<div>STATEMENT OF PAMELA F OLSON TO THE HOUSE COMMITTEE ON WAYS AND MEANS SUBCOMMITTEE ON SELECT REVENUE MEASURES ON TEMPORARY POLICY IN THE INTERNAL REVENUE CODE March 12, 2019 Chairman Thompson, Ranking Member Smith, and distinguished members of the Subcommittee, I appreciate the opportunity to appear today as the Subcommittee considers temporary policy in the Internal Revenue Code. I had the honor of serving as the Treasury Department’s Assistant Secretary for Tax Policy from 2002 to 2004, and am currently US Deputy Tax Leader of PricewaterhouseCoopers LLP and leader of PwC’s Washington National Tax Services practice. I am appearing on my own behalf and not on behalf of PwC or any client. The views I express are my own. Introduction Temporary tax policy has a long history in the United States. For decades, taxes and tax provisions have been enacted on a temporary basis to fund various revenue needs and for other purposes. Temporary tax provisions have become more common in recent years. In the face of that, pausing to consider the impact of temporary policy is prudent, and I applaud the Subcommittee for doing so. In my testimony, I will endeavor to provide the Subcommittee with information that may be useful as it evaluates temporary policy in general or specific items of temporary policy. General Considerations To begin, it is important to note that predictability is important to decision-making and planning for the future. The need for predictability extends to taxation. Uncertainty - the lack of predictability - adds a risk premium to decisions about saving and investment that affects whether, when, and where to invest. Tax provisions enacted to expire or change over time necessarily result in greater uncertainty because their extension or their terms depend upon future congressional action. There are clear policy reasons for Congress to enact certain kinds of tax provisions on a temporary basis, including as fiscal policy to counteract an economic downturn, to stimulate investment intended to speed development or bringing to market of a new technology or product, to encourage a change in behavior, to address a market failure believed to be of temporary duration, or to consider the necessity for or impact of a tax provision. Temporary provisions can afford Congress a built in mechanism to evaluate the efficacy of the provisions before extending or making them permanent. There are many examples of such temporary tax provisions enacted by Congress over the years. It is oftentimes the case that provisions enacted on a temporary basis are subsequently extended, in some cases repeatedly, which can lead to taxpayer expectations that the provisions will be extended again. If temporary provisions are enacted to incentivize behavior, the provisions are more likely to have the    <div class="indented"><div class="indented">1</div></div> intended effect if enacted with prospective, as opposed to retroactive, effect, though expectations of extension of expired provisions may compensate. In discussing temporary tax provisions, it should be acknowledged that all tax law is temporary in the sense that each provision is subject to subsequent revision or repeal by Congress, regardless of whether it has a specified expiration date. The broader implications of temporary tax provisions and federal tax policy in general are especially important to keep in mind considering our country’s overall fiscal condition, which gives rise to questions regarding the sustainability of current revenue and spending policies. It has been noted that the House Ways and Means Committee has jurisdiction over 100 percent of federal tax revenues and over 50 percent of federal spending flowing from its responsibility for critical federal programs such as Social Security and Medicare. The Committee has begun this year to explore ways to promote retirement income security, an issue which encompasses both Social Security and incentives for workplace savings. The Committee also held a hearing last week on infrastructure. Infrastructure investment plays an especially important role in the overall productivity of the US economy. Whatever decisions are made, it is critical to ensure that federal tax policies and federal spending policies are mutually sustainable. A key test for any tax provision, temporary or permanent, is whether it promotes economic growth, jobs, and rising wages, efficiently and effectively serves the interests of American individuals and families, and leads to more broadly-shared prosperity. To be sustainable, tax and spending policies should (1) make the United States an environment that attracts and retains business investment leading to an economy that grows and creates jobs and (2) be seen as fair in the eyes of the public. I want to add that, on the business side, there is perhaps more uncertainty today than in recent years because of governmental activities outside of the United States affecting the taxation of US companies’ global revenues or profits. In particular, a number of foreign governments have enacted unilateral tax provisions that appear aimed at US-based companies. While the OECD has undertaken a project aimed at staving off such unilateral actions, the project itself involves a broad look at jurisdiction to tax. The direction and outcome of the OECD project are hard to predict, which adds further uncertainty. Other considerations The experience with temporary tax provisions aimed at encouraging investments in experimental technology for renewable or clean forms of energy has provided a few observations the Subcommittee may wish to consider. First is that if Congress determines to support an investment through a temporary provision, it is important to ensure that the provision remains in effect for a sufficient period of time to allow completion of the project. For example, experimental technology often takes longer to develop, operationalize, and install than is anticipated with the result that the temporary provision may expire before the taxpayer completes the project and obtains the intended tax benefit, leading to abandonment of the project.      <div class="indented"><div class="indented">2</div></div> Second is that delivering the governmental investment through a temporary (or permanent) tax benefit may not be the most efficient way to do so. To be able to use a tax benefit, the taxpayer must have sufficient taxable income to offset the expense treatment or sufficient tax liability to offset the credit. If the taxpayer does not, then the tax benefit has value only if an investor can be found willing to absorb the risk of the project as well as the tax risk. The risk premium attached to the tax benefit likely means that the cost to the government exceeds that of direct governmental support for the project. Third is that it can be hard to assess the efficacy of governmental investment when the benefit is delivered via the tax code. On the other hand, delivering an investment through the tax code brings valuable market information to help direct investment. Temporary tax policy is not new Temporary tax provisions have long been part of our nation’s tax code. They are such a well established feature of the code that their existence is marked each year by the release of the Joint Committee on Taxation’s (JCT) report on expiring tax provisions. Expired or expiring tax provisions even have their own special branding, as they are known collectively as ‘tax extenders.’ The JCT on January 18 released the most recent listing of expiring federal tax provisions covering the years 2017 through 2027. The report lists more than 20 provisions that expired at the end of 2017, including incentives for renewable and alternative energy sources, incentives for investment in designated empowerment zones, targeted tax depreciation provisions, and a deduction for qualified tuition and related expenses. (A special pamphlet was prepared by the JCT for this hearing.) Provisions that expired at the end of 2018 include a temporary reduction in the adjusted gross income income (AGI) floor for itemized medical expense deductions from 10% to 7.5% and a temporary increase in a Black Lung Disability Trust Fund excise tax on coal. A number of significant tax provisions are set to expire at the end of 2019, including the Subpart F rule for look-through payments between related foreign controlled corporations, the work opportunity tax credit (WOTC), and the new markets tax credit. The JCT report also lists temporary provisions that were enacted as part of the 2017 tax reform act, including, in particular, individual tax reform provisions set to expire at the end of 2025. Significant temporary business tax provisions from the 2017 Act that JCT identifies as expiring provisions include the expiration at the end of 2021 of the current method of computing the limitation on business interest deductions without regard to any deduction for depreciation, amortization, or depletion, and the expiration at the end of 2026 of additional first-year ‘bonus’ depreciation for certain qualified property.       <div class="indented"><div class="indented">3</div></div> The JCT report states that provisions with a suspended or deferred effective date are not considered to be expiring tax provisions by the staff of the Joint Committee on Taxation, and notes as an example the scheduled shift to five-year amortization of research expenditures after 2021. Because the House and Senate were unable to reach an agreement last year to extend retroactively provisions that had expired by the end of 2017, those expired provisions remain expired today. As a result, Senate Finance Committee Chairman Charles Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) introduced legislation (S. 617) on March 4, 2019, that proposes to extend retroactively a number of provisions that expired at the end of 2017 and 2018. The R&amp;D credit as a case study in temporary tax policy The research credit is perhaps the best known example of a temporary tax policy that long ago outgrew its temporary status. The R&amp;D tax credit was enacted as a temporary provision in 1981 and was repeatedly extended over more than three decades until it was made permanent in 2015. More often than not, and for every extension since 1992, the R&amp;D credit was renewed for short periods of time on a retroactive basis, notwithstanding the fact that this provision enjoyed broad bipartisan support in both the House and Senate. Administrations of both parties also would regularly propose a permanent extension of the R&amp;D credit in annual budgets. The R&amp;D credit was initiated to promote increased levels of domestic research activities at a time when the information technology revolution still was in a relatively early stage of development. The success of American companies in developing high tech innovations in a broad range of products and services has contributed greatly to the strength of the US economy and job opportunities for many Americans. It is well understood that there are large spillover benefits to the economy from robust research programs in the United States. Other countries also recognize the broader benefits to their economies from research activity and followed the United States to implement their own R&amp;D credits, enhanced deductions for research expenditures, and later began to provide ‘patent box’ incentives. As a result, over time, the R&amp;D credit came to play an important role in the location of research activities. The example of the R&amp;D credit highlights a key point of debate over temporary tax policy. If temporary tax provisions are intended to provide an incentive for certain types of activity, then how effective is that incentive if it is allowed to lapse and must be reinstated retroactively? Should taxpayers operate on faith that Congress eventually will renew temporary tax provisions? It should be noted that faith in seamless extensions of the R&amp;D credit proved to be misplaced on one occasion, when Congress allowed a gap in the credit to occur from July 1, 1995 to June 30, 1996. Notwithstanding that rare experience of a gap in the R&amp;D credit, it is fair to say that most business taxpayers remained confident that Congress would renew the R&amp;D credit. In fact, the need to renew the R&amp;D credit, along with the temporary individual alternative minimum tax (AMT) exemption level ‘patch,’ often would serve as an ‘engine’ pulling tax extender legislation and other unrelated legislation through the House and Senate.    <div class="indented"><div class="indented">4</div></div> It is an open question whether taxpayers currently have as strong a level of confidence that Congress will renew temporary tax provisions that have expired recently or are scheduled to expire at the end of this year. The question being asked increasingly is what will be the engine or vehicle for action in 2019 on expired or expiring tax provisions? Today, renewable energy tax incentives may be serving a purpose comparable to the role played by the R&amp;D credit back in the early 1980s. Early stage development of solar, wind, and biofuel technologies have been promoted by a variety of tax incentives. There is an ongoing debate over whether current renewable tax incentives should be retained in their current form, phased out, or replaced with new ‘technology-neutral’ incentives. The potential positive role of renewable energy incentives nonetheless has been recognized by many economists. For example, the JCT staff in 20161 noted the economic rationale for certain energy tax expenditures in cases where purely market-based pricing signals have led to a lower level of investment in energy conservation or renewable energy production than is considered optimal for society in general. In such cases, JCT staff noted that tax preferences can encourage investment that benefits the American people in general and can address issues such as pollution where the costs are borne by society as a whole rather than by polluters themselves. This type of analysis seems applicable in the current discussion over how tax policy can potentially play a role in addressing the issue of climate change. The 2015 PATH Act as a model for addressing temporary tax provisions The 2015 PATH Act2 may offer a model to address expired or expiring tax provisions on a bipartisan basis because it included priorities of import to both parties, making some provisions permanent and extending other provisions for fixed periods. The PATH Act was the vehicle for business provisions such as increased Section 179 expensing for small business and the R&amp;D credit being made permanent, as noted earlier. In addition, the PATH Act made permanent certain temporary tax provisions benefitting children and families, including enhancements of the earned income tax credit (EITC) and child tax credit (CTC) and the American Opportunity Tax Credit, that were enacted in 2009. The Center on Budget and Policy Priorities projected in a 2015 report3 that more than 16 million individuals in low- and modest-income working families, including eight million children, would have fallen into -- or deeper into -- poverty if the expanded EITC and CTC provisions in particular had not been made permanent in 2015. The PATH Act extended for five years the Subpart F rule for look-through payments between related foreign controlled corporations, the work opportunity tax credit (WOTC), and the new markets tax credit, all set to expire at the end of 2019, as noted earlier. The 2015 Act also extended 30 other provisions   <ul><li>​Joint Committee on Taxation, ​Present Law And Analysis Of Energy-related Tax Expenditures​,JCX-46-16.</li></ul> 2 ​The Protecting Americans from Tax Hikes Act of 2015, P.L. 114-113. 3 ​Center on Budget and Policy Priorities, September 11, 2015.  <div class="indented"><div class="indented">5</div></div> through the end of the following year, in the expectation that tax reform legislation might address the long-term status of these provisions on a bipartisan basis in 2016. While the tax reform legislation enacted in 2017 provided some of the most significant changes to US tax law in more than 30 years, including globally competitive tax rates and ending the disincentive to repatriate foreign profits, the issue of expired or expiring tax provisions remains unresolved. As noted earlier, many provisions of the 2017 Act are effective on a temporary basis and will require further Committee consideration. Conclusion The design of tax policy is never simple, and building a tax system that is sustainable, given challenges at home and abroad, will be particularly difficult, but the Subcommittee has begun that effort with the hearing today. America is banking on your success. Thank you for the opportunity to participate.                                            <div class="indented"><div class="indented">6</div></div></div>

PwC Rep Says Predictability Is Important for Extenders

Among the considerations for tax policy are predictability, that enacting provisions with prospective instead of retroactive effects is more likely to incentivize behavior, and whether provisions promote economic growth, among others, Pamela F. Olson of PwC said at a March 12 House Ways and Means Committee panel hearing.

Among the considerations for tax policy are predictability, that enacting provisions with prospective instead of retroactive effects is more likely to incentivize behavior, and whether provisions promote economic growth, among others, Pamela F. Olson of PwC said at a March 12 House Ways and Means Committee panel hearing.