By Ryan Ellis
The House Ways and Means Committee today will conduct a hearing on tax provisions which expired at the end of 2017. Because families and businesses won’t file 2018 tax returns until the spring of 2019, Congress has the rest of this year to decide whether or not to extend these technically-expired 2017 tax breaks (if you’re confused remember that you just filed your 2017 taxes and won’t file your 2018 taxes for another whole year).
The Joint Tax Committee (JCT) has published a helpful primer for this hearing which lists all 26 of these expired tax provisions, gives a brief description and history of them, and provides a hypothetical revenue estimate of making each of the tax breaks permanent.
My modest proposal is this: make four and only four of these “tax extenders” permanent, and let the 22 others be subject to Congress’ annual whims. These four extenders are those which are most noticed by ordinary, middle class taxpayers. The goal would be to take these off the table, as they essentially serve as hostages to get the rest of the extenders passed. After all, a Congressman can say that he opposes the extenders package but that he had to vote for it in order to get looming middle class tax hikes off the table.
The four “middle class extenders” are:
Tuition and fees deduction. There are a myriad of education provisions in the tax code. To its credit, the House consolidated all these into a few simple benefits in its version of tax reform last year. This did not survive the conference committee. Congress should take up education tax mini-reform in a bipartisan way. That is more difficult to do if one of those education provisions is a hostage in the tax extenders package. Make it permanent, and get busy consolidating and reforming all the exclusions, adjustments, deductions, credits, and savings accounts the tax code contains to support higher education.
The tuition and fees deduction was part of the original Bush Tax Cuts all the way back in 2001, and has been extended by Congress seven times since then. JCT estimates that making it permanent would reduce taxes by $1.7 billion over the next ten years.
Exclusion of indebtedness on sale of a primary residence. A general tax principle is that a forgiven (“discharged”) debt is considered taxable income to the forgiven debtor. This happens all the time when credit card companies, student loan lenders, and others write off a debt and send a 1099-C tax form to their former customer (who is often surprised by all this at tax time). Understandably, Congress carved out one form of debt forgiveness from this default tax treatment back in the housing crash–sale of a primary residence when the homeowner is under water on the mortgage.
A “short sale” occurs when a homeowner sells a home but the proceeds are insufficient to pay off the mortgage note. The mortgage company writes off the remaining debt. The taxpayer receives a 1099-C, but the forgiven mortgage debt is excluded from income under this tax extender. This basic equity relief makes sense, since no one would sell a home in such a situation unless they were insolvent or at least in very dire straights.
Congress first passed this provision in 2007, and it’s been extended five times since then. JCT estimates that making it permanent would reduce revenues by $23 billion over the next decade.
Deductibility of private mortgage insurance (PMI) premiums. When purchasing a home, buyers are usually required to come up with a 20 percent down payment on an intended principle residence. If they cannot do so, the lender is taking a bigger risk on them and takes out an insurance policy in the event they default on the mortgage. The premiums for this “private mortgage insurance” (PMI) are paid by the homeowner until such time as they can show that their remaining mortgage is 80 percent or less of the value of their home.
PMI under the tax extender is deductible for middle income families, as it phases out for married couples between $100,000 and $110,000 AGI (half that for all others).
It was first passed by Congress in 2006, and has been extended six times. JCT estimates that making it permanent would reduce tax revenues by $6.5 billion over the next decade.
Credit for energy efficient home improvements. One thing that is definitely in the middle class taxpayer gossip grapevine is that there is a tax credit for certain energy saving improvements made to your main home. Taxpayers are often disappointed to see that this credit is far more modest than they had hoped, but they know about and count on it nonetheless–and it’s popular.
The current form of the credit is capped at a lifetime limit of $500. It can be claimed in the form of 10 percent of the cost of windows, doors, skylights and roofs. Alternatively, there are fixed dollar amounts from $50 to $300 for such purchases as furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditioners, and circulating fans. Again, the total lifetime credit is only $500 no matter how many times you do these things.
Congress passed this tax credit in 2005, and it’s been extended seven times. JCT estimates that making it permanent would reduce tax revenues by $5.4 billion over the next decade.
Again, none of this is to necessarily argue for any of these four tax provisions on their merits (though the underwater mortgage forgiveness seems somewhat defensible to me). Rather, this is a strategic suggestion. Congress should make these four items of middle class tax relief permanent, something which should garner near unanimous support from both Republicans and Democrats. What will be left in the tax extenders package is far less attractive politically without these four “hostages.”
That strategy should sound familiar to the Congress. Back in late 2015, Congress passed the “PATH Act,” which made permanent the AMT patch, the R&D credit, and the now-defunct but then important active financing exemption from Subpart F. In so doing, much of the political wind was taken out of the sails of the extenders bill, helping pave the way for the Tax Cuts and Jobs Act last December. Removing these four remaining popular provisions will do the same–that is, make the remaining extenders stand on their own two feet, and potentially pave the way for another round of tax reform and relief down the road.
Read more here.