Hearing on Framework for Evaluating Certain Expiring Tax Provisions
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Hearing on Framework for Evaluating Certain Expiring Tax Provisions _________________________________________
HEARING BEFORE THE COMMITTEE ON WAYS AND MEANS U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED TWELFTH CONGRESS SECOND SESSION |
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COMMITTEE ON WAYS AND MEANS |
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WALLY HERGER, California |
SANDER M. LEVIN, Michigan CHARLES B. RANGEL, New York FORTNEY PETE STARK, California JIM MCDERMOTT, Washington JOHN LEWIS, Georgia RICHARD E. NEAL, Massachusetts XAVIER BECERRA, California LLOYD DOGGETT, Texas MIKE THOMPSON, California JOHN B. LARSON, Connecticut EARL BLUMENAUER, Oregon RON KIND, Wisconsin BILL PASCRELL, JR., New Jersey SHELLEY BERKLEY, Nevada JOSEPH CROWLEY, New York |
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JENNIFER M. SAFAVIAN, Staff Director and General Counsel
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SUBCOMMITTEE ON SELECT REVENUE MEASURES |
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PETER J. ROSKAM, Illinois |
RICHARD E. NEAL, Massachusetts MIKE THOMPSON, California JOHN B. LARSON, Connecticut SHELLEY BERKLEY, Nevada |
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C O N T E N T S
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WITNESS LIST
Dr. Jim White, Director
Tax Issues, Government Accountability Office
Testimony
Dr. Donald B. Marron
Director, Tax Policy Center, The Urban Institute
Testimony
Mr. Alex Brill
Research Fellow, American Enterprise Institute
Testimony
Mr. Aaron Gornstein
Undersecretary for Housing and Community Development, Department of Housing and Community Development, Commonwealth of Massachusetts
Testimony
Hearing on Framework for Evaluating Certain Expiring Tax Provisions
U.S. House of Representatives,
Committee on Ways and Means,
Washington, D.C.
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The subcommittee met, pursuant to call, at 9:30 a.m., in Room 1100, Longworth House Office Building, Hon. Pat Tiberi [chairman of the subcommittee] presiding.
[The advisory of the hearing follows:]
Chairman Tiberi. This hearing will come to order. Good morning. Thank you for joining us today for another in a series of hearings on what are commonly referred to as tax extenders.
As most of you know, during member day hearing in April, we had the opportunity to hear from a number of our colleagues about the merits of extending or in some cases not extending many of these tax policies. By all accounts, it was a productive exercise, and I commend our chairman of the full committee, Chairman Dave Camp, for his leadership in providing the opportunity then and now and in the future to examine these tax provisions.
His leadership in setting forth a transparent process for reviewing the tax extenders is what the American people expect from their congressional representatives. I think that it is likely accurate to say that the days of simply rubber stamping and extending an entire package of extenders is now behind us, and today we pivot to exploring what we hopefully will hear, and that is ideas to providing a framework that Congress should use in evaluating these tax extenders.
Our witnesses today will share their views on principles of good tax policy and the specific merits and metrics against which Congress should test the merits of particular provisions.
I look forward to their testimony and the ensuing conversation.
Before we begin, I would like to take a moment to thank Congressman Mike Thompson from California for serving as our ranking member today. Unfortunately, Congressman Richie Neal couldn’t be with us today because he is attending a funeral in Springfield for a fallen police officer.
I now yield to Mr. Thompson for his opening statement.
Mr. Thompson. Thank you, Mr. Chairman. And I think I can speak for everyone when we say that our thoughts and prayers are with the family of those in Mr. Neal’s district who lost a police officer today, and I know as a father of a detective, I know that is something that all of us care a great deal about, and it is a mindful to most of us how dangerous those public servants are.
And I thank the chairman for convening this hearing today. We appreciate that the subcommittee has decided to begin consideration of certain expired and expiring tax provisions as this consideration is long overdue. Businesses have been desperate for certainty in the tax law when attempting to make decisions that can help to grow the economy.
However, many may view today’s hearing as actually increasing uncertainty for businesses and for individuals that use these tax benefits.
As we learned in our last hearing, so many of these benefits enjoy broad, bipartisan support. Their extension should not be difficult. As we learned from the recent jobs report, our economy is struggling and job creation is still too slow in coming. Unfortunately, proven job creation programs have not received adequate consideration in this Congress.
Press reports indicate that the highway conference may be stalled and possibly gridlocked and provisions on the President’s to‑do list to create jobs have not made it to a vote. The public is losing faith in Congress’ ability to act and act quickly to turn this economy around. Frankly, I don’t blame them.
We have had a hard time finding an agreement on a lot of things, but it is important to remember that there are things we can do in this committee that can help alleviate some of the pressures people are feeling and the uncertainties facing businesses.
As we learned from the last subcommittee hearing, so many expired provisions that are under consideration today enjoy broad, bipartisan support. In fact, many of us are lead sponsors of important job‑creation provisions, including the new markets tax credit, the R&D tax credit, the conservation easement credit, and the list goes on.
We have all worked well together on these provisions, and we should now work to get them across the finish line.
I appreciate the testimony from the witnesses today. Evaluation of temporary provisions is as important as evaluating all provisions in the Tax Code. There are a number of loopholes that can be closed or provisions that provide windfalls to certain industries that should be examined particularly close.
The temporary nature of provisions should not automatically make it more eligible for termination than some of the provisions in the Tax Code that are permanent. Many of these provisions were enacted on a temporary basis due to budgetary constraints. That does not automatically detract from the merit of the provisions themselves.
But today, we are talking about provisions that have already expired. Businesses, large and small, rely on these provisions when making investment decisions. We have allowed almost 18 months of the 112th Congress to pass without doing our job to move legislation providing extension of these provisions. I mentioned in detail at the last hearing ‑‑ the last time we had a tax extender hearing a few weeks ago just how important some of these extenders are to my district and to my constituents. I won’t go into detail again but will mention that Mr. Gerlach and I have a bill to make permanent the enhanced conservation easement incentive. It is one of the most successful tools we have to support preservation of open space and family farms, which protects our watershed and ensures food security. Today, it has 308 cosponsors, including the chairman, which I appreciate very much, and wish that we were marking that bill up today or, better yet, had it on the suspension calendar.
I couldn’t agree more with our chairman that this committee has a duty to ensure that the Tax Code is working to create jobs and grow our economy. It is an exercise that is necessary and takes time. But so much of the rest of Congress is gridlocked. This committee can act quickly and do so in a bipartisan way to extend expired provisions that need to be extended and help kick start our job creation and get the economy going.
I believe that such legislation should include not only job creating provisions that expired in 2011, but also proven job creating provisions that were allowed to expire in 2010, such as the Build America bonds and the 48(c) Advanced Manufacturing Investment Tax Credit.
The committee should engage in proper oversight and review of all of the tax provisions to identify those that are meritorious based on their economic performance and find ways to strengthen them and make them permanent. But this oversight should not come at the cost of inaction on important job‑creating provisions.
I hope that the subcommittee and the full committee can get to doing our work and get these in front of the full House for a vote and in front of the President for his signature so we can help to improve the economy.
I thank the chairman for allowing me to read this testimony.
Chairman Tiberi. Thank you, Mr. Thompson. All that and no mention of grapes or vineyards. Inside joke.
Mr. Thompson. Could I get unanimous consent?
Chairman Tiberi. Speaking of unanimous consent, can I have unanimous consent to allow for the reading or the submission of Mr. Neal’s opening statement?
Without objection.
[The statement of Mr. Neal follows:]
Chairman Tiberi. Well, next it is my pleasure to introduce the witnesses here today, and we have an excellent panel of witnesses seated before us.
Today’s witnesses bring both tax policy and oversight experience to us. Today’s witnesses begin with from my left to the right, we would like to welcome back Dr. Jim White from the General Accounting Office, where he is the Director for Tax Issues. Dr. White is responsible for GAO’s work pertaining to the IRS tax administration and tax policy. Thank you for being here, sir.
Second, we welcome back Dr. Donald Marron, the Director of Tax Policy Center at the Urban Institute here in Washington, D.C. Dr. Marron’s research at the Tax Policy Center has focused on tax reform as he has previously served as the Acting Director of the Congressional Budget Office and as a member of the President’s Council of Economic Advisers. Thank you for being here today, sir.
Thirdly, we will hear from Mr. Alex Brill, a Research Fellow at the American Enterprise Institute here in Washington, D.C. Mr. Brill is an alum of the Ways and Means Committee staff, and he has also served on the President’s Council on Economic Advisers and has served as an adviser to the President’s Fiscal Commission in 2010. Welcome back to the room, sir. Glad to have you here.
Finally, we will hear from Alex Gornstein, the Under Secretary for Housing and Community Development for the Commonwealth of Massachusetts. Go, Celtics. And being from Ohio, there is even an added little emphasis on that.
Thank you for being here today, folks. The subcommittee has received from each of you written statements, and they will be made part of the formal hearing record, as you know.
Each of you will be recognized for 5 minutes for oral testimony, and then we will have questions.
With that, Dr. White, the floor is yours.
STATEMENT OF DR. JAMES R. WHITE, DIRECTOR, TAX ISSUES, GOVERNMENT ACCOUNTABILITY OFFICE
Mr. White. Thank you. Mr. Chairman, Acting Ranking Member, and members of the subcommittee, I am pleased to be here to discuss how to evaluate the expiring tax provisions, sometimes called tax extenders. Most are tax expenditures, so I will focus on those. However, the evaluation principles I discuss do apply more broadly.
Tax expenditures are special credits, deductions, deferrals, and so on, that reduce a taxpayer’s tax liability from what it would have been under a normal tax ‑‑ under a “normal tax.”
Tax expenditures often have policy goals similar to those of spending programs. They may promote economic development, energy efficiency, or research and development. Because tax revenue is foregone, such provisions may, in effect, be viewed as spending channeled through the tax system. Like decisions about spending, decisions on whether and how to extend tax provisions involve tradeoffs between policy goals and costs. My written statement summarizes factors commonly used to evaluate government policy, including tax policies such as the expiring provisions.
First is the effect of extending the provisions on revenue. Tax expenditures shrink the tax base. They either reduce funding available for other Federal activities or require higher tax rates to raise the same amount of revenue from the smaller base. Put another way, revenue the government would have collected absent the tax expenditure could have been used to fund other programs, deficit reduction, or tax rate reductions.
Second is the effect on equity, the economy, and taxpayers’ compliance burden. Equity or fairness is a subjective judgment, but asking questions about who benefits from a provision and how ability to pay tax is affected can help policymakers reach conclusions about it.
The effect on the economy is what my statement calls economic efficiency; lightly taxing one activity shifts resources to it and away from less tax favored activities. The overall effect depends on whether the favored activity provides greater benefits than the less favored activity.
The effect on taxpayers’ cost to comply with the provision depends on its simplicity and transparency. Can taxpayers understand the provision? What kinds of records will they need to keep? And, of course, simplicity and transparency affect IRS’s ability to administer and enforce a provision.
A third factor to consider when evaluating the expiring provisions is whether the tax system is the best way to deliver the benefit or whether some other tool of government, such as spending, a loan or a loan guarantee, could provide the same benefit at lower costs.
Tax expenditures may have a cost advantage when benefits are means tested.
One goal is to prevent fragmentation, overlap or duplication among programs, not just to save money, but also to avoid confusing the public. Also important is the choice of tax policy tool. The choice of a credit versus a deduction, for example, affects incentives and the distribution of the benefits.
A final factor is measurement. Too often programs are implemented with little attention to how we will measure the results. In the case of tax provisions measuring results is complicated because IRS administers the provisions, but it is not the agency with functional responsibility for energy efficiency or community development or any of the other goals of the expiring provisions. Thus, decisions are needed about what agency should evaluate tax provisions, who should collect necessary data, and so on.
Now, I want to briefly illustrate how GAO has applied these factors in our reports.
Regarding the credit for ethanol, we found that while the credit helped create the industry during its formative years, having both a tax credit and a renewable fuel standard now is duplicative. Thus, we suggested that Congress consider modifying or phasing out the credit. Our reports on higher education tax assistance raised transparency questions. There are multiple such complex provisions, and we found many eligible taxpayers either failed to claim anything or claimed one that did not maximize their financial benefit.
We looked at the efficiency of the research credit. While economists tend to support a subsidy for research because the social returns exceed the private returns to firms, we found the current design introduces inefficiency because incentives are distributed unevenly across firms and estimated that more than half of the regular credit is a windfall for research that would have been done anyway. We suggested changes to improve the bang per buck of the credit.
We also looked at whether the new markets tax credits succeeded in moving resources as intended. The credit did appear to increase investment in low income communities. However, we also reported that its complexity makes it difficult to complete smaller projects and results in less money flowing through to low‑income community businesses than might be possible with alternative designs. We suggested that Congress consider offering grants instead of tax credits with one option being a side‑by‑side test of the two approaches.
Mr. Chairman, acting ranking member and other members, we have done a number of other such assessments all intended to provide Congress with factual information about the evaluation factors I outlined up front. How to use the information and make tradeoffs between the factors is up to policymakers.
I would be happy to answer questions.
[The statement of Mr. White follows:]
Chairman Tiberi. Thank you, Dr. White.
Dr. Marron, you have 5 minutes.
STATEMENT OF DR. DONALD B. MARRON, DIRECTOR, TAX POLICY CENTER, THE URBAN INSTITUTE
Mr. Marron. Great. Thank you.
Chairman Tiberi, Ranking Member Thompson, and members of the subcommittee, thank you for inviting me to appear today to discuss the perennial challenge of the tax extenders which might be better called the tax expirers.
As you know, the United States faces a sharp fiscal cliff at year end when numerous policy changes occur. If all these changes happen, they will reduce the fiscal 2013 deficit by about $500 billion, according to the Congressional Budget Office, before taking into account any negative feedback from a weaker economy. About one‑eighth of that cliff, $65 billion, comes from the expiring and expired tax cuts that are the focus of today’s hearing.
In deciding their fate, you should consider the larger problems facing our tax system. That system is needlessly complex, economically harmful, and widely perceived as unfair. It is increasingly unpredictable, and it fails at its most basic task ‑‑ raising enough money to pay our bills.
The expirers often worsen these problems. They create uncertainty, complicate compliance, and cost needed revenue. Some make the Tax Code less fair, some more fair. Some weaken our economy while others strengthen it. Fundamental tax reform would, of course, be the best way to address these concerns, but such reform isn’t likely soon, so you must again grapple with the expirers.
As a starting point, let me note that they come in three flavors.
The first are tax cuts that were enacted to address a temporary challenge such as a recession, the housing meltdown, or regional disasters.
The second are tax cuts that have reached a sunset review. Prolonged economic weakness and recent omnibus extensions mean that there aren’t that many of these at the moment, but they do exist.
And third, there are tax cuts that expire to game budget rules. These appear to be the most common. Supporters intend these provisions to be long‑lived or permanent, but they haven’t found the budget resources to do so.
To determine which of these policies should be extended and which not, you should consider several factors: Does the provision address a compelling need for government intervention? Does it accomplish its goal effectively and at reasonable cost? Does it make the Tax Code more or less fair? Do its potential benefits justify the revenue loss or the need for higher taxes elsewhere in the economy?
In short, you should subject these provisions to the same standards you apply to other policy choices, and in this case you should keep in mind, as Jim said, that most of the so‑called tax extenders are effectively spending through the Tax Code. You should thus hold them to the same standards as equivalent spending programs.
You should also reform the way you review expiring tax provisions. First, I think you ought to flip the burden of proof. Today’s standing presumption is that most of these provisions will ultimately be extended. That is why they are called the extenders even after they have expired. Ultimately, though, we should move to a system in which the presumption, rebuttable to be sure, is that expiring provisions will expire unless supporters can justify their continuation. In short, they should be the expirers.
Second, you should divide them up. Like musk oxen, the beneficiaries of these provisions have realized that there is safety in numbers. They must do their best to coalesce as a single herd, the extenders, and try to migrate across the annual legislative tundra with as little individual attention as possible. You should break up the herd. Reviewing each provision in detail may not be practical in a single year given how many there are, but you can identify specific groups for careful review.
For example, you can separate out the stimulus provisions, the charity provisions, the energy provisions, and so on. You should also try to spread scheduled expirations out over time. If few are expiring in any given year, you will be able to give each one more attention.
Third, I think you ought to change budget rules for temporary tax cuts. Pay‑as‑you‑go budgeting creates crucial discipline but has an unfortunate side effect. Long‑term tax policies often get chopped into 1‑year segments. In addition, 10 years of offsets can be used to pay for a single year extension. To combat this, you could require that any temporary tax provision be assumed to last no less than 5 years in the official budget baseline. Proponents would then have to round up enough budget offsets to pay for those 5 years. In addition, you could require that offsets happen over the same span of years as an extension. That would eliminate situations in which 10 years of offsets pay for 1 year of extension.
Thank you for inviting for me to appear today. I look forward to your questions.
[The statement of Mr. Marron follows:]
Chairman Tiberi. Thank you, Dr. Marron.
Mr. Brill, you are recognized.
STATEMENT OF ALEX BRILL, RESEARCH FELLOW, AMERICAN ENTERPRISE INSTITUTE
Mr. Brill. Thank you very much, Chairman Tiberi, Congressman Thompson, and members of the subcommittee, for the opportunity to appear before you this morning to discuss the regularly expiring tax provisions commonly known as tax extenders.
I believe today’s hearing is on an important topic as the number and budgetary magnitude of these regularly expiring tax provisions have ballooned in recent years. Some of these policies can serve an appropriate goal, but many have crept into the Tax Code over the years with little evaluation.
For example, in 2001, 13 tax provisions were set to expire that year or the next year. A decade later, 129 tax provisions were set to expire in 2011 or 2012.
The budgetary consequences of extenders has increased as well. For example, in September of 2004, Congress enacted a 1‑year extension of 23 tax extenders for a cost of $13 billion. In 2010, a 2‑year extension of these policies cost over $55 billion. And if Congress were to extend those policies again this year, the cost would be even higher.
Let me summarize three key conclusions from my written testimony.
First, no tax policy should be intentionally temporary. Any tax extenders deemed appropriate should be made permanent, and the rest should be allowed to expire.
Second, each of the tax extender provisions must be considered individually on its own merits and against a clearly defined policy objective. Each extender must be shown to meet an objective such as promoting economic efficiency or tax equity.
And third, a successful evaluation of the tax extenders – keeping the good and eliminating the bad or inefficient – may set a useful precedent for the bigger challenges of tackling tax expenditures broadly and ultimately tax reform.
To guide the evaluation of tax extenders, policymakers, I believe, need to answer simply two questions. First, intent. Does the intent of the provision improve economic efficiency, increase growth, promote fairness, or achieve some other desirable goal? For example, the R&D tax credit is intended to increase the aggregate level of research and development because R&D generates benefits to society beyond those realized by the firm.
But one key point I would like to stress is that with any tax extender that is intended to subsidize a given activity, special care must be taken to evaluate its net economic benefit. Most subsidies will increase the subsidized activity. But that does not mean that it will produce such a net benefit or improve overall economic efficiency.
In the absence of externalities, a credit for any given activity will lead to a misallocation of resources, more of the subsidized activity but less of everything else. And a provision that encourages more of a particular activity does not necessarily promote overall economic growth.
The second question, after determining the intent, that policymakers should ask is would the policy be effective if it were permanent and evaluate the effectiveness on a permanent basis, regardless of the fact that it has frequently in the past been a temporary provision.
Let me next quickly highlight four harmful consequences that I see from the constant expiration and reinstatement of tax extenders.
First, tax extenders distort the fiscal budget baseline and complicate revenue and deficit forecasts over the future period.
Second, tax extenders create financial reporting problems for publicly traded companies.
Third, and importantly, tax extenders exacerbate the uncertainty facing businesses as they don’t know whether they can depend on these policies once they have expired.
And fourth, tax extenders may be designed to encourage oversight, but they are generally extended without much consideration.
Obviously, this subcommittee has held a number of hearings on this topic of oversight, but a review historically would indicate that, more often than not, these policies are extended without serious review.
And allow me to conclude by observing, as this committee knows well, that the tax base has eroded over the last 25 years. A proliferation of tax credits, deductions, and exclusions has left a system that misallocates resources, creates complexity and introduces compliance problems. Reducing the number of tax extenders offers an opportunity to reduce this complexity and uncertainty and to promote efficiency.
I hope that such an effort could set a positive precedent for the greater challenges that this committee will face as it embarks on broader tax reform.
Thank you.
[The statement of Mr. Brill follows:]
Chairman Tiberi. Thank you, Mr. Brill.
Mr. Gornstein, you are recognized for 5 minutes.
STATEMENT OF AARON GORNSTEIN, UNDER SECRETARY FOR HOUSING AND COMMUNITY DEVELOPMENT, DEPARTMENT OF HOUSING AND COMMUNITY DEVELOPMENT, COMMONWEALTH OF MASSACHUSETTS
Mr. Gornstein. Thank you, Chairman Tiberi, Congressman Thompson, and members of the subcommittee. Thank you for the opportunity to testify today.
I am here to urge you to extend certain critical programs that support economic development, housing, and community development. Some of these successful job‑creating programs expired in 2011, while others were deemed not traditional extenders in 2010 regardless of their proven effectiveness.
The new markets tax credit, Build America bonds, empowerment zones, and the low‑income housing tax credit have created hundreds of thousands of jobs in housing units across the country. These programs play a vital role in encouraging investment in our communities.
As we continue our steady climb out of the great recession, now is the perfect time to extend these programs and the critical work that they support.
Let me briefly describe each program’s impact.
The first new markets tax credit allocations were awarded only 9 years ago, yet this well‑designed program has achieved excellent outcomes: $45 billion invested, 92 million square feet of retail, commercial, and office space developed, over 300,000 jobs created. These investments in each of your congressional districts are restoring abandoned buildings to the tax rolls, revitalizing small business districts, and creating momentum for further development.
I wanted to provide a few examples from Massachusetts.
Holyoke is a western Massachusetts city, once the world’s largest paper manufacturer, but now one of the poorest communities in the State. New markets generated $9 million in debt financing for a full service health care center in the heart of downtown, a project that created 350 jobs. A few blocks away, a world‑class computer technology center, a $168 million project, is under construction with 600 jobs already created. Universities, including Harvard and MIT, are actively supporting this initiative.
The new markets tax credit expired at the end of 2011, but it is not too late to extend it. Because of its importance, I ask the committee and Congress to take three actions: First, make the program permanent; second, extend the program for 5 more years at an annual allocation level of $5 billion, and we thank Congressman Neal and Congressman Gerlach for their sponsorship of H.R. 2655 in this regard, and three, allow new markets to be used to offset taxes paid under the alternative minimum tax.
In the short time Build America bonds were available, less than 3 years, Massachusetts issued close to $5 billion in bonds, with over $3 billion supporting our accelerated bridge program and creating 12,000 construction jobs for bridge repair.
Empowerment zone bonds have also been very important in many cities, including the City of Boston, which issued 130 million in tax‑exempt bonds to help several blighted neighborhoods, creating 14,000 jobs and stimulating retail and commercial development where none had occurred in years.
Reinstating the Rebuilding Bonds program could put hundreds of thousands back to work nationwide, and I encourage you to include it in any extenders package that the committee considers.
Finally, the low‑income housing tax credit program has created or preserved over 2.5 million units of rental housing. No other Federal housing program equals this record. But the credit is not just a housing program. It creates jobs, restores abandoned properties, and supports retail and commercial opportunities nearby. It is highly flexible, and it supports new construction, rehab, and renovation. It serves families, seniors, people with disabilities, veterans, and former homeless families.
On a specific matter, we urge Congress to extend the so‑called fixed 9 percent credit established in the Housing and Economic Recovery Act of 2008. When HERA replaced a floating tax credit rate with the fixed 9 percent rate, Congress brought consistency and clarity to the program.
Chairman Tiberi, we appreciate your leadership on this issue with your introduction, along with Ranking Member Neal, of H.R. 3661 to make the flat 9 percent credit permanent.
In conclusion, these community development tax credits provide many important benefits. They leverage private sector funds for economic development in housing. They create jobs, rebuild infrastructure, and transform distressed neighborhoods.
I urge you to extend these credits on a long‑term basis so that we can use them to continue to build the road to economic recovery. And as you consider ways to streamline and reform the Tax Code, please take into consideration the important contributions that these programs have made, especially while undertaking efforts to lower the top corporate and individual rates.
Thank you very much.
[The statement of Mr. Gornstein follows:]
Chairman Tiberi. Thank you, sir. Thanks for the testimony. Thank you all.
Dr. Marron, Mr. Brill, in your written testimony and as well as your oral testimony today, you both talk about how we should change the automatic nature of extending the extenders, which is the goal of Chairman Camp.
How do you think ‑‑ can you focus a little bit more operationally from your perspectives on how we should put the burden on having supporters of each extender provide us and how we should therefore proceed in separating the different types of extenders and their worthiness of staying in the law?
Dr. Marron?
Mr. Marron. Certainly. So I think actually the last time I appeared before you I thought it was a good start, which was to take a category of tax preferences and focus on them directly. So in that case, it was energy provisions. You can imagine doing similar things, right? While the tax extenders or expirers list is very long, you can group it into categories of charity, community development, energy, stimulus, and try to sort of focus on those as a group, figure out which ones make sense, which ones don’t.
Chairman Tiberi. Should supporters be providing certain data points, economic development, jobs numbers, any thoughts on that?
Mr. Marron. Actually that would be great if they could. You know, our friends at GAO sometimes have data on this as well, or if not to add to Jim’s workload, but it can be asked to provide such information as available.
I should note, by the way, on that particular issue, I don’t want to over emphasize these particular provisions. There are a lot of provisions in government policy in general and the Tax Code in particular that don’t get enough review. So, you know, certainly there are things that are in the permanent tax system that deserve more review than they currently get as well.
But some way of kind of separating them out, giving them attention requiring some data and justification for what they are doing.
And then also I think the other point is if you can spread them out in time, right? So if a typical tax extender lasts 5 years, then on average you are only going to have one‑fifth as many to look at every year, and you are going to be able to give those closer attention.
Chairman Tiberi. Mr. Brill?
Mr. Brill. Thank you. I think you are raising really a critical issue. One is the burden of proof question. Is it the responsibility of the constituent and the advocate to prove to Congress the worthiness of these policies, or does the burden rest with Congress itself or other Federal agency to prove the policies are not working?
I think that we would be well‑served by trying to pursue both of those agendas.
As Jim noted in his remarks, there is oftentimes not a lot of ‑‑ there may be oversight but ‑‑ on the administrative side but not a lot of evaluation by the government on the effectiveness of these programs.
These are really hard questions, however, because simply observing that a subsidized activity, that that activity is doing well doesn’t prove the effectiveness of the policy itself. And so for any given credit, for example, there may be lots of energy production, but that doesn’t mean that on the margin we are encouraging that investment or activity. Rather, we may just be providing a windfall.
And so the analysis necessarily requires that you develop a “but for” case in the absence of this policy, what would be the outcome. These are really hard economic problems to figure out because we don’t have a control case. And I think that the conclusion there is that the bar needs to be very high. In order to have a policy that distorts from what would otherwise be happening, we need to set a very high expectation for the outcome.
Chairman Tiberi. Thank you.
Dr. White, some of the work that GAO has done on the new market tax credit suggests that we should consider converting the credit into a grant program. So I have two questions related to that.
First, since 2003, the program’s cost to the treasury has been about $5‑1/4 billion. In exchange, the treasury has allocated roughly $29 billion in tax credits that have resulted in what Mr. Gornstein has said is roughly $45 billion in new market investments. So that is a leverage of about 8 to 1.
In addition, some estimates are that 300,000 jobs are created or retained at a cost of about $17,000 per job.
So the question, first question is can you elaborate on how GAO’s perspective on obtaining that same sort of leverage would work through, that ratio would work through a grant program in place of a tax credit program?
Mr. White. Yes. The question we were looking at with the grant program was the amount of money that is flowing through from the treasury ultimately to the beneficiary businesses, the community‑based businesses, and because of the way the tax credit is structured, credits are allocated and then they are sold to investors, and there is a fairly complex process for raising the funds from the private sector; in effect the tax credits are sold to them. And in that process, not all of the money is flowing through to the ultimate beneficiary businesses in the community.
And so the question we had was whether a grant would allow for the same cost to the treasury, more money to flow through to the beneficiary businesses. What we actually suggested was running an experiment ‑‑ divide up the funding for this and have some of it run as a grant program, some run as the traditional tax credit program and test which one is more effective at getting money through to the community businesses.
Chairman Tiberi. Well, it seems to me that one of the driving factors in GAO’s conclusion of the grant program operation is that the tax credits are running at a discount. But certainly, the economy and the recession have probably intensified that issue.
And so Mr. Gornstein suggested that maybe one way of improving that is to treat the new market tax credit program like the low‑income housing tax credit program and the historic tax credit by entering into exempting from the alternative minimum tax as we do for low‑income housing tax credit and historic tax credit. What are your thoughts on that?
Mr. White. Well, I think you still have the basic question of whether there is some alternative design to a tax credit that would allow more money to flow through to the beneficiary businesses. And then a whole separate issue from what we are talking about here is how much of the assistance from the treasury actually flows through. And the separate issue is the effectiveness of these programs overall, and we have tried to look at that.
Our work on that suggested that there was some increase in the amount that investors were investing in this sort of program. And those are kind of two separate questions. One is the effectiveness of the money from the treasury flowing through, and the other one is the effectiveness of the program overall.
Chairman Tiberi. My time has expired, but Mr. Gornstein, since you brought it up and I asked the question, do you have any thoughts on that?
Mr. Gornstein. Yes, I do. Let me get to the ‑‑ answer the grant versus tax credit issue if I can, very briefly. As you point out, the tax credit attracts significant private investment which otherwise would not have been made in very targeted low‑income communities within the new markets credit. And I think GAO’s own study found a survey of the investors, 88 percent, would not have made the investment without the tax credit. So a grant program is not going to give you that private leverage that is so important to getting funding into these communities.
Second, it brings private sector participation in both the underwriting of the projects and the ongoing matter, which you would not have under a grant program.
And finally, I think converting to a grant program obviously brings the appropriation risk. And as there is so much pressure on the domestic programs, we are certainly going to run into that I think as you convert to a grant program.
So those are some of the concerns we would have with converting to a grant program.
The program is working well. It is becoming more efficient, as you point out, since the recession. After the 2‑year extension that Congress provided to the new markets, we have seen the yields going up. We have seen the investments increasing, record levels in 2011. So I think we are on the right path and a permanent extension would even build on that momentum.
Chairman Tiberi. Mr. Neal would be proud of your testimony today.
Mr. Gornstein. Thank you very much.
Chairman Tiberi. Mr. Thompson is recognized.
Mr. Thompson. Thank you, Mr. Chairman.
I want to follow up on the new market stuff on behalf of Mr. Neal. I have a couple of specific questions for him.
But I just want to note that a couple of things.
One, all of the issues that have been explained, everything from uncertainty to the difficulty in the Code are clearly important. And the effect that the work that this committee does on both the Tax Code and on the economy I don’t think can be overlooked. I think we are in a very unique position here. You know, a lot of this stuff is just a math problem, bottom line. It is the political side that gets in the way. And I think that is where this committee’s responsibility really needs to be stepped up because we need to get beyond some of that, the political bickering, and focus on what tax policy is going to improve our economy and improve the lives of the American people.
We need to have honest debate.
I know that, Mr. Marron, you mentioned in your written statement, you didn’t talk about it, the whole issue of the NASCAR provision. And you said that it adds to the perception that the Tax Code is riddled with special interest giveaways, when in fact that was merely done to correct an administrative action by IRS that would have treated one theme park different than another theme park, to put it basically.
We went through the same thing a couple of years ago where it was media fodder over the arrows. There was a company, I think it was in San Diego, that made aluminum arrows, and they were going to move offshore because the Tax Code made it more lucrative for them to make the arrows in Korea rather than in the United States of America because they assembled, they could make them one place and assemble them here and get a tax break.
When that was fixed, it kept a bunch of jobs in the United States. And we handled aluminum arrows the same way we handled aluminum baseball bats. But the press went wild with this stuff. They talked about it being a giveaway to the bow and arrow people, which was ridiculous.
So I think we all have a responsibility to make sure that the debate is honest. So I appreciate you bringing that up, and I hope that we can get to that honest debate to make sure that we have tax policy that is effective, that is efficient, that is fair, and that meets all of the criteria that a couple of you had mentioned.
On the new market tax credit, I think this deserves a lot more discussion. Not only has it worked in Massachusetts, where there has been historic building preservation and jobs associated with that, it is being used all over.
I have a clinic on the North Coast of California that is one of the main health care providers on the North Coast, and they are looking at it to do their expansion. And not only is this a growth in construction jobs, but it is a growth in medical jobs. You know this. Doctors, nurses, nurse practitioners, all of the folks who not only are good jobs, but when you are all done, you have got good infrastructure and you have got a healthier community, which saves us money in the future as well.
So on behalf of Mr. Neal, Mr. Gornstein, I would like to ask you his question. And you have talked about the new market tax credit quite a bit. But he would like you specifically to comment on the GAO’s recommendation on this issue. Could you please do that.
Mr. Gornstein. Yeah. As I had said before, we certainly have to look for every way to make the new markets tax credit more efficient and effective. And I think the community development field welcomes the scrutiny, the evaluation, and appreciates all that the GAO has done to point out areas where the program could be strengthened. But, we do have concerns about shifting to a grant program, as I mentioned, and that would really be around the issue of leveraging private sector investment and how critical that is to get the private sector involved in these distressed communities, in investing in low‑income neighborhoods. This is a highly targeted tax credit that is benefiting thousands of low‑income people in low‑income neighborhoods around the country, as you had said in California as well.
And it is a program that also brings oversight from that private sector around underwriting. This is true in the low income housing credit.
So you are getting the market discipline imposed and having another set of eyes on these projects both in underwriting and then once they are built and occupied, ongoing monitoring to ensure that the benefits continue going forward.
Again, new markets and the housing credits score very high, I believe, in that regard, and the very nature of the tax credit is a big reason for that.
Mr. Thompson. Thank you. Thank you, Mr. Chairman.
Chairman Tiberi. Dr. Boustany is recognized for 5 minutes.
Mr. Boustany. Chairman Tiberi, I want to thank you for the series of hearings we are having on these temporary tax provisions and the thoughtful approach you are taking to it, as well as thanking Chairman Camp for his leadership on these issues as well.
Gentlemen, I chair the Oversight Subcommittee for Ways and Means, and we have been looking very intensively at a number of tax credits and the administration problems, the propensity for fraud and abuse and those kinds of things.
And Dr. White, it is fairly easy to dissect down on that particular aspect. But you have mentioned a number of other areas, metrics that we ought to be looking at and some of the challenges. And I am kind of curious, help us figure out what we should be looking at when we try to make distinctions between a tax provision that is very well written but yet hard to measure versus one that may be flawed in the way it is written, and of course that creates measurement problems and distortions as well.
Could you give us a little more insight how we might approach that dilemma as policymakers?
Mr. White. Yes. And a couple of things I would emphasize. First would be, as I think some of the panelists have discussed, first would be setting clear goals for the program, spelling out what the, what the effect is that you are looking for.
Mr. Boustany. Would you do that in the statute?
Mr. White. It could be done in the statute. And you know, is the community development program focused on construction or is it focused on jobs, and is it focused on jobs for existing residents or just new jobs in that community that might come in from the outside.
And then a second issue would be focusing on evaluation. And there, one issue, especially in the case of tax provisions, is what agency ought to be responsible for the evaluation. IRS administers these tax provisions, but IRS is not the Federal agency, the executive branch agency responsible for housing programs or energy programs or community development programs. And so what happens with tax provisions is they are administered by IRS, the agency with a functional responsibility in many cases doesn’t pay much attention to the program. So assigning responsibility for actually doing some assessment of the programs I think would help.
Mr. Boustany. Thank you. Any of you want to comment further on this? Mr. Brill?
Mr. Brill. I would just add briefly to Jim’s comment.
The evaluation of the effectiveness of any given tax policy extender needs to also occur while recognizing other programs on the other side of the ledger. And so we need to think about the net consequences not only of our tax policy geared, say, for example, towards housing but also due to our spending policies, bring those together in a single framework and then make a determination and evaluation.
Mr. Boustany. Thank you.
If I could shift gears for a moment. Mr. Brill, you mentioned no tax policy should be intentionally temporary, and as we go through tax reform, clearly we want to simplify, streamline the Code, hopefully see more permanency so that you create an environment of certainty. And that sounds all great, but if we are going to have provisions that sunset give me ‑‑ I mean what is a reasonable time frame? Clearly, 1 year makes it very difficult when you are doing things year after year. Several of you highlighted that. It also creates problems for oversight. What is a reasonable time frame for a temporary provision?
Mr. Brill. I think the answer probably depends on the policy itself. But I know that the committee has thought in the past about how to create a temporary policy that is convincing to the beneficiaries that it’s permanent. That is, in essence, how do you work around the budget constraint systems in the Budget Act, yet still convince the users that this is something they can rely on?
Certainly only reinstating policies retroactively is to create windfall benefits. On the other hand, I would look back to 2003 when the dividend / capital gains rates were lowered on a temporary basis due to a budget process issue, not a cost issue, but budget process. At that point, it was viewed that 5 years would give that amount of certainty, some confidence to the market. And other policies were considered at that time that would have been much shorter and not pursued because of the importance of convincing beneficiaries or constituents, taxpayers, that the intent is to create policy that is permanent.
Mr. Boustany. Thank you. My time has expired. Thank you, Mr. Chairman.
Chairman Tiberi. Thank you. Mr. Marchant is recognized for 5 minutes.
Mr. Marchant. Thank you, Mr. Chairman.
Mr. Brill, over the years various industries have urged the adoption of tax provisions with the stated purpose of incentivizing investment in certain types of energy.
In selling the merits of these incentives to Congress, it was indicated that these taxpayer supports would only be required for the amount of time necessary for these industries to mature. To date, very few, if any, of these industries have independently determined that these subsidies are no longer necessary.
Could you address the methods and criteria that Congress should use to make its own evaluation as to whether the originally stated objectives of these subsidies has been achieved and what the appropriate means of discontinuing this taxpayer benefit?
Mr. Brill. Thank you. This goes to one of perhaps the hardest questions for Congress or the private sector to grapple with, which is the rate of technological progress. And so while many will be hopeful that their nascent technology will quickly mature and that cost of production will fall quickly in such a way that will no longer need government support, these are really hard issues to ultimately predict ahead of time how well those markets will mature.
We have seen a lot of policies work their way into the Code on exactly that argument. “We only need this relief, this encouragement, for a limited period of time.”
Ultimately, the industry can grow to become dependent on these policies. And the economics for any given activity will rely on the availability of a taxpayer subsidy. And the ability to wean an industry, particularly the energy industry, off of these credits is obviously proving very difficult.
I would suggest that to the extent the committee pursues a policy, an effort to reduce these credits, you need to think carefully perhaps about a transition, a phaseout of some of these policies that might allow the market to understand how things are going to, over time, step down and ultimately end.
Mr. Marchant. So a strategy for an energy source that is heavily relying on these subsidies, a strategy for this to come to this committee would be to demonstrate very clearly at what point they feel like they would not need the subsidy any more and then codify that and put that into law?
Mr. Brill. That is exactly right. And if you codified the stepdown or the phaseout of that policy instead of having them hit a wall where a large benefit goes away overnight, both as a policy matter and I also would suggest politically, that might make it more likely that the policy will actually terminate.
Mr. Marchant. And then in the investor community, an investor would look at that and make a decision whether that investment was in fact, you could tie the risk of the investment to the stepdown of it and it might more realistically reflect ‑‑ the investment level might more realistically reflect how actually feasible that industry was?
Mr. Brill. That is exactly right.
Mr. Marchant. Mr. White, you mentioned in your written statements that with some tax expenditures, it is difficult or impossible to determine whether a provision is having its intended effect. Should Congress decide to extend a given tax expenditure, what steps should it take to facilitate measuring its impact?
Mr. White. As I said earlier, I think setting goals, assigning responsibility to an executive branch agency for actually doing the evaluations, and I think that ought to be the agencies with functional responsibility, not IRS. IRS is a tax agency. I don’t think they should be in the business of assessing a housing program or an energy program. And then that agency then would make some determinations about the type of data that would be needed to actually conduct the evaluations.
Mr. White. So, right now, the only data that is collected on many provisions is data that IRS needs for ensuring compliance with the law. IRS is not collecting information suitable for assessing the effectiveness of many provisions.
Mr. Marchant. Okay.
Thank you, Mr. Chairman.
Chairman Tiberi. Thank you, Mr. Marchant.
As a follow‑up, Mr. Brill, to Mr. Marchant’s question on energy, I am sure you were glued to your computer screen when we had the last hearing ‑‑ it was a very highly rated session we had ‑‑ with Members on both sides of the aisle, for example, talking about the production tax credit. And we had a lot of consensus from not just Members but supporters on this issue of phasing out the tax credit over the period of the next several years, which was kind of interesting.
And as just a side question to what Kenny talked about, I also heard that, since this has already expired, that it is having an impact on reinvestment. Because folks don’t know whether or not we are going to re‑extend it.
So, as we look at this, how does that impact the policy, the fact that it is already expired and the fact that you have advocates now saying we will phase it out?
Mr. Brill. Yes, there is no question in my mind that many of these policies in the extenders package have real, measurable, observable consequences in the market. The taxpayers act or don’t act depending on whether or not they are getting these policies.
And so if it is a determination that the subsidy is desirable, that we want more of that activity, there are many of them that work that way. And it is observable for sure in the energy sector, with a host of the credits, how the levels of investment have increased and decreased over time as the credits have changed or expired.
In particular with regard to letting them lapse and then going back or promising to go back or then arguing about whether or not you are going to go back and reinstate them, it is going to have a big consequence, too, and create an additional uncertainty for that community, for that industry.
And so, to the extent that we are trying to develop a set of policies where Washington is freeing the private sector to do as it wishes or to set a set of policies that encourages it without constantly interfering, we are failing that test when we let those policies expire and then go back and reinstate them.
Chairman Tiberi. Thank you.
Mr. Thompson. Mr. Chairman, would you yield?
Chairman Tiberi. I will yield for a minute.
Mr. Thompson. That is all I need. I just want to get some certainty. When we are talking about the energy tax provisions, we are talking about all of them, not just the renewables, correct? So the 199 deduction for gas and oil? We are talking about everything?
Mr. Brill. Well, the 199 is not an expiring provision. I was speaking generally of tax credits to encourage activity in a given sector, including in the energy sector.
Mr. Thompson. So the 199 deduction for gas and oil would be one that you are talking about?
Mr. Brill. Well, section 199 is not an expiring provision.
Mr. Thompson. I understand it is not expiring. But if you are going to talk about energy tax provisions, I don’t know how you talk about one side without talking about the other side.
Mr. Brill. So, section 199, which applies for manufacturing income, including income derived through energy production, may have an effect on the allocation of resources toward those activities and away from activities ‑‑
Mr. Thompson. Similar to tax expenditures’ effect on the allocation of resources as it pertains to renewable energy.
Mr. Brill. That is correct.
Mr. Thompson. Thank you.
Chairman Tiberi. I was actually trying to be helpful.
Mr. Thompson. Me, too.
Chairman Tiberi. Mr. Gerlach is recognized for 5 minutes.
Mr. Gerlach. Thank you, Mr. Chairman.
First of all, thank you both, Mr. White and Mr. Gornstein, on your thoughts, further thoughts, on this issue of the New Markets Tax Credit. And particularly, Mr. Gornstein, I share your view on keeping the program as is and growing it in terms of the amount of allocation that is available each year over a longer period of time. I think it does a pretty terrific thing in a lot of communities with these projects.
Mr. White, if I can, however, go back to your testimony or your GAO report that gets into, again, the criteria for good tax policy. And I am interested very much in the terminology you use, criteria including equity, economic efficiency, simplicity, transparency, and administrability, as well as relationship to other policy tools.
Interestingly, as we were talking about what should stay in or what should be taken out of the Tax Code as we go through this process of hopefully simplifying it, you would think and most of the conversations we have had center around job growth, making it more easy to grow capital that makes itself available then for investment in the economy. But you term it as economic efficiency.
And can you describe a little bit more fully that term relative to jobs, relative to capital formation, as a criteria for how we ought to look at a lot of these provisions down the road?
Mr. White. Yes. Essentially what you are doing with these tax provisions ‑‑ and this applies not just to tax provisions; this applies more broadly to spending programs or other types of programs ‑‑ you are shifting resources, you are providing incentives to move resources from one area in your economy to other activities in your economy. And the question is whether there is a net gain or not from doing that. And, in some cases, there may be a net gain from that.
So with the research credit, for example, it is argued that private businesses will underinvest in basic research because they can’t capture all of the benefits of that research. And so there is a justification there for some government subsidy to shift additional resources into basic research. Tax provisions are one way to do that but not the only way to do that.
Mr. Gerlach. Uh‑huh. And does that roll into this issue of relationship to other policy tools? For example, let’s take the New Markets Tax Credit that can be used in an older community in my district to undertake renovation of older housing stock and turn it around for affordable housing projects. And yet you could find umpteen other Federal programs that are grant programs that might do the same thing, say, HUD programs.
So is it better, from a policy standpoint, to allow a more private‑sector, market‑based approach, to use a credit but then allow also the formation of cap to do that project, or just have some entity go and file a grant application with HUD and get it done that way?
Or take a look at a situation where you might have an R&D tax credit or a section 179 business expensing. Or, rather than a Tax Code approach, just have them go get an SBA 7(A) loan to do something.
So shouldn’t we be looking at these Tax Code extender as well as reform issues not only from the context of what would happen reaction‑wise in the private sector based on what the Code says, but also what is available out there on the programmatic side that is also available to people? And maybe even think about whether those programmatic approaches to doing what we want to see happen in the private sector ‑‑ those ought to be maybe reduced and provide better opportunities in the Tax Code so individual companies can make decisions based on the Tax Code without having to go through the bureaucratic process of filing an application, go through a grant review, maybe get the grant, maybe not get the grant.
Mr. White. Yes.
Mr. Gerlach. But rather then relying on government to give them some benefit through a bureaucracy, have a Tax Code that can be more responsive to what they can do in our communities to improve the quality of life in our communities.
Mr. White. There are some different advantages and disadvantages to using these different, I call them tools of government ‑‑ spending programs versus tax programs, for example. With the Low‑Income Housing Tax Credit, for example, the way that is structured, the private sector does have some incentive over time to ensure that the projects that are built stay in compliance with the rules. So it was a way to bring in some private‑sector management experience there.
Another example of what we are talking about here is the assistance provided to higher education, where you have Title IV spending programs and a number of tax programs at the same time, and what you would like to do is apply these evaluation criteria across the board to all of those programs.
One of the things we found in our work right now is that it appears that the mix of these programs is just not very transparent to many people. They are either not claiming anything at all even when they are eligible or they are using the wrong program. They seem to be overwhelmed by the choice here. And it has resulted in confusion and people making bad decisions from their own financial self‑interest perspective.
Mr. Gerlach. Yeah.
Does anybody else on the panel have a thought on that, in terms of the relationship of current grant loan programs that are administered through a massive bureaucracy in Washington versus just allowing the Tax Code to be a better tool to stimulate private‑sector investment in our economy and our communities?
Mr. Gornstein. Yeah, just one more point about that.
The grant programs are extremely important, but it is the tax credits ‑‑ Low‑Income Housing Tax Credit, New Markets ‑‑ that are the engine that drive these deals. So the grant programs alone are not enough to move forward on most development projects in most communities. You need a combination, typically.
But the biggest resource, the most powerful one, is the tax credit. So I think if we lose the tax credit or it is not extended or there is uncertainty and we are not getting the yields we need, it is going to have a detrimental effect on our ability to do more projects in very targeted communities.
Mr. Gerlach. Thank you.
Any others?
Okay. If not, thank you, Mr. Chairman.
Chairman Tiberi. Thank you, Mr. Gerlach. And thank you for your leadership on the New Markets Tax Credit.
And, Dr. White, just an aside to add to what Mr. Gerlach was talking about, I know in my district, which is urban/suburban in my current district, the fact is, if you and I drove through it and saw the differences of housing policy at the Federal level between a housing authority, a HUD property, versus Low‑Income Housing Tax Credit policy or go to a New Markets Tax Credit policy that has private‑sector involvement and oftentimes local support from cities and counties, the differences are unbelievable.
And I would love to see you all do a study on how those different policies at the Federal level impact, in the end, what the bricks and mortars are built on the ground and how it impacts communities. I don’t know if you have ever done that before. Have you?
Mr. White. I don’t think we have done as comprehensive a look as you are asking about. I have been involved with our past reviews of Low‑Income Housing Tax Credits and have visited projects myself. So I have seen that difference, as well.
And I think, you know, ultimately it boils down to questions of, if you are comparing programs, does one deliver more bang for the buck than another one; and then also the overall effect of the combination of programs ‑‑
Chairman Tiberi. Right.
Mr. White. ‑‑ for example, to what extent are the programs crowding out private‑sector investment in an area. That would be part of the evaluation.
One of the things we found in our reviews of the New Markets Tax Credit was that it did appear to increase overall investment in the targeted communities.
Chairman Tiberi. So you probably wouldn’t answer this question. You probably couldn’t come out and support Mr. Gerlach’s amendment to the appropriations bill to zero out HUD grants and transfer them to the tax credit ‑‑ just kidding.
Mr. Berg is recognized for 5 minutes.
Mr. Berg. I had better cut in there. Thank you, Mr. Chairman.
And I thank the panel for being here. I mean, this is an important, great discussion that is really the next step.
You know, I mean, there is no question the problems we have with the Tax Code. The uncertainty, the unpredictability, I mean, it has just caused just so much doubt throughout our economy. I mean, I think that is just one of the key things that we need to get fixed if we are going to get our economy turned around. There is absolutely no question about it.
You know, having said that, you know, there has been a lot of discussion about a comprehensive tax reform. And, you know, I think that is something that many of us in this committee would like to see happen.
And so I would like to kind of ask the panel just kind of briefly, you know, we have the extenders. If we do that outside of the box of a comprehensive tax reform, you know, really, what are we accomplishing? Or should they not be part of this comprehensive tax reform when we get that?
You know, I think everyone that is a beneficiary of these, you know, the discussion today is make them stand up, make them say, you know, “Here is why this is important,” let them stand on their own merit, and I think that is important. I think the comment about, so many of these are short‑term because of the budget problem ‑‑ well, these are some long‑term decisions that, quite frankly, need to be made, as well as long‑term comprehensive tax reform.
So my question is, can we do this outside this, or should they all be part of this comprehensive tax reform?
Mr. White?
Mr. White. I think you want to do both. You want to look at the merits of individual provisions or the package of programs targeting a specific area, such as assistance for higher education, but then you also, on tax reform, you have broader issues.
With tax expenditures as a whole, not just the expiring provisions, but tax expenditures as a whole are so large that that affects what tax rates have to be. There is so much revenue given up from shrinking the base that tax rates on the remaining base have to be higher. Well, there are economic consequences to those higher tax rates. And so there is a tradeoff there that needs to be taken into account at a more macro level.
Mr. Berg. Thank you.
Mr. Marron. I would absolutely agree. The optimal would be to do fundamental tax reform and clean up everything. So there are a bunch of expiring provisions that really ought to be permanent features of law, either because they are good tax policy ‑‑ Mr. Thompson gave an example where one might correct an error that is out there. You know, those kinds of things ought to just be addressed permanently as part of overall reform.
The challenge, as you know better than me, is that the clock of legislation doesn’t suggest that we are going to have such tax reform before people deserve some resolution in the near term about what is going to happen to these provisions, particularly those that have already expired but are still under consideration. And you have sort of an opportunity to let some of them die permanently and maybe keep them out of the next discussion of tax reform. But, frankly, I think the legislative clock will require that you address a whole bunch of these for another year or 2 as sort of another bridge to the hoped‑for tax reform of 2013 or 2014.
Mr. Brill. I would just note that many of the policies in the tax extender package are tax expenditures. And there has been a dialogue over the last 2 years or so more focused on the notion of broadening the tax base, curtailing these tax expenditures, whether they are temporary or a permanent part of the Tax Code today.
And then with a broader tax base that is more efficient, less distortionary, there is an opportunity to reduce tax rates, which would be pro‑growth, and/or potentially reduce the deficit in some combination that policymakers will need to wrestle with.
But I think that we should consider these tax extenders and the distortionary effects that many of them have, just as we have had a debate about tax expenditures generally in the Code.
Mr. Gornstein. Well, given the urgency and the need to extend the expiring credits, I would hope Congress would move quickly on that, you know, as soon as possible and not wait for the broader reform package, which, as has been pointed out, may or may not happen by the end of the session.
So, New Markets in particular, the flat 9 percent fix terms of the Low‑Income Housing Tax Credit ‑‑ two very, very high priorities.
Mr. Berg. All right. Thank you.
Thank you, Mr. Chairman.
Mr. Thompson. Would the gentleman yield?
On the issue of the comprehensive tax reform and doing away with the tax expenditures to get the rate down, do you all agree that ‑‑ I know we need to do it, and I think you all agree that we need to do it, but do you agree that it needs to be revenue‑neutral?
You don’t think we should grow the debt and the deficit in order to do this?
Mr. White. Well, certainly, you know, the United States is on a long‑term budgetary path that is not sustainable ‑‑
Mr. Thompson. I get all that. I am just wondering, should tax reform be revenue‑neutral?
Mr. White. I think that has to be answered in the context of how you are going to reduce the debt, bring down the deficit.
Chairman Tiberi. They all weren’t prepared to testify on tax reform, so you got them, Mike.
So you may answer if you want. Go ahead, guys. Go ahead, if you want.
Mr. Marrow. Sir, again, as you experience as much as I do, unfortunately the phrase “revenue‑neutral,” now there is enormous debate about what on earth that means and does it include the extenders, whatever. So it is easy to say “yes” or “no” to that without.
I would say, the way I would summarize your point is that we need a tax revenue target for tax reform. And my reading of the tea leaves is, as you look into the future, the Federal Government is going to have to raise more revenue than it has historically in the past, given the spending pressures that are building and continue to build.
Chairman Tiberi. Anybody else want to answer? Mr. Gornstein? Mr. Brill?
Mr. Brill. I agree with Donald’s comments, that we need to think about what that revenue level needs to be, given all of the spending objectives that we have, and we need to find a balance. And so it is a question that needs to be answered both considering the outlay side and the spending side. And, obviously, there are significant spending pressures.
Chairman Tiberi. All right. The gentleman’s time has expired.
The gentleman from Texas?
Mr. Marchant. Thank you, Mr. Chairman. I will be very brief.
I would like for our committee to also interject another aspect of the extenders and the viability of them, and that is the probability of that program or extender having the same ability to attract investment and the proper amount of investment in a, in fact, reformed Tax Code; where if I am at 39 percent and I am an investor, I am looking at deals based on the tax effect on my personal tax return. I am looking at the income credits. And, at that point, the value of all those credits and the value of that investment is worth X.
If we follow through ‑‑ and I believe we will ‑‑ as a committee and lower the tax rate, simplify the Code, then in 1 year or 2 years many of the programs that we renew or put back on the books will not have the same level of viability in the investor community because they simply won’t have the horsepower to attract the investment that they will at the higher rates.
So I would just like to interject that as another criteria when we look at these extenders ‑‑
Chairman Tiberi. Thank you. Thank you.
Mr. Marchant. ‑‑ and see if there is some ‑‑
Chairman Tiberi. Excellent point.
Mr. Marchant. Thank you.
Chairman Tiberi. Excellent point.
Well, this concludes today’s hearing, right on cue with the bell. I really appreciate the four of you today. You have really provided some excellent testimony. And I appreciate the dialogue and the give and take and even some of the questions outside the area to which we attracted you here to give your expert opinions.
And we are going to continue as a committee and as a subcommittee to go through this process and try to determine what extenders should be extended and what should not be extended and what, maybe, should be part of a permanent form of tax reform. So we appreciate your input.
Please be advised that Members may submit written questions to the witnesses. Those questions and the witnesses’ answers will be made part of the official record.
Chairman Tiberi. Again, I would like to thank you all for taking time out of your busy schedule. Thank our Members for being here today for this great discussion.
This hearing is adjourned.
[Whereupon, at 10:51 a.m., the subcommittee was adjourned.]
Member Submission For The Record
The Honorable Richard Neal
The Honorable Doc Hastings
Public Submissions For The Record
ABM Energy
Alliance to Save Energy
American Cleaning Institute
American Council for an Energy Efficient Economy
American Farm Bureau Federation
American Public Transportation Association
Business Council for Sustainable Energy
Center for Fiscal Equity
City of Clevland Department of Law
ClearStack LLC
Efficiency First
Feeding America
Financial Executives International
Food Donation Connection LLC
Fuel Cell and Hydrogen Energy Association
National Association of Manufacturers
National Biodiesel Board
National Education Association
National Govornors Association
National Preservation Working Group
National Restaurant Association
Ohio Grantmakers Forum
One Voice
R and D Credit Coalition
Radian
Rebuild Americas Schools
Residential Energy Efficient Tax Credit Industry Coalition
Sustainable Energy and Environment Coalition (Congressional Coalition)
The Council on Foundations
The Jewish Federations of North America
True Blue