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Tax Extenders May Miss ‘Last Train’ Out of Congress This Year (1)

Oct. 25, 2019, 3:31 PMUpdated: Oct. 25, 2019, 7:04 PM

Stalled government funding negotiations threaten to end expired tax benefits that a variety of industries have fought for Congress to extend.

Senate Appropriations Chairman Richard Shelby (R-Ala.) told reporters that a short-term stopgap looked like a far more likely option to fund the government beyond Nov. 21 than the comprehensive government funding package lawmakers hoped to complete. Shelby said Oct. 23 that his preference would be to extend current funding levels for three to four months, likely without any additional policy riders.

That would pull the rug out from industries counting on tucking their preferred tax breaks into an end-of-year must-pass package, which lobbyists refer to as the “last train out of the station.”

“I would say if I were in favor of tax extenders that would be problematic to me,” said Rep. Kenny Marchant (R-Texas), who sits on the House Ways and Means Committee.

Lawmakers who support extending dozens of expired tax breaks have been looking for a legislative vehicle that could carry the extenders. There was some talk that the tax breaks could be extended as part of a deal to raise the debt limit, but they didn’t make it in the spending cap and debt limit legislation (Pub. L. No. 116–37) that moved this summer. Supporters have been looking towards the the next must-pass legislation that Congress would take up: a package to fund the government for the rest of fiscal 2020.

Window Closing

If the short-term extension happens, that means tax benefits that lapsed at the end of 2017 will have been gone for more than two years by the next deadline to fund the government. Those provisions range from a credit for biodiesel production and fuel sales to a tax break for individuals who faced foreclosure.

It would be difficult to make the political case that the economy would benefit from retroactively allowing companies and individuals to take expired benefits more than two years after the economic activity those benefits are meant to drive. It would also be difficult to administer those breaks if they were retroactively extended, as the IRS would then need to process amended returns for individuals and companies.

“Congress is flirting with the outer limits of what IRS can handle from a tax administration standpoint,” said Liam Donovan, a principal focused on energy and tax policy at Bracewell LLP in Washington.

Jon Traub, a managing principal at Deloitte Tax LLP and a former Republican staffer for Ways and Means, said it would be even harder to garner support for extending the expired breaks if the effort slid into next year.

“If they don’t get done this year, then the case for doing them next year is obviously lessened,” Traub said. “I wouldn’t say it’s dead, it’s just that the case for an extension becomes weaker with every passing quarter.”

Industries are still holding out hope that Congress could act before the end of the year.

“It’s most certainly a risk, but we don’t see any good reason why an approps CR in November couldn’t carry a tax package if bipartisan and bicameral tax leadership can agree on a package,” Chuck Baker, president and CEO of the American Short Line and Regional Railroad Association, said in an email.

The Section 45G tax perk for short line railroad track maintenance is one of the extenders that has gathered bipartisan support.

Talks Continue

Senate Finance Chairman Chuck Grassley (R-Iowa), a proponent of extending tax breaks for biodiesel production and other industries, was pessimistic about the outlook for extenders when he spoke with reporters Oct. 22. He cited low interest among Democrats for acting on expired and soon-to-expire tax breaks.

But House Democrats have signaled a different timeline on funding that may offer a reprieve to some breaks, indicating they want an even shorter-term stopgap resolution to run until the date Congress will end the year on, likely before Christmas.

Sen. Ron Wyden (D-Ore.), the top Democrat on the Senate Finance Committee, said he held out hope that tax policy leaders in both chambers could work out a package of so-called extenders, but demurred as to how the lack of a must-pass legislative vehicle for them to ride on might affect those talks.

“Chairman Grassley and I, and our counterparts in the House, continue to talk,” Wyden told Bloomberg Tax.

Grassley and Wyden introduced a standalone measure (S. 617) in February to renew the perks that expired in 2017 and 2018, but there hasn’t been much momentum since.

When asked if extenders would be possible without an appropriations package for them to ride on, Wyden, an Oregon Democrat said, “I’m not going to get into all the negotiating, but we continue to talk.”

The ongoing impeachment inquiry in the House could affect the Senate’s acceptance of such a timeline.

If the House votes to impeach President Donald Trump, a potential Senate trial would significantly limit floor time for complex legislation—like setting funding levels through separate appropriations bills.

Tax Law Corrections

Republicans also want to pass corrections to unintentional errors or consequences in the 2017 tax law, like the accidental exclusion of businesses that renovate their shops or restaurants from an immediate deduction of those expenses. That adds an additional wrinkle to negotiations.

“If they want us to be part of a correction for something we weren’t part of originally, there has to be, you know, other things given,” said Sen. Robert Menendez (D-N.J.), a Senate Finance Committee member. “And so far we haven’t seen the Republicans have an appetite to give anything meaningful.”

It’s not yet clear what Democrats will ask for in return for those fixes. House Democrats have floated everything from clean energy tax breaks to major, but temporary, expansions of benefits for low-income taxpayers. But members of Congress and other observers agree that if a package is going to happen, it needs to be put together and attached to a government funding bill in the coming weeks.

“If the theory is that they’re going to go into next year with a [continuing funding resolution], or just into December, negotiations for what that technical corrections package would be would have to get serious pretty quickly,” Traub said. “I just don’t know if there’s a lot of other bills moving before the end of the year that can carry extraneous matters on it.”

—with assistance from Kaustuv Basu and Nancy Ognanovich.

To contact the reporter on this story: Colin Wilhelm in Washington at cwilhelm@bloomberglaw.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com