind are claiming that they just voted for tax cuts, the reality is that they voted for a net increase in taxes. They have used not increasing a host of taxes as an excuse to raise other taxes.
The Tax Extenders Act of 2009 increases taxes on private-equity firms that sell shares to the public to more than 30% instead of the usual15% rate. It also taxes carried interest that investment managers receive at the ordinary income rate of 35% instead of the lower capital?gains?rate of 15% they currently pay.
The Private Equity Council says of the carried interest tax increase, “By more than doubling the tax rate, the carried interest proposal will discourage investment, deprive many American businesses of the capital they need to survive and grow, and jeopardize critical job-creation opportunities.”
Unlike Kind who does not even mention the tax increases, Kagen does not hide the purpose behind the targeting of the tax hikes. “The irresponsibility of Wall Street speculators and corporate greed got us into this mess and we are writing new laws to make sure they help pay for our recovery.”
Perhaps someone should ask Congressman Kagen how increasing taxes on investment and depriving business of capital will aid the recovery. Then they should ask the congressman what taxes on capital and investment he will support unnecessarily when it’s time to preserve the same tax breaks in 2010.
Instead of claiming they have cut taxes when they have in fact raised them, Congressmen Kagen and Kind should be working to change the CBO scoring rules so that past tax breaks will not justify the war on investment like this year’s version of the Tax Extenders Act.
By James Wigderson
Special Guest Perspective for the MacIver Institute