I commend Chairman Camp for his leadership in working to overhaul the tax code. As he said in the first hearing of this congress, tax reform will be a long process. In the meantime we must continue our work on the current tax code.
And unfortunately, the current tax code is riddled with scores of provisions that have been enacted on a temporary basis. I say riddled not because I believe all these provisions are bad but because – while there are rare occasions when it makes sense to enact temporary tax provisions, such as during an economic downturn – most of the temporary provisions were made temporary not for policy reasons, but because of arcane budget or Senate rules. Making tax policy this way wreaks havoc on the ability of families and businesses to plan for the future with some certainty.
With a few exceptions, temporary tax provisions that are worthy should be made permanent. Those that are not worthy should be terminated. That kind of certainty might not happen until we pass comprehensive tax reform, but in the meantime today’s hearing provides a formal opportunity for the subcommittee to hear from our House colleagues about the merits of extending—or not extending—many of these tax policies.
For too long this Congress has simply rubber-stamped the extenders package without any review or oversight of whether the individual provisions are effective; whether they create jobs; or whether they still serve their intended purpose. This hearing will help us gather that information so we can properly evaluate each and every provision on its merits.
H.R. 749, To Permanently Extend the Subpart F Exception for Active Financing Income
Last year Congressman Neal and I introduced H.R. 749, which would permanently extend the Subpart F exception for active financing income. A majority of the Members on the Ways & Means Committee are now cosponsors of the bill. In my view, it is among the most important recently expired provisions that must be extended. Further extension of that provision, which simply extends to financial services businesses the same tax treatment as other active trades or businesses conducted outside the U.S., is essential to the competitiveness of U.S. companies seeking to do business internationally.
Deferral of active foreign income is a fundamental component of the current U.S. international tax code. From 1909 through 1986, active foreign financial income received the benefit of deferral consistent with other types of active foreign income. Indeed, in 1962 Congress chose not to subject active banking, financing or similar business income to immediate taxation when it crafted Subpart F. For a brief period from 1986 to 1997, the active financing income exception was repealed. However, in 1997 Congress again recognized that such income is active and should not be subjected to immediate taxation under Subpart F. Since then, the exception has been extended six times: for one year in 1998, for two years in 1999, for five years in 2001, for two years in 2006, for one year in 2008, and for two years in 2010 (covering 2010 and 2011). The exception should again be extended, as it is consistent with a fundamental principle of U.S. international taxation that foreign earned active income should be eligible for deferral.
Also, extension of the subpart F exception for active financing income will create jobs here in America. Many tens of thousands of jobs in the U.S. are directly attributable to supporting financial services businesses conducted abroad or serving global customers. Further, U.S. manufacturers rely heavily on the active financing rules to provide competitive financing for the purchase of goods made in the U.S. and exported. For example, a single U.S. manufacturer, Caterpillar, exported machinery and products totaling $20 billion in 2011. Nearly 60% of the loans or finance leases extended to customers in Canada financed Caterpillar exports from the U.S. and over 50% of loans to customers in Brazil financed U.S. exports. Without an extension, Caterpillar and other major U.S. companies would lose an important tool that facilitates export of U.S. manufactured products and would be placed at a disadvantage relative to their foreign competitors.
The active financing exception is a poster child for tax extenders provisions whose temporary nature have no policy justification. I look forward to discussing its permanency in the context of tax reform and I continue to support its temporary extension in the meantime.