Video: Sweetened bailout may be hard to swallow

By Tom Curry National affairs writer
updated 10/2/2008 4:06:39 PM ET 2008-10-02T20:06:39

A tax break for windmills that generate electricity?

A tax break to spur employers in the region hit by Hurricane Katrina to hire new workers?

A tax break for Hollywood film and television producers?

What does any of this have to do with the $700 billion bill to rescue banks and investment firms that the House is expected to vote on Friday?

Well, nothing and everything.

The tax breaks, which were added to the bailout legislation passed by the Senate on Wednesday, are part of a budget package that it approved last month. The House would not agree to this package unless offsetting revenues were found somewhere (by means of a tax increase or spending cuts).

As with a lot of items in the tax code, many of these provisions are limited to a finite lifespan (usually one year) in order to fit into overall revenue forecasts required by law.

The fight over these tax provisions is one of the Capitol’s long-running battles. The House and Senate have spent months arguing over the so-called “tax extenders,” which add $106 billion to the cost of the legislation, and whether offsetting revenue raisers would be added to the legislation.

A way to end the impasse
As this week started, the leadership of the two bodies had reached an impasse.

But on Wednesday in the midst of the international banking crisis, the Senate found a way out: It essentially told House leaders there’d be no financial sector bailout bill unless the tax extenders package was attached to it.

That’s why House Democratic Leader Steny Hoyer, who had bitterly opposed passing an extension of the tax breaks without some means of raising revenue to pay for them, had an air of resignation on Thursday.

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The growing feeling among members of Congress is the financial sector bailout needs to pass. The tax extenders package is simply one of the prices of passing it.

As passed by the Senate Wednesday night, the bailout bill would provide a number of tax incentives related to energy and fuel production and energy conservation.

According to the non-partisan Congressional Budget Office, the bill also includes several provisions that would raise revenue, such as new requirements imposed on stock brokers for the reporting of some their customers’ transactions.

Some of the tax breaks might strike most taxpayers as oddball, frivolous or exotic.

Why, for instance, did the Senate think it was necessary to repeal an excise tax on a certain type of wooden arrow?

One answer: Because it was important enough to Oregon’s two senators, Democrat Ron Wyden and Republican Gordon Smith, to get that provision in the bill to help an Oregon-based manufacturer.

And why did the Senate extend certain tax breaks for residents of the U.S. territory of American Samoa from 2008 to 2010?  One probable reason: Democratic leaders in House and Senate are sensitive to the fact that American Samoa has only a non-voting representative in the House. He happens to be a Democrat, Eni Faleomavaega, and has proven adept at persuading Democratic leaders to pay attention to his constituents.

Among other tax breaks that would be given a new lease on life: tax relief for regions of the country affected by severe storms this year and a break from the alternative minimum tax, or AMT, for 2008.

A battle over the AMT
AMT relief is called, in Capitol Hill lingo, “the AMT patch.”

The AMT is a feature of the tax code intended to ensure that upper-income people do not escape the bite of the income tax by using deductions and other tax breaks.

But in states with high state and local taxes, such as New York, the AMT’s bite is especially painful.

The AMT “affects not the wealthy but in New York, at least, people making $50,000, $75,000, $100,000, $125,000 who were paying too much under the AMT,” Sen. Charles Schumer, D-N.Y., said on the Senate floor Wednesday night as he praised the inclusion of AMT relief in the financial rescue bill.

But like other parts of the tax code, the AMT pits one group and sometimes one state against another.

The AMT patch “is a huge part of the tax extenders package,” complained Sen. Jeff Sessions, R-Ala. “It will cost almost $79 billion in tax revenue, just this year alone.”

He said, the AMT patch “is also unfair to the low-tax states. High-tax states benefit much more than lower tax states such as Tennessee or Alabama, because you also can't claim deductions for state and local taxes... We need to end the bias against states that do not have high taxes.”

While critics may see some of the tax extenders as frivolous or too narrowly focused, others may be appealing to the public: for example, the extension of a job creation tax credit for areas hit by Hurricane Katrina and the extension of a building rehabilitation tax credit for buildings in the areas hit by Katrina.

Help for fishermen in Alaska
The same may be true of the tax provisions benefiting fisherman hit by Exxon Valdez oil spill: they will be allowed to use income averaging to reduce their tax liability on payments received from Exxon as part of the settlement of the litigation arising out of the 1990 spill.

At one point Wednesday morning it looked as if Congress might adjourn without passing the tax extenders bill.

This would have meant — among other things — that the tax credit for energy produced from windmills would have expired.

A coalition of groups, ranging from the Sierra Club to the Audubon Society to the United Steelworkers sent an urgent letter to members of Congress saying, “At risk with the possible failure of the extenders package are hundreds of thousands of jobs” and “billions of dollars in clean energy investment.”

The American Wind Energy Association was ready with factoids: To generate the same amount of electricity as today’s U.S. wind turbine fleet would require burning 23 million tons of coal. (Picture a line of 10-ton trucks over 9,000 miles long.)

Love them or hate them, the tax breaks are probably going to become law for another year. In the current circumstances it’s impossible for the House to insist that specific provisions be removed. The House must take all the tax provisions or none of them.

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