Disagreements Continue on Tax Extender Bill

July 8, 2008

Democrats and Republicans are locked in a battle over whether or not to offset a $54 billion package (H.R. 6049) of tax extenders, with Democrats sticking firmly to their pay-go budgeting rules and Republicans opposing paying for extensions of current tax policy. The two parties have been exchanging letters back and forth over the past few weeks and a resolution to the expiring tax cuts--which includes the research and development tax credit, and the deduction for state and local general sales taxes--has yet to be determined.

In the latest letter from Senate Minority Leader Mitch McConnell (R-Ky.) to Senate Majority Leader Harry Reid (D-Nev.) and House Speaker Nancy Pelosi (D-Calif.), he advocated for a bipartisan solution to the stalemate and said the Senate Republican Conference would agree to offset the cost of "new tax relief policy with spending reductions or revenue raised from appropriate tax policy proposals."

Currently, the Senate bill—a modified version of Senate Finance Committee Chairman Max Baucus’ (D-Mont.) original extenders bill (S. 2886)—would extend temporary tax provisions including the research and development credit, multinationals’ active financing exemption for taxes deferred on income earned abroad and renewable energy incentives for two years. The bill also would patch without any offset the Alternative Minimum Tax (AMT) for one-year.

Meanwhile, the House-passed measure only would extend the temporary provisions for one year and does not include an AMT patch. Instead, the House passed a separate, fully offset $61.5 billion bill (H.R. 6275) to patch the AMT for tax year 2008.

The Senate twice has failed to proceed to consideration of the revenue-neutral $54 billion House-passed bill, which includes a package of energy tax incentives, including a long-term extension and modification of the renewable energy production tax credit; an extension and modification of the tax credit for solar energy and fuel cell investment; and tax credits for carbon capture and sequestration demonstration projects.

The legislation would be paid for by changing the tax treatment of deferred compensation paid by managers of offshore hedge funds and delaying the implementation of the worldwide interest allocation rule.

There is some hope the Senate will bring a bipartisan AMT/tax extenders package to the floor for a vote before the August recess. However, the administration does not support offsetting extensions of existing tax laws, arguing that spending programs continue in the budget baseline even after they expire and do not require offsets.