Tax breaks that expired at the end of 2013
WASHINGTON — This is becoming an annual tradition of sorts. Every year, a raft of “temporary” tax breaks, credits and deductions expires on Dec. 31. Lawmakers usually plan on extending them. But they don’t always do so in time.
Congress let about 55 tax breaks expire Dec. 31. The full array includes everything from a credit for corporate research and development to tax relief for underwater homeowners. The list also includes a batch of energy tax breaks, such as a credit for wind farms that generate electricity or a deduction for commuters who take the bus to work. Those are now gone.
In theory, Congress could still extend these (retroactively) for 2014. In December, Senate Majority Leader Harry Reid, a Nevada Democrat, pushed for a one-year extension, and he’ll no doubt try again when lawmakers return from recess. But there’s a hitch: Extending all these breaks would raise the deficit by about $50 billion per year, according to the Center on Budget and Policy Priorities, unless they’re offset with tax increases or spending cuts elsewhere.
Below are nine tax breaks that just expired. They aren’t necessarily the most important: Some are well-liked, some are highly idiosyncratic. But they’re all gone for 2014 unless Congress renews them.
Congress can still extend some or all of these tax breaks retroactively (that’s exactly what lawmakers did in 2012, for instance). But, for now, these are all off the books.
1. Gone: A tax credit for companies that engage in R&D
Cost of last year’s extension: $8.22 billion
This credit dated to 1981 and had been extended 14 times. The credit allowed companies that perform certain types of research to write off some of their expenses, such as scientists’ wages and various equipment. The idea was to try to stimulate a little more domestic R&D and innovation.
Was this credit a good idea? Economists generally think so. One 2002 study in the Journal of Public Economics looked at the use of tax credits across nine countries over 19 years and found evidence that they “are effective in increasing R&D intensity.” It’s worth noting that other countries think the credits are effective — the United States now ranks 24th in tax support for R&D. And that was before the research credit expired.
2. Gone: A production tax credit for wind power
Cost over 10 years of last year’s extension: $12 billion
For years, U.S. wind farms received a tax credit worth 2.3 cents for every kilowatt hour of electricity they produced. That credit was extended again last year, with a special provision: Every wind farm that began construction in 2013 could qualify for the credit once it started generating power. That led to a frenzy of development at the end of last year.
The credit had been fairly effective at boosting wind farms over the years: Wind power now generates about 3.5 percent of U.S. electricity, in no small part because of the tax break. But the fact that the credit continually expired created a fair amount of uncertainty for the industry.
So what will happen if the tax credit expires once and for all? The wind industry won’t disappear entirely, said energy analyst Jesse Jenkins. For one, there is still about 6,000 to 10,000 megawatts worth of capacity in the pipeline. Those are projects that broke ground in 2013 and eventually will be built. Meanwhile, in areas such as the Great Plains and parts of Texas, wind power is now broadly competitive with fossil fuels. But the industry will certainly shrink down to about 3,000 to 7,000 megawatts per year.
Some of those in favor of cleaner energy have argued that the credit should be reformed rather than repealed. For instance, Sen. Max Baucus (D-Mont.) has proposed a tax credit that would favor all lower-carbon electricity sources, regardless of type. But for now, the only thing being discussed is a one-year extension or nothing.
3. Gone: Tax credits for Hollywood films
Annual cost to extend: $75 million
Last year, studios in Hollywood and elsewhere could deduct up to $15 million of their costs if more than three-fourths of the movie’s production took place in the United States. (They could get up to $20 million in deductions if they produced the film in a low-income community.) No more.
4. Gone: Incentives for commuters to take the bus or train
Cost to extend last year: $220 million
For the past two years, the tax code has treated commuters who take mass transit the same as those who drive. That is, if you take the bus or train to work, your employer can choose to cover $245 in expenses per month tax-free. And if you drive, your employer can choose to cover $250 in parking costs per month tax-free.
But that changed on Dec. 31. Employers can still subsidize parking to the tune of $250 per month. But they can now cover only $130 per month in transit expenses tax-free.
In essence, with the expiration, the tax code now favors cars, and there’s some evidence that this change will induce more people to drive to work.
5. Gone: Tax relief for underwater homeowners
Cost of a one-year extension last year: $1.3 billion
Since 2007, Congress has exempted homeowners from paying taxes on any mortgage debt cancellation. So say you’re an “underwater” homeowner who owes more on your mortgage than your house is worth. And the bank decides to forgive some of the loan (after all, it might be a better option than foreclosure). Under this earlier tax tweak, the homeowner didn’t have to pay any taxes on that write-down.
This provision helped some Americans recover from the housing crash and pay down their debts more quickly. But it expired, so anyone who gets relief on a mortgage will now have to pay taxes on that amount. And 6 million Americans are still underwater on their mortgages.
6. Gone: A $9 billion favor for Wall Street banks and major multinationals
Annual cost to extend: $9 billion
Multinational corporations in the United States also lost a key tax break: The extension of the “Active Financing Exception to Subpart F.” Sounds dull, right? It’s not.
This provision, created in 1997, allows manufacturers and banks to defer taxes on overseas income when they engage in a special type of financial transactions known as “active financing.” Critics claim it encourages firms to create jobs overseas. But it’s a top lobbying priority for companies such as GE and JP Morgan, which say it helps them compete abroad.
7. Gone: A $250 deduction for teachers with school expenses.
Annual cost to extend: $240 million
Until last year, elementary and secondary school teachers could deduct up to $250 worth of teaching supplies and expenses from their taxes. That just went away.
8. Gone: Tax subsidies for energy efficiency
Annual cost to extend: $2 billion
Let’s see. There was a tax credit for building new energy-efficient homes. There was a credit for people who bought energy-efficient appliances. Even a tax credit for two- or three-wheeled plug-in electric vehicles. (Yes, these things do exist: The Observer reported that e-bikes have become ubiquitous in New York, used for everything from Chinese food deliveries to expensive joy rides.) Now those are gone.
9. Gone: A rum tax rebate program for Puerto Rico
Cost of extension: $240 million
Here’s how this program worked last year: Congress levied an excise tax worth $13.50 per gallon on all rum produced in or imported to the United States. A big chunk of that money was transferred to Puerto Rico and the Virgin Islands, which used the revenue to support their rum industries. All told, about $240 million was transferred.
But now the program, which dates to 1917, has expired. (By the way, Puerto Rico’s nonvoting representative in the House, Pedro Pierluisi, thinks this tax setup is too favorable to rum distillers.)
10. Gone: A tax break to help NASCAR build racetracks
Annual cost to extend: $50 million
This break allowed anyone who builds a racetrack to receive a small tax benefit through accelerated depreciation. (It was called the “NASCAR loophole,” but it doesn’t help only NASCAR.) Supporters said the break allowed NASCAR to compete on a level playing field with other theme parks. But it’s gone now, unless Congress decides to extend it.