Reports & Data

TCS Budget Cut List for the 112th Congress: Tax Expenditures

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February 10, 2011
Programs: Budget & Tax

Tax Expenditures
Total Cuts: $624 billion

Cuts Include:

Mortgage Interest Deduction
Cut: $390 billion

LIFO
Cut: $52.9 billion

Foreign Tax Credit
Cut: $90 billion

Deduction of State and Local General Sales Taxes
Cut: $28 billion*

Research and Development Tax Credit
Cut: $60 billion*

Extension of Seven Year Straight Line Cost Recovery Period for Motorsports Entertainment Complexes
Cut: $400 million*

Extension of Enhanced Charitable Deduction for Contributions of Food Inventory
Total Cut: $920 million*

Extension of Special Expensing Rules for U.S. Film and Television Productions
Cut: $1.6 billion*

 



TAX EXPENDITURES
Total Cuts: $624 billion


Mortgage Interest Deduction
Cut: $390 billion

The mortgage interest deduction enables homeowners to effectively deduct interest from up to $1.1 million in debt used to buy, build, or improve their primary or second home. The Congressional Budget Office detailed a budget option that would, beginning in 2013, reduce the maximum mortgage eligible for the deduction by $100,000 annually through. This option would also convert the deduction to a tax credit and apply it only to interest on mortgages below this reduced limit ($500,000). The deduction would convert to a 15% tax credit for interest paid under this cap and would better help achieve the purported goals of the existing deduction – making home ownership more affordable. The ten year total savings was calculated in 2009 at $387 billion.


LIFO
Cut: $52.9 billion

Last‐in, first‐out (LIFO) accounting enables companies to move the most expensive inventory off of their balance sheets, and thereby reduce their taxable income, even though the actual movement of inventory occurs on a first‐in, first‐out (FIFO) basis in many industries. LIFO is already prohibited by International Financial Reporting Standards. The repeal of LIFO if applied to all industries would save $52.9 billion over the next ten years. Oil and gas companies account for roughly half of the cost of LIFO.


Foreign Tax Credit
Cut: $90 billion

The Foreign Tax Credit was established to prevent U.S. businesses—and U.S. citizens living abroad—from being double‐taxed on income earned in foreign countries. The FTC allows U.S. companies and individuals to count foreign income taxes as a credit on taxes owed in the U.S. Unfortunately, the FTC contains a loophole that allows companies to shift income abroad to maximize the break. Companies have also obtained credits on “income taxes” that are not subject to tax in the U.S. For instance, oil and gas companies counting royalty payments to foreign governments as income tax that can be counted dollar‐for‐dollar against U.S. tax payments. Reforming the FTC by requiring companies to pool and report on all of their foreign income would provide more transparency for what is being counted as income tax that is eligible for a tax credit, and would reclaim an estimated $51.4 billion in lost tax revenue from 2012‐2021. Also, ending the practice of splitting foreign income and foreign taxes for accounting clarity would lead to $37.7 billion in taxpayer savings over the same period.


Deduction of State and Local General Sales Taxes
Cut: $28 billion*

This provision was eliminated from the tax code in the 1986 reforms, but was brought back to life in recent years. It enabled taxpayers the option of deducting itemized state and local sales taxes from federal income tax, but only if they do not deduct state income tax. Therefore, the major beneficiaries are the residents of states that don’t pay state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.


Research and Development Tax Credit
Cut: $60 billion*

Companies doing research and experimentation in the United States receive a lucrative tax credit from this provision in the tax code. Companies that have benefited from this provision include Microsoft Corp., Boeing Co., United Technologies Corp., Electronic Data Systems Corp., and Harley-Davidson Motor Co.


Extension of Seven Year Straight Line Cost Recovery Period for Motorsports Entertainment Complexes
Cut: $400 million*

Undercutting IRS rulings to the contrary, owners of motorsports entertainment complexes (aka NASCAR tracks) would be able to write-off the cost of their facilities on their taxes over seven years, instead of the standard 39 years for nonresidential property and 15 years for “improvements” (such as fences and roads), as long as the venue hosts an event within three years of its completion. Such an accelerated depreciation schedule increases the value of the yearly deduction for owners. Track owners have also gotten plenty of other tax breaks over the years from states and localities eager to get speedways. The provision encompasses all facilities including grandstands, parking lots, and concession stands.


Extension of Enhanced Charitable Deduction for Contributions of Food Inventory
Total Cut: $920 million*

Congress has routinely extended an enhanced deduction for the charitable contribution of food inventory. Under this provision, the food must be “apparently wholesome food.” However, “wholesome” food isn’t necessarily healthful or even edible and is defined as “food intended for human consumption that meets all quality and labeling standards imposed by Federal, State, and local laws and regulations even though the food may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.”


Extension of Special Expensing Rules for U.S. Film and Television Productions
Cut: $1.6 billion*

In an effort to keep film and television production in the United States, filmmakers have the option of immediately deducting significant costs for most film or television productions. Under this provision producers can elect to expense in the current year the first $15 million of production costs incurred in the U.S. ($20 million if the costs are incurred in economically depressed areas in the U.S.). This can be used if at least 75% of the costs are for services performed in the U.S. and is available for both blockbusters and those that go “directly to video cassette or any other format.”

* Because each of these programs was subject to annual appropriations or was an expiring tax provision (that had been regularly extended), the ten year cost estimate was extrapolated based on available cost or spending data.

Note: Figures from the Joint Committee on Taxation estimates, FY2012 Budget of the U.S. Government.





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