The pending debate over highway spending has tax implications and the pass-through business community should pay attention.
The Highway Trust Fund will run out of money in the next couple weeks and both the Senate and the House are planning a two-step response — a short-term patch that will keep highway projects funded into next year and then longer bills that would establish highway policy for the next couple years.
How to allocate all those dollars for roads and bridges is always a complicated and politically charged affair. So is how to pay for it. Finance and Ways and Means both are expected to hold markups tomorrow on their respective plans. Here are the offsets for each:
- Ways and Means: $11 billion in offsets from pension smoothing ($6.4 billion), customs user fees ($3.5 billion), and transferring funds from the Leaking Underground Storage Tank fund ($1 billion)
- Finance: No final deal yet, but it looks like they are shooting for $10 billion in offsets including mortgage reporting ($2.2 billion), extending the statute of limitations on overstatement of basis ($1.3 billion), and a host of other items.
Considering the alternatives — gas tax hike, tolls on interstate highways — this set seems pretty tame. That said, the debate over the highway bill should serve notice to the business community that while tax reform may be on hold, Congress will continue to look to tax policy to offset some of its other priorities, so we need to be vigilant.
Meanwhile, action on extenders and related items continues at a low level. This week, the House will take up a permanent 50 percent bonus depreciation bill. While bonus depreciation is not really an “extender,” it does keep the focus on all those expired provisions, and it’s not bad policy either. Coupled with the higher Section 179 limits, the bill goes a long way towards moving the tax treatment of business investment towards general expensing, something many economists have argued is good for the economy. As the Tax Foundation noted:
We find that permanently extending this provision would boost GDP by over 1 percent, wages be 1 percent, and create 212,000 new jobs due to its effects on the cost of capital. It would also increase federal tax revenues by $23 billion after taking into account the increases wages and incomes caused by making bonus expensing permanent.
Extending R&E, Section 179, and built-in gains — either permanently or for several years — would be good for the economy too. These provisions already expired at the end of last year (2013), so every day Congress waits is a day of benefit lost. When Congress does act, it will make the extension effective back to January 1st, but it will be hard to argue that business investment increased in 2014 because of higher Section 179 limits that weren’t retroactively extended until this December, won’t it? The behavioral effect will be lost.
Moreover, any extension that is less than two years (2014 and 2015) would require Congress to come back next year and perform the exercise all over again. How Congress expects businesses to use these provisions to their advantage when they keep expiring is beyond our ability to explain, and one of the best arguments behind Chairman Camp’s push to make them permanent.
Despite the strong case for action now, any meaningful movement prior to the elections would be shocking. There’s only seven or eight weeks of session left before Congress recesses for the elections, and with the extenders already expired, we can’t see a real catalyst out there that would compel the House and Senate to come together on a package.
That’s too bad, and is just one more reason why both the tax code and the policy making process that creates it appear wholly dysfunctional.