Short-Term Extenders Put Businesses in Limbo Heading Into 2020

Few congressional policies resemble Limbo from “Dante’s Inferno” more than the dozens of temporary tax incentives known as extenders.

For years lawmakers have sought to end the practice of keeping industry-specific tax breaks going on a temporary basis, a practice reminiscent of the appropriations earmarks that Congress put a stop to in 2011. But, as with earmarks, constituencies and industries from various parts of the country are reluctant to let their own incentives expire.

While few express affection for ‘extenders’ as a whole, they continue to be advanced on a temporary basis, most recently in the fiscal 2020 government funding legislation signed Dec. 20. That leaves the affected industries stuck in the middle: happy that their tax breaks live to see another day, but uncertain whether they will be able to count on them long-term.

Two provisions popular with current Senate Finance Chairman Chuck Grassley (R-Iowa) and his potential successor Sen. Mike Crapo (R-Idaho) were extended through the end of 2022: the biodiesel tax credit and a railroad track maintenance credit. But dozens of incentives, on everything ranging from race horses to home insulation, were only extended through the end of 2020, setting Congress up to do it all over again next year.

“My fear is that this will be Groundhog Day again, next year, in the same meetings with the same people discussing the same exact extenders as we have for years,” Rep. Kevin Brady (R-Texas), the top Republican on the House Ways and Means Committee said Dec. 18, the day after the House passed the funding package.

Temporary Tax Respite

Senate tax staffers worked for months on a bipartisan basis to identify which tax perks should stay or go. But hopes for a broader tax deal fell apart, leaving lawmakers to meet with Treasury Secretary Steven Mnuchin late Dec. 16 to reach a smaller deal that included short-term extensions, a few fixes to inadvertent errors in the 2017 tax law, and tax relief for the victims of major disasters.

“Sunday night when they were still negotiating, I was worried we would have to deliver a message to many, many craft distillers that they would have to prepare for a 400% tax increase,” said Chris Swonger, CEO of the Distilled Spirits Council of the United States, an advocacy group for the U.S. liquor industry.

This year was the first go-around in extenders talks for alcohol manufacturers: the 2017 tax law established excise tax cuts for beer, wine, and liquor producers, but only put the cuts in place for two years. The funding deal leaves those breaks in place through the end of 2020, which means alcohol businesses will likely need to wait until a similar midnight hour decision between lawmakers next year before knowing whether their tax burdens will significantly rise in 2021.

“The uncertainty stymies growth for us,” Ryan Krill, CEO of the Cape May Brewing Company in New Jersey, told Bloomberg Tax. “We have to be more conservative in our budgeting, and there’s less money.”

‘We Don’t Retroactively Decide To Fix A Bridge’

Policy experts across ideological spectrums contend short-term, or even retroactive, tax breaks provide little economic benefit at high cost, because companies can’t make the longer-term investments due to uncertainty in the policy—or would need to make the investment anyway. Although companies were grateful for the short-term reprieve, no one believes it’s the ideal way for government to set policy.

“One of the talking points we have used is that we don’t retroactively decide to fix a bridge,” said Laura McNichol, senior vice president for government and industry relations at Watco Companies LLC, an international rail service provider, describing the company’s push for proactive—rather than retroactive—tax policy.

Because extenders tend to narrowly benefit industries, standalone bills rarely receive votes. Instead they catch rides on large, must-pass legislation, like this year’s government funding package.

McNichol said legislation upcoming in September to extend various government transportation programs is her industry’s next chance to make permanent the tax break for maintaining short railways that connect rural and industrial areas to longer tracks.

Industries will also eye transition dates for chunks of the 2017 reform law, like the immediate deduction of business expenses and a switch to a more restrictive business deduction system for debt, in 2022 as another chance to advance their own priorities.

Alcohol companies are confident they can make their current tax breaks permanent—at least at some point. A majority of legislators in both the House and Senate has signed onto a bill (H.R. 1175, S. 362) that would do just that, but neither chamber has voted on the legislation.

Back to Work

Swonger, a veteran of a years-long effort to repeal the medical device tax in a previous job before joining DISCUS, sees the alcohol industry eventually making its way out of the ongoing limbo of extenders.

“I think we’ll get there for sure. I don’t think it will take nine years, just because policymakers see first-hand the benefits that they have in their districts,” Swonger said. “We’re celebrating, but not for long. We’ll be back to work in about three weeks.”

Brady—who has bemoaned temporary tax policy even though he supported over $1 trillion worth of temporary policies as part of the 2017 law—suggested each benefit be given an individual final judgment as a way to break out of the extenders cycle.

“I’m rethinking this, including, perhaps the merits of insisting each provision moves through Congress separately,” said Brady. “Either in or out.”