Whatever Happened to All Those Expiring Tax Breaks?

In two days, 53 targeted tax breaks will, officially at least, die.

By the congressional Joint Committee on Taxation’s count, that’s the number of temporary tax subsidies that are due to expire on December 31. They’ve become known as the extenders, which sounds like the name of a wonky rock band but isn’t. They got the name because every year or so, like clockwork, Congress mindlessly continues them for another year or so. But this month, in the last–minute kerfuffle over the payroll tax, the extenders never quite got into the conversation.

This doesn’t mean they’ve been killed, however. It is more like they are being held hostage.

Most of these special interest baubles are hardly worth keeping. They include a menagerie of alternative energy credits, special depreciation rules (including the ever-popular tax break for NASCAR race tracks), extraordinary deductions for certain charitable gifts, and various investment incentives for developers in tax-favored communities (enterprise zones, Gulf coast opportunity zones and lower Manhattan–a distressed neighborhood if ever there was one).

Congress would do the nation and the budget a great favor if it let most of these goodies quietly fade away. But the list also includes two very popular individual provisions and two lucrative business breaks. These are the hostages.

They may be trotted out in a few months, about the time Congress re-litigates the fate of the payroll tax cut (which it just extended through February). Or their fate may not be decided until the end of 2012, when they’ll become part of the slow motion fiscal train wreck that everyone sees coming but nobody seems to be able to stop. This time next year, lawmakers will just throw the extenders into the mix with the 2001/2003/2010 tax cuts that expire at the end of 2012, the automatic across-the-board spending cuts that are supposed to be the price of this year’s failed deficit talks, and the need to once again increase the debt limit.

On the individual side, the most valuable hostage is the provision that protects about 30 million middle-income households from the Alternative Minimum Tax.  Another high-profile captive is an extra-generous tax subsidy for employees who commute by mass transit. That subsidy will drop from $230-a-month to $125 in a few days.

For businesses, a measure that lets firms write off the full cost of capital equipment in the year it is purchased is about to end. So will the ever-popular research and experimentation tax credit. This windfall does little to spur R&D in the real world, but has reached near-mythical status among lobbyists and lawmakers.

There is big money in some of these. Extending the AMT patch would add about $70 billion to the deficit in 2013 alone. Keeping the research credit would add $13 billion.

Delaying the decision on what to do about these provisions is a glorious annuity for lobbyists and creates more work for the IRS and private lawyers and accountants. But it creates nothing but confusion for taxpayers and reduces whatever small economic benefit many of these subsidies offer.  For instance, what business is going to make an investment decision based on a now-you-see-it-now-you-don’t subsidy?

But Congress has made a habit of letting these measures expire and then bringing them back to life, no matter how useless they are. In the end, most of those who benefit from these temporary provisions will likely keep their tax breaks. It’s just that Washington first has to make them mad about the entire transaction.