JCT Publishes Report on Temporary Tax Provisions

BACKGROUND RELATED TO CERTAIN TEMPORARY AND DISASTER RELIEF TAX PROVISIONS

Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION

May 16, 2019
JCX-22-19

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CONTENTS

INTRODUCTION

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INTRODUCTION

The Senate Committee on Finance has convened taskforces to consider certain Federal tax provisions that expired in 2017 or 2018, or that will expire by December 31, 2019, and certain temporary provisions related to disaster relief. This document,¹ prepared by the staff of the Joint Committee on Taxation, provides an overview of those Federal tax provisions.² This document describes the expired and expiring provisions in light of the December 2017 enactment of an Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (the “2017 Tax Act”).³ All the provisions discussed herein that expired in 2017 were scheduled to expire in 2016 and were extended through 2017 by the enactment in February 2018 of the Bipartisan Budget Act of 2018 (the “Bipartisan Budget Act”).⁴

The 2017 Tax Act repealed provisions of law that included two now-expired provisions. A provision treating Puerto Rico as part of the United States for purposes of the domestic production activities deduction under section 199⁵ expired in 2017. Similarly, a maximum 23.8-percent tax rate for qualified timber gain of corporations under section 1201 expired in 2017.⁶ For taxable years beginning after December 31, 2017, the 2017 Tax Act repealed sections 199 and 1201 in their entirety. For that reason, those two provisions are not included in this document.

A. Temporary Tax Policy and Uncertainty

If all future outcomes were certain, individuals would make choices that are different from those they make in the real world where they must reckon with uncertainty. For example, in such a world, insurance contracts would be neither offered nor purchased. Uncertainty generally reduces individual welfare and imposes costs. As a general matter, the greater the uncertainty, the greater the economic cost.

Because public policy affects economic choices that individuals make, uncertainty in the minds of individuals regarding the course of future public policy diminishes their well-being and may impose economic costs. Concern about the effect of economic policy uncertainty on outcomes has grown in recent years, perhaps in response to the perception that policy uncertainty has grown. Consistent with that perception, a number of uncertainty indices show that, over the last 50 years, policy uncertainty in the United States has increased.⁷ Broadly, economic policy uncertainty is thought to influence the behavior of individuals and businesses and may affect investment rates, employment growth, and stock price volatility in certain sectors.

Some empirical research shows that uncertainty in tax policy may have similarly negative effects, inefficiently reducing economic activity, depressing profits for businesses, and reducing individual well-being.⁸ While those effects seem intuitive, and are consistent with a basic understanding of markets and prices, a closer examination of the underlying economic principles shows that policy uncertainty may also, in certain cases, improve the efficiency of the tax system by altering prices in specific markets in specific ways.⁹

In a market economy with limited resources, prices play a crucial role in the efficient distribution of those limited resources. Prices act as signals for shortages and surpluses of resources, which help businesses and individuals make appropriate decisions about which goods to produce and consume and in what quantities. Taxes alter these signals, inducing different production and consumption decisions relative to the undistorted market economy. Sometimes these distortions are desired effects of policy and other times they are by-products of achieving other policy goals, but in most cases they reduce the efficiency of markets.¹⁰

Policymakers may design temporary policy notwithstanding that it may create policy uncertainty, in cases where they want to experiment with new ideas (e.g., through pilot programs), make the policies more appealing to voters, form winning political coalitions, or extend benefits to help protect new technologies in infant industries until they become sufficiently established to survive without subsidies.

Another important question is what constitutes uncertainty in this setting.¹¹ Both timing and expectations affect the extent to which any particular policy is truly uncertain. Changes to tax policy may occur before or after irreversible decisions are made, and they may be expected or unexpected. Over the past several decades, the Congress has enacted a number of Code provisions with a sunset date after which the provision would no longer apply. For example, since 2014, the staff of the Joint Committee on Taxation has reported that, each year, an average of 52 provisions would expire within the current year or by the subsequent year.¹² The possibility that any one provision may expire may create uncertainty among many taxpayers. However, some temporary tax policies are routinely extended, and are therefore often expected to be extended. A statutorily temporary policy that is expected to be extended may have economic effects that are similar to a permanent policy, rather than an uncertain one.¹³

B. Employment and Community Development

Congress has enacted a number of tax provisions related to employment of disadvantaged populations and community development in disadvantaged areas of the United States. Some policies target individuals, providing incentives for employers to hire and raise wages for certain groups of people.¹⁴ However, those people-based policies may face obstacles, such as low participation by employers, and may not in all cases effectively target low-income families. Other policies target specific geographic areas by using eligibility criteria based on locational characteristics. While place-based policies do not always target disadvantaged areas, they often do.

Place-based policies that target disadvantaged communities aim to alleviate problems associated with such disadvantage. Research shows that high-poverty neighborhoods are associated with high unemployment rates, low wages, and low wage growth,¹⁵ and living, working, or going to school in such neighborhoods has an array of negative effects, including adverse health outcomes,¹⁶ lower educational achievement,¹⁷ and lower intergenerational mobility.¹⁸

One of the key goals of place-based policies is to seek to provide incentives for job creation and wage growth.¹⁹ A longstanding explanation for high unemployment in disadvantaged neighborhoods is the spatial mismatch hypothesis, according to which housing discrimination may segregate disadvantaged workers into residential neighborhoods with fewer jobs nearby, and that inadequate transportation to jobs in other areas leads fewer residents to choose to work, especially low-wage workers for whom commuting may be especially costly.²⁰ This explanation implies that increasing employment and reducing poverty in disadvantaged neighborhoods may require job creation and hiring of local residents within disadvantaged neighborhoods or investments in transportation infrastructure to neighboring areas with better employment opportunities, or both.

An important consideration in designing place-based policies is potential spillover effects. In this context, spillovers (which may be positive or negative) are the ways in which place-based policies may affect neighborhoods other than those directly targeted. For example, hiring credits may increase hiring in one locality by simply moving jobs from a second locality to the first. In this case, the second locality experiences negative spillover effects as a result of the place-based policy (i.e., the hiring credits). On the other hand, a reallocation of jobs from one neighborhood to another may result in positive spillovers if the reallocation generates gains in output from agglomeration economies,²¹ which then benefit the entire region through higher income levels and public spending.

Effective place-based policies may also include efforts to boost State and local capacity to raise revenue, and, relatedly, create incentives for quality investments in local public goods such as health, education, housing, and transportation infrastructure.²² These incentives, if temporary, may be made less effective by increasing uncertainty and disrupting long-term planning.

1. Indian employment tax credit (sec. 45A)

• The provision allows a credit to employers against income tax liability for the first $20,000 of qualified wages and qualified employee health insurance costs paid or incurred by the employer with respect to certain employees. The credit is equal to 20 percent of the excess of eligible employee qualified wages and health insurance costs incurred during the current year over the amount of such wages and costs incurred by the employer during 1993. The credit is an incremental credit, such that an employer's current-year qualified wages and qualified employee health insurance costs (up to $20,000 per employee) are eligible for the credit only to the extent that the sum of such costs exceeds the sum of comparable costs paid during 1993. The provision expired for taxable years beginning after December 31, 2017.

• The provision was enacted in the Omnibus Reconciliation Act of 1993²³ and did not apply to taxable years beginning after December 31, 2003.

• The provision has been extended nine times, most recently by the Bipartisan Budget Act.

2. New markets tax credit (sec. 45D)

• The provision allows a credit in the aggregate amount of 39 percent of qualified investments in order to attract private capital to promote economic and community development in low-income communities. The credit is allowed over seven years, five percent in each of the first three years and six percent in each of the next four years.

• In general, the credit is allowed to a taxpayer who makes a “qualified equity investment” in a “qualified community development entity” (“CDE”), which further invests in a “qualified active low-income community business.” The credit is recaptured if the entity fails to continue to be a CDE or the interest is redeemed within seven years.

• The provision was enacted in the Community Renewal Tax Relief Act of 2000.²⁴ The credit applied to investments made after December 31, 2000, and $15 billion of credits were allocated through 2007.

• In 2005, an additional $1 billion of credits were allocated for qualified areas affected by Hurricane Katrina over a period of three years in the Gulf Opportunity Zone Act of 2005.²⁵ In 2006 and again in 2008, another $3.5 billion of credits were allocated in the Tax Relief and Health Care Act of 2006,²⁶ and in the Tax Extenders and Alternative Minimum Tax Relief Act of 2008.²⁷ In 2009, an additional $3 billion of credits were allocated to be split equally between the 2008 (retroactively) and 2009 allocations in the American Recovery and Reinvestment Act of 2009.²⁸

• The provision was extended four times since 2009, most recently by the Consolidated Appropriations Act, 2016.²⁹ That law provided for an allocation limit of $3.5 billion in each of 2015, 2016, 2017, 2018, and 2019, and extended for five years, through 2024, the carryover period for unused new markets tax credits.

3. Mine rescue team training credit (sec. 45N)

• The mine rescue training credit is a general business credit available with respect to each qualified mine rescue team employee employed by the taxpayer equal to the lesser of: (1) 20 percent of the amount paid or incurred by the taxpayer during the taxable year with respect to the training program costs of each qualified mine rescue team employee (including the wages of the employee while attending the program), or (2) $10,000. The provision expired for taxable years beginning after December 31, 2017.

• The provision was enacted in the Tax Relief and Health Care Act of 2006³⁰ and was effective for tax years beginning after December 31, 2005, and before January 1, 2009.

• The provision has been extended six times, most recently by the Bipartisan Budget Act.

4. Work opportunity tax credit (sec. 51)

• The work opportunity tax credit (“WOTC”) provides an elective general business credit to employers hiring individuals who are members of one or more of ten targeted groups. Generally, the maximum credit per employee is $2,400 (40 percent of the first $6,000 of qualified first-year wages), but special rules apply for certain targeted groups. To claim the credit, an employer must have the employee certified as eligible by the appropriate State workforce agency. Amounts paid or incurred to individuals who begin work for an employer after December 31, 2019 are not qualified first-year wages.

• The provision was enacted in the Small Business Job Protection Act of 1996³¹ for wages paid or incurred to a qualified individual who began work for an employer before October 1, 1997. The credit was enacted to replace the targeted jobs tax credit.

• The provision was been modified multiple times since enactment to add, subtract, or refine the targeted groups, to change the maximum credit levels, and to make other modifications. In particular, WOTC has been used to target specific populations following certain national events, including New York Liberty Zone business employees following the September 11, 2001, terrorist attacks³² and Hurricane Katrina employees following the 2005 hurricane.³³ Beginning in 2007, the welfare-to-work tax credit was repealed and the credit's eligible population was incorporated into the WOTC population.³⁴

• The provision has been extended 12 times,³⁵ most recently by the Consolidated Appropriations Act, 2016.³⁶

5. Empowerment zone tax incentives (secs. 1391(d)(1)(A)(i) and (h)(2), 1394, 1396, 1397A, and 1397B)

• The empowerment zone tax incentives are intended to encourage economic growth and investment in distressed communities by providing Federal tax incentives to businesses located within the designated geographic areas. There are 40 areas designated as empowerment zones. The tax incentives available within the designated empowerment zones³⁷ include tax-exempt bond financing,³⁸ a Federal income tax credit for employers who hire qualifying employees,³⁹ accelerated depreciation deductions on qualifying equipment under section 179,⁴⁰ and deferral of capital gains tax on sale of qualified assets sold and replaced.⁴¹ The tax incentives generally expire after December 31, 2017.

• The empowerment zone tax incentives were enacted in the Omnibus Budget Reconciliation Act of 1993,⁴² which authorized the designation of nine empowerment zones (“Round I empowerment zones”) to be designated by the Secretaries of the Department of Housing and Urban Development and the Department of Agriculture. These designations were to be made after 1993 and before 1996 and terminated upon the earliest of (i) the close of the tenth calendar year beginning on or after such date of designation, (ii) the termination date designated by the State and local governments as provided for in their nomination, or (iii) the date the appropriate Secretary revoked the designation.

• The Taxpayer Relief Act of 1997⁴³ authorized the designation of two additional Round I urban empowerment zones, and 20 additional empowerment zones (“Round II empowerment zones”). These designations were to be made after the date of the enactment and before January 1, 1999. The Community Renewal Tax Relief Act of 2000 (“Renewal Act”)⁴⁴ authorized a total of 10 new empowerment zones (“Round III empowerment zones”). These designations were to be made after the date of the enactment and before January 1, 2002. The designations were generally to remain in effect during the period beginning on January 1, 2002, and ending on December 31, 2009. In addition, the Renewal Act conformed the tax incentives that are available to businesses in the Round I, Round II, and Round III empowerment zones, added some additional tax incentives (deferral of capital gains tax on sale of qualified assets sold and replaced under section 1397B and partial exclusion of capital gains tax on certain sales of qualified small business stock), raised the expensing limitation on qualifying equipment under section 1397, and generally extended all of the empowerment zone incentives through December 31, 2009.

• The empowerment zone tax benefits were extended five times, most recently by the Bipartisan Budget Act. The empowerment zone tax incentives may expire earlier than December 31, 2017, if a State or local government provided for an expiration date in the nomination of an empowerment zone or the appropriate Secretary revokes an empowerment zone's designation. The State or local government may, however, amend the nomination to provide for a new termination date.

6. American Samoa economic development credit (sec. 119 of Pub. L. No. 109-432, as amended)

• The American Samoa economic development credit is a credit against U.S. corporate income tax for domestic corporations with operations in American Samoa. The credit is available to domestic corporations that claimed the now-expired section 936 possessions tax credit with respect to American Samoa for its last taxable year beginning before January 1, 2006, and for other domestic corporations with operations in American Samoa for taxable years beginning after December 31, 2011. The credit expired for taxable years beginning after December 31, 2017.

• The provision was enacted in the Tax Relief and Health Care Act of 2006⁴⁵ and originally applied to the first two taxable years of a corporation that began after December 31, 2005, and before January 1, 2008.⁴⁶ The credit was available only to domestic corporations that claimed the now-expired section 936 possessions tax credit. For years beginning before December 31, 2011, the amount of the credit is equal to the sum of certain percentages of a domestic corporation's employee wages, employee fringe benefit expenses, and tangible property depreciation allowances for the taxable year in respect of the active conduct of a trade or business in American Samoa.

• The American Taxpayer Relief Act of 2012⁴⁷ modified the provision for taxable years beginning after December 31, 2011 to permit corporations that were not existing claimants of the former section 936 credit to claim the credit and to require that all claimants have qualified production activities income in American Samoa within the meaning of former section 199(c).

• The provision has been extended six times, most recently by the Bipartisan Budget Act.

C. Health Tax

1. Credit for health insurance costs of eligible individuals (sec. 35)

• The provision (commonly referred to as the health coverage tax credit or “HCTC”) allows certain individual taxpayers a refundable credit equal to 72.5 percent of the premiums paid by the individual for coverage of the individual and qualifying family members under qualified health insurance. Advance monthly payments paid directly to the health plan administrator are available.⁴⁸ The HCTC is only allowed for amounts paid for eligible coverage months. An eligible coverage month is any month if (1) the month begins before January 1, 2020, and (2) as of the first day of the month, (i) the individual is an eligible individual, (ii) is covered by qualified health insurance, the premium for which is paid by the individual, (iii) does not have other specified coverage, and (iv) is not imprisoned under Federal, State, or local authority. In the case of a joint return, the eligibility requirements are met if at least one spouse satisfies the requirements.

• An eligible individual is an individual who is (1) an eligible Trade Adjustment Assistance (“TAA”) recipient, (2) an eligible alternative TAA recipient, or (3) an eligible Pension Benefit Guaranty Corporation pension recipient, all as defined in the provision.

• The provision was enacted a part of the Trade Act of 2002⁴⁹ effective for taxable years beginning after December 31, 2001 and for eligible coverage months beginning after November 4, 2002.⁵⁰ As initially enacted, the HCTC was equal to 65 percent of the premiums paid.

• The provision has been modified several times, most significantly by the American Recovery and Reinvestment Act,⁵¹ which temporarily increased the HCTC to 80 percent of the premiums paid and made certain other changes to the eligibility criteria.⁵² The Trade Adjustment Assistance Extension Act of 2011⁵³ lowered the HCTC to the current amount of 72.5 percent of the premiums paid. That Act also made the provision temporary by terminating the HCTC for eligible coverage months beginning after December 31, 2013.

• The provision has been extended once by the Trade Adjustment Assistance Reauthorization Act of 2015,⁵⁴ which extended the HCTC to eligible coverage months beginning before January 1, 2020.

2. Employer credit for paid family and medical leave (sec. 45S)

• For taxable years beginning before January 1, 2020, the employer credit for paid family and medical leave permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave, as defined for this purpose. The credit is equal to 12.5 percent of eligible wages if the rate of payment is 50 percent of such wages, and is increased by 0.25 percentage points (but not above 25 percent) for each percentage point that the rate of payment exceeds 50 percent. The maximum amount of family and medical leave that may be taken into account with respect to any qualifying employee is 12 weeks per taxable year. Among other requirements, to claim the credit, employers must have a written policy in place that provides at least two weeks of paid family and medical leave to all qualifying employees at a rate of payment that is at least 50 percent of wages normally paid to the employee. A qualifying employee generally means an employee who has been employed by the employer for at least one year and did not earn compensation above a certain threshold in the preceding year (for the 2018 taxable year, this threshold was $72,000).

• The provision was enacted as part of the 2017 Tax Act,⁵⁵ effective for wages paid in taxable years beginning after December 31, 2017.

3. Medical expense deduction: 7.5 percent adjusted gross income (“AGI”) floor (sec. 213)

• For taxable years ending before January 1, 2019, individuals may claim an itemized deduction for unreimbursed medical expenses paid during the taxable year to the extent that the expenses exceed 7.5 percent of AGI for purposes of regular tax and the alternative minimum tax (“AMT”). For taxable years ending after December 31, 2018, the deduction is available to the extent such expenses exceed 10 percent of AGI.

• An itemized deduction for unreimbursed medical expenses above a specified floor has been allowed since 1942. The Patient Protection and Affordable Care Act⁵⁶ created a temporary specified floor of 7.5 percent of AGI for regular tax purposes if the taxpayer or taxpayer's spouse attained the age of 65 before the close of the taxable year for taxable years beginning after December 31, 2012, and beginning before January 1, 2017. For all other taxpayers and for AMT purposes, the floor was 10 percent of AGI.

• The 2017 Tax Act reduced the floor to 7.5 percent of AGI for all taxpayers for taxable years beginning after December 31, 2016, and ending before January 1, 2019, for regular tax and AMT purposes.

• The 7.5-percent floor applicable if a taxpayer or taxpayer's spouse has attained the age of 65 has been extended one time as part of the overall reduction in the floor enacted in the 2017 Tax Act.

4. Black Lung Disability Trust Fund: increase in amount of excise tax on coal (sec. 4121)

• For sales before January 1, 2019, there was a temporary increase in the tax rates on coal: $1.10 per ton of underground-mined coal or $0.55 per ton of surface-mined coal, not to exceed 4.4 percent of the sales price. For sales after December 31, 2018, those tax rates revert to the rates established in 1977: $0.50 per ton of underground-mined coal or $0.25 per ton of surface-mined coal, not to exceed two percent of the sales price.

• The Black Lung Benefits Revenue Act of 1977⁵⁷ first imposed the excise tax on coal. The tax was effective for sales after March 31, 1978.

• The Black Lung Benefits Revenue Act of 1981⁵⁸ temporarily doubled the excise tax rates to $1.00 per ton for coal from underground mines and $0.50 per ton for coal from surface mines, not to exceed four percent of the sales price. The doubled rates were effective January 1, 1982, and were scheduled to revert to the previous rates on January 1, 1996. The Consolidated Omnibus Budget Reconciliation Act of 1985⁵⁹ temporarily increased the rates to $1.10 for underground-mined coal and $0.55 for surface-mined coal, not to exceed 4.4 percent of the sales price. The Omnibus Budget Reconciliation Act of 1987⁶⁰ extended those rates through 2013. The increased excise tax rates on coal were again extended through 2018 as part of the Emergency Economic Stabilization Act of 2008.⁶¹

5. Medical device excise tax (sec. 4191)

• For sales after December 31, 2012, excluding sales during the period beginning on January 1, 2016, and ending on December 31, 2019, a tax equal to 2.3 percent of the sale price is imposed on the sale of any taxable medical device by the manufacturer, producer, or importer of such device. A taxable medical device generally is any device, as defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act,⁶² intended for humans. Regulations further define a taxable medical device as one that is listed by the Food and Drug Administration (“FDA”) under section 510(j) of the Federal Food, Drug, and Cosmetic Act and 21 C.F.R. Part 807, pursuant to FDA requirements.⁶³ The excise tax does not apply to eyeglasses, contact lenses, hearing aids, or any other medical device determined by the Secretary to be of a type that is generally purchased by the general public at retail for individual use.

• The provision was enacted in the Patient Protection and Affordable Care Act,⁶⁴ and applies to any sale of a taxable medical device during the period beginning after December 31, 2012, and ending on December 31, 2015, as well as any sale of a taxable medical device after December 31, 2019.

• A moratorium on the provision was enacted in the Consolidated Appropriations Act, 2016,⁶⁵ which provided that the excise tax would not apply to sales during the period beginning January 1, 2016, and ending on December 31, 2017.

• The moratorium on the provision has been extended once by the Extension of Continuing Appropriations Act, 2018,⁶⁶ which extended the moratorium to include sales during the period beginning January 1, 2018, and ending on December 31, 2019.

6. Specified health insurance policy fee (sec. 4375)

• For policy years ending before September 30, 2019, the provision imposes a fee on each specified health insurance policy equal to the product of $2 multiplied by the average number of lives covered under the policy. For fiscal years beginning after September 30, 2014, the dollar amount is adjusted for increases in health care spending. The fee is paid by the issuer of the policy, and helps fund the Patient-Centered Outcomes Research Trust Fund established under section 9511.

• The provision was enacted in the Patient Protection and Affordable Care Act,⁶⁷ and applies to each specified health insurance policy for each policy year ending after September 30, 2012, for policy years ending before September 30, 2019.

• The provision has not previously been extended.

7. Self-insured health plan fee (sec. 4376)

• For plan years ending before September 30, 2019, the provision imposes a fee on any applicable self-insured health plan equal to the product of $2 multiplied by the average number of lives covered under the plan. For fiscal years beginning after September 30, 2014, the dollar amount is adjusted for increases in health care spending. The fee is paid by the plan sponsor, and helps fund the Patient-Centered Outcomes Research Trust Fund established under section 9511.

• The provision was enacted in the Patient Protection and Affordable Care Act,⁶⁸ and applies to any applicable self-insured health plan for each plan year ending after September 30, 2012, for plan years ending before September 30, 2019.

• The provision has not previously been extended.

D. Energy

Congress has enacted many tax provisions related to energy production (including oil and gas and renewables) and conservation. Generally, policymakers offer two broad rationales for intervention in the energy market and for using tax policy to help effectuate these policy goals.

One policy rationale is to promote domestic energy independence. Some have argued that decreasing the dependence of the United States on foreign-source energy is desirable for geopolitical and national defense reasons. The oil embargo of the 1970s imposed economic costs on the U.S. economy. Mitigating the potential of similar energy supply disruptions in the future has motivated various policies both to increase domestic energy production from multiple sources, including fossil fuels and alternative energy, and to promote conservation in energy consumption. Some have argued that using tax policy to achieve these objectives has the advantage of using the market economy, with taxpayers responding to the economic incentives created by the tax policy, instead of programs requiring applications to and grants from the Federal government.

A second rationale for government intervention in certain markets (including many aspects of energy markets) is the presence of “externalities” in the consumption or production of certain goods. Externalities exist when, in the consumption or production of a good, there is a difference between the cost (or benefit) to an individual and the cost (or benefit) to society as a whole. These externalities lead to “market failures” wherein the mismatch between individual and social costs (or benefits) result in the purely market-based outcome providing either too little or too much of certain economic activity, relative to what is socially optimal. Thus, tax preferences that encourage more or less consumption or production, as appropriate, can help to achieve increases in economic efficiency by moving consumption or production toward the socially optimal level.

The externality that is generally the subject of concern for energy markets is pollution. Pollution is considered a negative externality because the producers of pollution generally do not bear the full costs of pollution to society, thus resulting in the production of a larger amount of pollution than is socially optimal. Many economists agree that the most efficient means of addressing pollution is a direct tax on pollution-causing activities,⁶⁹ rather than through the indirect approach of targeted tax credits for certain technologies.⁷⁰ A direct tax on pollution-causing activity is technology neutral, meaning that it does not favor any particular technology that individuals may choose to use, or any particular behavioral modification that individuals may choose to make, in their pollution-reducing responses to the tax.

Rather than taking this direct approach, many energy-related Federal tax incentives provide targeted tax credits for investment in, or expenditures on, certain assets that reduce, directly or indirectly, the consumption of conventional fuels and the attendant negative externalities. Likewise, if promoting energy independence is a policy rationale, a collection of disparate tax benefits in favor of specific approaches to conservation and specific sources of increased supply achieves the goal at a greater cost to the government because of the economic inefficiency created by the distortion of the markets for energy-conserving goods and services and energy production.

Ideally, the design of these tax benefits would be coordinated to try to mimic the more economically efficient outcome that a broad-based tax would provide. Some criticize the current system of incentives as a set of disparate provisions that lack not only this coordination but also well-defined objectives, and further argue that the temporary nature of the incentives and uncertainty regarding renewal or extension reduces their efficacy by disrupting long-term planning.⁷¹

1. Credit for certain nonbusiness energy property (sec. 25C)

• For property placed in service before January 1, 2018, the provision allows a credit of 10 percent of the expenditures on energy-efficient improvements to the building envelope (windows, doors, skylights, and roofs) of principal residences, and credits of fixed dollar amounts ranging from $50 to $300 for energy-efficient property including furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditioners, and circulating fans. It is subject to a lifetime cap of $500.

• The provision was first enacted in the Energy Policy Act of 2005⁷² for property placed in service after December 31, 2005, and before January 1, 2008.

• The provision was substantially modified in the American Recovery and Reinvestment Tax Act of 2009,⁷³ with the principal change being an increase in the credit amounts to 30 percent of expenditures on all qualifying property, up to a $1,500 aggregate credit over two years for 2009 and 2010. This modification was not included in the most recent extension of the provision.

• The provision has been extended seven times, most recently by the Bipartisan Budget Act.

2. Alternative motor vehicle credit for qualified fuel cell motor vehicles (sec. 30B(b))

• For purchases made before January 1, 2018, a credit is available for vehicles propelled by chemically combining oxygen with hydrogen and creating electricity. The base credit is $4,000 for vehicles weighing 8,500 pounds or less. For heavier vehicles, a credit of up to $40,000 may be allowed. An additional $1,000 to $4,000 credit is available for purchases of cars and light trucks to the extent their fuel economy exceeds the 2002 base fuel economy set forth in the Code.

• The provision was enacted as part of the Energy Policy Act of 2005⁷⁴ through December 31, 2014.

• The original provision included incentives for hybrid electric vehicles, lean burn diesel vehicles, and other incentives. These elements of the provision have all expired, generally in 2009, 2010, and 2011.

• The provision has been extended twice, most recently by the Bipartisan Budget Act.

3. Credit for alternative fuel vehicle refueling property (sec. 30C)

• For property placed in service before January 1, 2018, a 30-percent credit is available for property that dispenses alternative fuels, including ethanol, biodiesel, natural gas, hydrogen, and electricity. The credit may not exceed $30,000 per location for business property and $1,000 for property installed at a principal residence.

• The provision was enacted as part of the Energy Policy Act of 2005⁷⁵ effective for property placed in service after December 31, 2005, in tax years ending after such date, and before January 1, 2010 (January 1, 2015 for hydrogen refueling property).

• The provision has been extended six times, most recently by the Bipartisan Budget Act.

4. Credit for two-wheeled plug-in electric vehicles (sec. 30D)

• A 10-percent credit (up to $2,500) is available for purchases of vehicles otherwise qualifying as plug-in electric-drive vehicles but which have only two wheels and which are acquired before January 1, 2018. Such two-wheeled vehicles must have a battery capacity of at least 2.5 kilowatt-hours.

• The provision was enacted (and originally codified under section 30) as part of the American Recovery and Reinvestment Tax Act of 2009⁷⁶ through December 31, 2011.

• The credit was originally available for two- and three-wheeled vehicles but lapsed for calendar year 2014. It was prospectively extended (for two-wheeled vehicles only) from January 1, 2015, through December 31, 2016, by the Consolidated Appropriations Act, 2016.⁷⁷

• The provision was most recently extended by the Bipartisan Budget Act.

5. Second generation biofuel credit (formerly known as the “cellulosic biofuel producer credit”) (sec. 40(b)(6))

• The provision provides for a $1.01-per-gallon income tax credit (nonrefundable) for qualified second generation biofuel sold at retail into the fuel tank of a buyer's vehicle, or second generation biofuel mixed with gasoline or a special fuel and sold or used as a fuel (not limited to transportation fuel). The provision expires for fuel produced after December 31, 2017.

• The provision was enacted as part of the Heartland, Habitat, Harvest, and Horticulture Act of 2008⁷⁸ for qualified cellulosic biofuel production after December 31, 2008, and before January 1, 2013.

• The Health Care and Education Reconciliation Act of 2010⁷⁹ amended the cellulosic biofuel production credit to exclude fuels exceeding certain water and/or sediment content (such as black liquor). In addition, the Creating Small Business Jobs Act of 2010⁸⁰ amended the provision to exclude certain fuels exceeding certain acidity levels (such as crude tall oil). The American Tax Relief Act of 2012⁸¹ renamed the credit the “second generation biofuel producer credit” and added algae, cyanobacteria, and lemna as qualifying feedstocks.

• The provision has been extended four times, most recently by the Bipartisan Budget Act.

6. Incentives for biodiesel and renewable diesel (secs. 40A, 6426(c), and 6427(e))

The incentives for biodiesel and renewable diesel consist of four components:

Biodiesel

• The biodiesel fuels credit is the sum of three credits: (1) the biodiesel mixture credit ($1.00 per gallon of biodiesel used by the taxpayer in the production of a qualified biodiesel mixture), (2) the biodiesel credit ($1.00 per gallon of biodiesel that is not in a mixture with diesel fuel), and (3) the small agri-biodiesel producer credit (10 cents per gallon for up to 15 million gallons of agri-biodiesel produced by small producers). The credits may be taken as income tax credits and the biodiesel mixture credit may be taken as an excise tax payment or credit.

• The biodiesel provision was enacted in the American Jobs Creation Act⁸² and originally expired on December 31, 2006.

• The provision was subsequently modified and extended by the Energy Tax Incentives Act of 2005⁸³ which added small agri-biodiesel producer income tax credit and extended the incentives through December 31, 2008. The provision was amended by the Energy Improvement and Extension Act of 2008,⁸⁴ which equalized credit for biodiesel and agri-biodiesel at $1.00, clarified that fuel produced outside the United States for use outside the United States was ineligible for the credit, and extended the incentives through December 31, 2009.

• The provision has been extended seven times, most recently by the Bipartisan Budget Act.

Renewable diesel

• Renewable diesel is treated the same as biodiesel for purposes of the Code, except there is no small producer credit.

• The renewable diesel provision was added by the Energy Tax Incentives Act of 2005⁸⁵ and was limited to fuel made using a thermal depolymerization process and was originally to expire December 31, 2008.

• The Energy Improvement and Extension Act of 2008⁸⁶ removed the requirement that renewable diesel be made using a thermal depolymerization process, gave the Secretary authority to approve fuel standards equivalent to the requirements of American Society of Testing Materials (“ASTM”) D975 or D396 for purposes of renewable diesel, provided that military jet fuel and ASTM aviation turbine fuel qualified as renewable diesel, provided that renewable diesel could not be coprocessed with a feedstock that is not biomass as defined in section 45K(c)(3) (e.g., crude oil), and extended the incentive through December 31, 2009.

• The provision has been extended six times, most recently by the Bipartisan Budget Act.

7. Credit for electricity produced from certain renewable resources (secs. 45 and 48(a)(5))

• A production tax credit is available for electricity produced from certain renewable resources during the 10-year period beginning after the related renewable power facility has been placed in service. The credit rate is adjusted annually for inflation and for 2017 is 2.4 cents per kilowatt hour for power produced at wind, closed-loop biomass and geothermal facilities and 1.2 cents per kilowatt hour for power produced at open-loop biomass, small irrigation power, municipal solid waste, marine/hydrokinetic, and certain hydropower facilities. The credit for nonwind facilities expires for facilities the construction of which begins after December 31, 2017. The credit for wind facilities expires for facilities the construction of which begins after December 31, 2019. The credit for wind facilities is subject to a phasedown whereby the total credit is reduced by 20 percent for facilities the construction of which begins in calendar year 2017, by 40 percent for facilities the construction of which begins in calendar year 2018, and by 60 percent for facilities the construction of which begins in calendar year 2019.

• Taxpayers may elect to claim a 30-percent investment tax credit in lieu of a production tax credit with respect to property placed in service at a qualified facility. Property used in wind facilities for which this election has been made are subject to the phasedown described above.

• The provision was enacted as part of the Energy Policy Act of 1992⁸⁷ at which time only electricity produced at qualified wind and closed-loop biomass facilities were credit-eligible. The credit originally expired for facilities placed in service after June 30, 1999.

• The credit has been extended and modified many times. Major modifications (listed below) occurred in 1999, 2004, 2005, and 2008. The Ticket to Work and Work Incentives Improvement Act of 1999⁸⁸ extended the credit and added poultry waste facilities placed in service after 1999 as qualified renewable power facilities. The American Jobs Creation Act of 2004⁸⁹ extended the credit and added open-loop biomass (which subsumed poultry waste), solar power, small irrigation power, and municipal solid waste as qualified renewable power resources. Facilities producing power using these resources were only eligible for five years of credit. In addition, the credit rate for power from such facilities was half the rate for electricity produced at qualified wind and closed-loop biomass facilities. The Energy Policy Act of 2005⁹⁰ extended the credit (except for solar power facilities), increased the credit period to 10 years for all qualified facilities, and added qualified hydropower facilities to the list of credit-eligible facilities. The Energy Improvement and Extension Act of 2008⁹¹ extended the credit and added marine and hydrokinetic renewable energy as a qualified resource. The American Recovery and Reinvestment Tax Act of 2009⁹² added the election to claim a 30-percent investment credit in lieu of a production credit, for facilities placed in service after December 31, 2008. The Consolidated Appropriations Act, 2016,⁹³ extended the credit for two years, through 2016, for nonwind facilities and for five years, through 2019 but subject to the phasedown, for wind facilities.

• The nonwind portions of the provision were most recently extended by the Bipartisan Budget Act.

8. Credit for production of Indian coal (sec. 45(e)(10))

• A $2-per-ton credit (adjusted for inflation; $2.423 per ton for 2017) is available through December 31, 2017, for coal produced from reserves that on June 14, 2005, were owned by (or held in trust by the United States on behalf of) an Indian tribe.

• The provision was enacted as part of the Energy Policy Act of 2005⁹⁴ through December 31, 2012.

• The provision has been extended four times, most recently by the Bipartisan Budget Act.

9. Credit for construction of new energy efficient homes (sec. 45L)

• A credit of $1,000 or $2,000 per home (depending on efficiency standard met) is provided to the contractor or manufacturer for each certified energy efficient new home acquired from the contractor or manufacturer before January 1, 2018.

• The provision was first enacted in the Energy Policy Act of 2005⁹⁵ for new homes constructed in 2006 and 2007.

• The provision has been extended seven times, most recently by the Bipartisan Budget Act.

10. Special depreciation allowance for second generation biofuel plant property (sec. 168(l))

• The provision allows an additional first-year depreciation deduction equal to 50 percent of the adjusted basis of qualified second generation biofuel plant property that is used in the United States solely to produce second generation biofuel and if (1) the original use of the property commences with the taxpayer on or after December 20, 2006, (2) the property is to be acquired by purchase by the taxpayer after the date of enactment, but only if no written binding contract for the acquisition was in effect on or before such date, (3) the property is placed in service before January 1, 2018, and (4) no portion of the property is financed with the proceeds of a tax-exempt bond obligation. For this purpose, second generation biofuel means any liquid fuel which is derived from qualified feedstocks and meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency under section 211 of the Clean Air Act. “Qualified feedstocks” means any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis, and any cultivated algae, cyanobacteria, or lemna.

• The provision was enacted in the Tax Relief and Health Care Act of 2006⁹⁶ for cellulosic biomass ethanol plant property placed in service after December 20, 2006, and before January 1, 2013.

• The provision has been extended four times, most recently by the Bipartisan Budget Act.

• The 2017 Tax Act provides 100-percent bonus depreciation (subject to a phasedown) for qualified property acquired and placed in service after September 27, 2017.⁹⁷ Qualified property includes MACRS property with an applicable recovery period of 20 years or less, and therefore generally includes qualified second generation biofuel plant property.

11. Special rule for sales or dispositions to implement Federal Energy Regulatory Commission (“FERC”) or State electric restructuring policy (sec. 451(k))

• The provision allows a taxpayer that is a qualified electric utility to elect to recognize gain from a qualifying electric transmission transaction ratably over an eight-year period beginning in the year of sale if the amount realized from such sale is used to purchase exempt utility property within the applicable period. The provision does not apply to transactions occurring after December 31, 2017.

• The provision was enacted (originally as section 451(i)) as part of the American Jobs Creation Act of 2004⁹⁸ and was effective for transactions occurring between October 23, 2004 and December 31, 2007.

• The provision has been extended seven times, most recently by the Bipartisan Budget Act.

• The 2017 Tax Act redesignated this provision as section 451(k) as a result of other amendments made to section 451.

12. Incentives for alternative fuel and alternative fuel mixtures (secs. 6426(d) and (e), and 6427(e))

• The provision provides for a 50-cents-per gallon excise tax credit or payment for certain alternative fuel used as fuel in a motor vehicle, motor boat, or airplane, and a 50-cents-per gallon credit for alternative fuel mixed with a traditional fuel (gasoline, diesel, or kerosene) for use as a fuel (not limited to transportation applications). The credits expire for fuel sold or used after December 31, 2017.

• The provision was enacted in the Safe, Accountable, Flexible, Efficient Transportation Equity Act of 2005⁹⁹ and expired on September 30, 2009 (September 30, 2014, in the case of hydrogen fuel). The provision was subsequently modified in the Tax Technical Corrections Act of 2007.¹⁰⁰ The original provision provided a credit for fuel that was a “liquid hydrocarbon derived from biomass.” The credit was intended to cover fish oil, which contains oxygen, and is not exclusively composed of hydrogen and carbon. The modification changed “liquid hydrocarbon” to “liquid fuel.”

• The provision was modified in the Energy Improvement and Extension Act of 2008¹⁰¹ which extended the non-hydrogen incentives through December 31, 2009, clarified that fuel produced outside the United States for use outside the United States was ineligible for the credit, added compressed or liquefied biomass gas to the list of alternative fuels, allowed credit for aviation use, and added a carbon capture requirement for liquid fuel derived from coal through the Fischer-Tropsch process (coal to liquids). The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010¹⁰² excluded from credit eligibility any fuel derived from the production of paper or pulp (including lignin, wood residues, or spent pulping liquor).¹⁰³

• The provision has been extended six times, most recently by the Bipartisan Budget Act.

E. Cost Recovery

Economic output may be understood as the product of labor supply and average labor productivity. Capital investment affects economic output by influencing average labor productivity. A primary way tax policy can promote capital investment is by lowering the user cost of capital, which is the opportunity cost that a firm (user) incurs as a consequence of owning a capital asset.¹⁰⁴ Lower statutory income tax rates and greater tax depreciation deductions both tend to lower the user cost of capital.

While taxes may affect economic output directly as discussed above, taxes may also affect output levels indirectly by influencing how efficiently resources, such as capital, are allocated in the economy. As economic resources are allocated more efficiently (i.e., are increasingly directed to their most productive use), average labor productivity increases. Taxes generally lead to economy-wide distortions that reduce economic efficiency, but in some cases taxes can correct for market failures and thereby increase economic efficiency. The effect of taxes on economic efficiency depends on both the nature of the tax and the economic activity being taxed.

To the extent extensions of expired cost-recovery provisions reduce differences in marginal tax rates across different types of investment, they may promote a more efficient allocation of resources by eliminating preferential treatment of certain activities over others and by reducing the scope of distortionary behavioral responses to taxation. If the provisions do not correct market failures, however, they may create or exacerbate preferential treatment of certain activities over others, causing an inefficient allocation of resources. A less efficient allocation of resources leaves society with a lower level of output of goods and services than it would enjoy in the absence of the distortions caused by the tax system.

The 2017 Tax Act generally reduced the top marginal corporate income tax rate from 35 percent to 21 percent¹⁰⁵ and generally reduced marginal individual income tax rates. A reduction in marginal income tax rates generally reduces the value to taxpayers of an exclusion or deduction from gross income, and reduces by the same amount the revenue cost to the government of providing such exclusion or deduction.

The extension of expired cost recovery provisions would interact with the cost recovery provisions of the 2017 Tax Act. To the extent expired provisions relate to property that is eligible for the special allowance for depreciation (commonly referred to as “bonus depreciation”), the revenue cost of extension is diminished during the period in which such property would otherwise be eligible for bonus depreciation, as is any economic effect on the level of investment in such property.

1. Credit for certain expenditures for maintaining railroad tracks (sec. 45G)

• A business tax credit is allowed for 50 percent of qualified railroad track maintenance expenditures paid or incurred by an eligible taxpayer during taxable years beginning before January 1, 2018. Qualified railroad track maintenance expenditures are gross expenditures (whether or not otherwise chargeable to capital account) for maintaining railroad track (including roadbed, bridges, and related track structures) owned or leased as of January 1, 2015, by a Class II or Class III railroad (determined without regard to any consideration for such expenditure given by the Class II or Class III railroad that made the assignment of such track). The credit is limited to the product of $3,500 times the number of miles of railroad track (1) owned or leased by an eligible taxpayer as of the close of its taxable year, and (2) assigned to the eligible taxpayer by a Class II or Class III railroad that owns or leases such track at the close of the taxable year. An eligible taxpayer is any Class II or Class III railroad, and any person (including a Class I railroad) that transports property using the rail facilities of a Class II or Class III railroad or that furnishes railroad-related property or services to a Class II or Class III railroad, but only with respect to miles of railroad track assigned to such person by such railroad under the provision.

• The provision was enacted in the American Jobs Creation Act of 2004¹⁰⁶ for qualified railroad track maintenance expenditures paid or incurred during taxable years beginning after December 31, 2004, and before January 1, 2008.

• The Gulf Opportunity Zone Act of 2005¹⁰⁷ clarified that (1) Class II and Class III railroads that operate track under a lease are not required to obtain assignment from the track owner in order to utilize or assign the credit; (2) a Class I railroad is not treated as a Class II or Class III railroad for purposes of the credit (and is not eligible to claim the credit with respect to track it owns) by reason of performing track maintenance services (on the same or different track) for a Class II or Class III railroad; (3) a track mile may be assigned only once per tax year, effective as of the close of the tax year; (4) any track mile assigned may not also be taken into account by the assignor taxpayer for the tax year; and (5) an assigned track mile is taken into account by the assignee in the tax year that includes the effective date of the assignment.

• The Tax Relief and Healthcare Act of 2006¹⁰⁸ modified the definition of qualified railroad track expenditures, so that the term means gross expenditures (whether or not otherwise chargeable to capital account) for maintaining railroad track (including roadbed, bridges, and related track structures) owned or leased as of January 1, 2005, by a Class II or Class III railroad (determined without regard to any consideration for such expenditures given by the Class II or Class III railroad that made the assignment of such track), effective for expenditures paid or incurred in taxable years beginning after December 31, 2004, and before January 1, 2008.

• The Tax Extenders and Alternative Minimum Tax Relief Act of 2008¹⁰⁹ permitted the railroad track maintenance credit to reduce a taxpayer's tax liability below its tentative minimum tax, effective for credits determined under section 45G in taxable years beginning after December 31, 2007, and to carrybacks of such credits.

• The Consolidated Appropriations Act, 2016¹¹⁰ modified the definition of qualified railroad track maintenance expenditures to include gross expenditures (whether or not otherwise chargeable to capital account) for maintaining railroad track (including roadbed, bridges, and related track structures) owned or leased as of January 1, 2015, by a Class II or Class III railroad (determined without regard to any consideration for such expenditure given by the Class II or Class III railroad that made the assignment of such track), effective for expenditures paid or incurred in taxable years beginning after December 31, 2015.

• The Bipartisan Budget Act provided a safe harbor rule that allows assignments, including related expenditures paid or incurred, for taxable years ending after January 1, 2017, and before January 1, 2018, to be treated as effective as of the close of that taxable year if made pursuant to a written agreement entered into no later than May 10, 2018.

• The provision has been extended six times, most recently by the Bipartisan Budget Act.

2. Three-year depreciation for race horses two years old or younger (sec. 168(e)(3)(A)(i))

• The provision assigns a recovery period of three years for any race horse placed in service prior to January 1, 2018, that is two years old or younger at the time it is placed in service. Subsequently, the three-year recovery period for race horses will only apply to those that are more than two years old when placed in service by the purchaser after December 31, 2017, and a seven-year recovery period will apply to those that are two years old or younger when placed in service after such date.

• The provision was enacted in the Heartland, Habitat, Harvest, and Horticulture Act of 2008¹¹¹ for property placed in service after December 31, 2008, and before January 1, 2014.

• The provision has been extended three times, most recently by the Bipartisan Budget Act.

• The 2017 Tax Act provides 100-percent bonus depreciation (subject to a phasedown) for qualified property acquired and placed in service after September 27, 2017.¹¹² Qualified property includes MACRS property with an applicable recovery period of 20 years or less, and therefore generally includes race horses, regardless of age when placed in service.

3. Seven-year recovery period for motorsports entertainment complexes (sec. 168(e)(3)(C)(ii) and (i)(15))

• The provision assigns a seven-year recovery period for any motorsports entertainment complex placed in service prior to January 1, 2018. A motorsports entertainment complex is a racing track facility that (i) is permanently situated on land, and (ii) during the 36-month period following its placed-in-service date hosts one or more racing events for automobiles (of any type), trucks, or motorcycles that are open to the public for the price of admission. The term motorsports entertainment complex also includes ancillary facilities, land improvements (e.g., parking lots, sidewalks, waterways, bridges, fences, and landscaping), support facilities (e.g., food and beverage retailing, souvenir vending, and other nonlodging accommodations), and appurtenances associated with such facilities and related attractions and amusements (e.g., ticket booths, race track surfaces, suites and hospitality facilities, grandstands and viewing structures, props, walls, facilities that support the delivery of entertainment services, other special purpose structures, facades, shop interiors, and buildings). Such ancillary and support facilities must be owned by the taxpayer who owns the complex and be provided for the benefit of patrons of the complex. A motorsports entertainment complex does not include any transportation equipment, administrative services assets, warehouses, administrative buildings, hotels, or motels.

• The provision was enacted in the American Jobs Creation Act of 2004¹¹³ for property placed in service after October 22, 2004, and before January 1, 2008.

• The provision has been extended six times, most recently by the Bipartisan Budget Act.

• The 2017 Tax Act provides 100-percent bonus depreciation (subject to a phasedown) for qualified property acquired and placed in service after September 27, 2017.¹¹⁴ Qualified property includes MACRS property with an applicable recovery period of 20 years or less, and therefore generally includes motorsports entertainment complexes placed in service before 2018. After 2017, a racing track facility will have to determine the proper recovery period on an asset-by-asset basis as racing track assets are placed in service (e.g., a 39-year recovery period will generally apply to the stadium and a 15-year recovery period will generally apply to any land improvements). Racing track facility assets with a recovery period of 20 years or less will generally be eligible for bonus depreciation if placed in service before January 1, 2027.

4. Accelerated depreciation for business property on an Indian reservation (sec. 168(j))

• The provision provides the following accelerated recovery periods for certain property used in connection with the conduct of a trade or business within an Indian reservation and placed in service before January 1, 2018:

3-year property	2 years
5-year property	3 years
7-year property	4 years
10-year property	6 years
15-year property	9 years
20-year property	12 years
Nonresidential real property	22 years115

• “Qualified Indian reservation property” eligible for accelerated depreciation includes property described in the table above that is: (1) used by the taxpayer predominantly in the active conduct of a trade or business within an Indian reservation; (2) not used or located outside the reservation on a regular basis; (3) not acquired (directly or indirectly) by the taxpayer from a person who is related to the taxpayer; and (4) is not property placed in service for purposes of conducting gaming activities. Certain “qualified infrastructure property” may be eligible for the accelerated depreciation even if located outside an Indian reservation, provided that the purpose of such property is to connect with qualified infrastructure property located within the reservation (e.g., roads, power lines, water systems, railroad spurs, and communications facilities). The depreciation deduction allowed for regular tax purposes is also allowed for purposes of the alternative minimum tax. A taxpayer may annually make an irrevocable election out of section 168(j) on a class-by-class basis.

• The provision was enacted in the Omnibus Budget Reconciliation Act of 1993¹¹⁶ for property placed in service after December 31, 1993 and before January 1, 2004.

• The provision was modified by the Taxpayer Relief Act of 1997,¹¹⁷ which clarified the definition of “Indian reservation” and made such language generally effective as if included in the Omnibus Budget Reconciliation Act of 1993.

• The provision was modified by the Consolidated Appropriations Act, 2016,¹¹⁸ which provided that a taxpayer may annually make an irrevocable election out of section 168(j) on a class-by-class basis for qualified Indian reservation property placed in service in taxable years beginning after December 31, 2015.

• The Tax Technical Corrections Act of 2018¹¹⁹ clarified that if a taxpayer elects out of the otherwise applicable accelerated recovery periods for qualified Indian reservation property, no alternative minimum tax adjustment applies.

• The provision has been extended nine times, most recently by the Bipartisan Budget Act.

• The 2017 Tax Act provides 100-percent bonus depreciation (subject to a phasedown) for qualified property acquired and placed in service after September 27, 2017.¹²⁰ Qualified property includes MACRS property with an applicable recovery period of 20 years or less, and therefore generally includes qualified Indian reservation property other than nonresidential real property.

5. Energy efficient commercial buildings deduction (sec. 179D)

• A deduction of up to $1.80 per square foot of the building is allowed for the cost of energy efficient commercial building property relating to the (1) building envelope, (2) lighting, or (3) HVAC systems for buildings that meet specific energy standards, for property placed in service before January 1, 2018. If the entire building does not meet the specific energy standards, a partial deduction of up to $0.60 per square foot may be allowed for qualifying expenditures in each of the building subsystems listed above. If qualified property is installed on or in government-owned property the deduction may be allocated to the person primarily responsible for designing the property in lieu of the owner.

• The provision was first enacted in the Energy Policy Act of 2005¹²¹ for property placed in service after December 31, 2005, and before January 1, 2008.

• The provision has been extended five times, most recently by the Bipartisan Budget Act.

• The 2017 Tax Act provides section 179 expensing for certain qualified real property (i.e., roofs, HVAC, fire protection and alarm systems, and security systems).

6. Election to expense advanced mine safety equipment (sec. 179E)

• The provision allows a taxpayer to elect to treat 50 percent of the cost of any qualified advanced mine safety equipment property as an expense in the taxable year in which the equipment is placed in service. Qualified advanced mine safety equipment property means any advanced mine safety equipment property for use in any underground mine located in the United States the original use of which commences with the taxpayer and which is placed in service before January 1, 2018. Advanced mine safety equipment property means any of the following: (1) emergency communication technology or devices used to allow a miner to maintain constant communication with an individual who is not in the mine; (2) electronic identification and location devices that allow individuals not in the mine to track at all times the movements and location of miners working in or at the mine; (3) emergency oxygen-generating, self-rescue devices that provide oxygen for at least 90 minutes; (4) pre-positioned supplies of oxygen providing each miner on a shift the ability to survive for at least 48 hours; and (5) comprehensive atmospheric monitoring systems that monitor the levels of carbon monoxide, methane, and oxygen that are present in all areas of the mine and that can detect smoke in the case of a fire in a mine.

• The provision was enacted by the Tax Relief and Health Care Act of 2006¹²² for costs paid or incurred after December 20, 2006, and property placed in service before January 1, 2009.

• The provision has been extended six times, most recently by the Bipartisan Budget Act.

• The 2017 Tax Act provides 100-percent bonus depreciation (subject to a phasedown) for qualified property acquired and placed in service after September 27, 2017.¹²³ Qualified property includes MACRS property with an applicable recovery period of 20 years or less, and therefore generally includes mine safety equipment.

7. Expensing of certain qualified film and television and live theatrical productions (sec. 181)

• The provision allows taxpayers to elect to deduct up to $15 million of the aggregate production costs ($20 million if a significant amount of the production costs are incurred in areas eligible for designation as a low-income community or eligible for designation by the Delta Regional Authority as a distressed county or isolated area of distress) of any qualified film, television, or live theatrical production commencing prior to January 1, 2018, in the year the costs are paid or incurred by the taxpayer, in lieu of capitalizing the costs and recovering them through depreciation allowances once the production is placed in service. A qualified film, television, or live theatrical production means any production of a motion picture (whether released theatrically or directly to video cassette or any other format), television program, or live-staged play if at least 75 percent of the total compensation expended on the production is for services performed in the United States by actors, directors, producers, and other relevant production personnel.

• The provision was enacted in the American Jobs Creation Act of 2004¹²⁴ for qualified film and television productions commencing after October 22, 2004, and before January 1, 2009.

• The Gulf Opportunity Zone Act of 2005¹²⁵ clarified that the $15-million production cost limitation and the 75-percent qualified compensation requirement are determined for television series on an episode-by-episode basis (not an aggregate basis), and added rules for recapture as ordinary income of the deduction under section 181 in a manner similar to the recapture rules applicable to expensing under section 179.

• The Tax Extenders and Alternative Minimum Tax Relief Act of 2008¹²⁶ modified the dollar limitation such that the first $15 million ($20 million for productions in low-income communities or distressed area or isolated area of distress) of an otherwise qualified film or television production may be treated as an expense in cases where the aggregate cost of the production exceeds the dollar limitation. This modification applies to qualified film and television productions commencing after December 31, 2007.

• The Consolidated Appropriations Act, 2016¹²⁷ expanded eligible productions to include qualified live theatrical productions commencing after December 31, 2015. A qualified live theatrical production means any live-staged production of a play (with or without music) that is derived from a written book or script and is produced or presented by a taxable entity in any venue which has an audience capacity of not more than 3,000, or a series of venues the majority of which have an audience capacity of not more than 3,000, if at least 75 percent of the total compensation expended on the production was for services performed in the United States by actors, production personnel, directors, and producers. In addition, qualified live theatrical productions include any live-staged production which is produced or presented by a taxable entity no more than 10 weeks annually in any venue that has an audience capacity of not more than 6,500.

• The provision has been extended six times, most recently by the Bipartisan Budget Act.

• The 2017 Tax Act expands qualified property eligible for 100-percent bonus depreciation (subject to a phasedown) to include qualified film, television, and live theatrical productions acquired and placed in service after September 27, 2017, for which a deduction otherwise would have been allowable under section 181 without regard to the dollar limitation or termination of such section.¹²⁸ A qualified production is considered placed in service at the time of initial release, broadcast, or live-staged performance (i.e., at the time of the first commercial exhibition, broadcast, or live-staged performance of a production to an audience).

F. Individual, Excise Taxes, and Other Temporary Policies

1. Discharge of indebtedness on principal residence excluded from gross income of individuals (sec. 108(a)(1)(E))

• A maximum exclusion from gross income of $2,000,000 is provided for any discharge of indebtedness income by reason of a discharge (in whole or in part) of qualified principal residence indebtedness. In general, the discharged indebtedness eligible for the exclusion must be indebtedness incurred in the acquisition, construction, or substantial improvement of the principal residence of the individual and secured by the residence. The provision does not apply to discharges after December 31, 2017, or to discharges subject to an arrangement that is entered into and evidenced in writing after such date.

• The provision was enacted in the Mortgage Forgiveness Debt Relief Act of 2007¹²⁹ and effective for discharges of indebtedness occurring on or after January 1, 2007, and before January 1, 2010.

• The provision has been extended five times, most recently by the Bipartisan Budget Act.

2. Premiums for mortgage insurance deductible as interest that is qualified residence interest (sec. 163(h)(3)(E))

• Premiums paid or accrued for qualified mortgage insurance by a taxpayer during the taxable year in connection with acquisition indebtedness on a principal residence or second home of the taxpayer is treated as if it were deductible qualified residence interest. The deduction is phased out for taxpayers with adjusted gross income over $100,000 ($50,000 if married filing separately). The provision does not apply to amounts paid or accrued after December 31, 2017, or properly allocable to any period after such date.

• The provision was enacted in the Tax Relief and Health Care Act of 2006¹³⁰ with respect to mortgage contracts issued after December 31, 2006, effective for amounts paid or accrued after December 31, 2006, and before January 1, 2008, that are properly allocable to such period.

• The provision has been extended six times, most recently by the Bipartisan Budget Act.

• The 2017 Tax Act modified the deduction for home mortgage interest such that a taxpayer may claim a deduction for interest paid on up to $750,000 of acquisition indebtedness, for indebtedness incurred after December 15, 2017. For indebtedness incurred on or before December 15, 2017, the deduction may be claimed with respect to interest paid on up to $1,000,000 in acquisition indebtedness.

3. Above-the-line deduction for qualified tuition and related expenses (sec. 222)

• An individual is allowed an above-the-line deduction for qualified tuition and related expenses for higher education paid by the individual during the taxable year. The maximum deduction is $4,000 for taxpayers with adjusted gross income of $65,000 or less ($130,000 for joint filers) and $2,000 for taxpayers with adjusted gross income above $65,000 ($130,000 for joint filers) but less than or equal to $80,000 ($160,000 for joint filers). No deduction is allowed for taxpayers with adjusted gross income above $80,000 ($160,000 for joint filers). The provision expired for taxable years beginning after December 31, 2017.

• Because both the American Opportunity credit (in the case of tuition for the first four years of post-secondary education) and the Lifetime Learning credit (in the case of tuition paid for all post-secondary education) are permanent features of the Code, and generally offer taxpayers a larger tax benefit than the tuition deduction, many taxpayers use those provisions rather than the deduction for tuition.¹³¹

• The provision was enacted in Economic Growth and Tax Relief Reconciliation Act of 2001¹³² for payments made in taxable years beginning after December 31, 2001, and before January 1, 2006.

• The provision has been extended seven times, most recently by the Bipartisan Budget Act.

4. Look-through treatment of payments between related controlled foreign corporations under the foreign personal holding company rules (sec. 954(c)(6)(C))

• Certain payments of dividends, interest, rents, and royalties that would otherwise be included in foreign personal holding company income (and thus subpart F income) may be excepted if the payments are received from a related controlled foreign corporation and are properly attributable and allocable to income of the payor that is neither subpart F income nor treated as effectively connected to a U.S. trade or business. The provision expires for taxable years of foreign corporations beginning after December 31, 2019, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.

• The provision was enacted in the Tax Increase Prevention and Reconciliation Act of 2005,¹³³ for taxable years of foreign corporations beginning after December 31, 2005, and before January 1, 2009, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end.

• The provision has been extended five times, most recently in the Consolidated Appropriations Act, 2016.¹³⁴

5. Excise taxes on beer, wine, and distilled spirits

a. Special rule for the production period for beer, wine, and distilled spirits (sec. 263A(f)(4))

• For interest costs paid or accrued before January 1, 2020, the provision excludes the aging periods for beer,¹³⁵ wine,¹³⁶ and distilled spirits¹³⁷ from the production period used for purposes of the interest capitalization rules. Under the provision, producers of beer, wine, and distilled spirits are able to deduct interest (subject to any other applicable limitation) attributable to a shorter production period that does not include the aging period of the beer, wine, or distilled spirits.

• The provision was enacted in the 2017 Tax Act for interest costs paid or accrued after December 31, 2017, and before January 1, 2020.

• The provision has not previously been extended.

b. Provisions modifying the rates of taxation of beer and certain other rules (secs. 5051 and 5414)

• Section 5051 imposes an excise tax on beer. Liability for the excise tax on beer arises when the beer is brewed or imported but is not determined and payable until the beer is removed from the brewery or customs custody for consumption or sale. In the case of brewers who produce fewer than two million barrels of beer during a calendar year, the first 60,000 barrels domestically produced is taxed at a lower rate.

• The 2017 Tax Act temporarily reduces the excise tax rate on beer per barrel from $18 per barrel to $16 per barrel on the first six million barrels brewed or imported and then $18 per barrel on barrels brewed or imported in excess of that amount. In the case of brewers who satisfy the two-million-barrel limitation, the 2017 Tax Act temporarily further reduces the excise tax rate on the first 60,000 barrels domestically produced from $7 per barrel to $3.50 per barrel. The reduced excise tax rates on beer are in effect for beer removed after December 31, 2017, and before January 1, 2020.

• Section 5414 allows beer to be removed from one brewery to another brewery belonging to the same brewer without payment of tax. The 2017 Tax Act temporarily relaxes these shared ownership requirements and allows beer to be transferred from one brewery to an unrelated brewery without payment of tax, provided that the transferee brewery accepts responsibility for the ultimate payment of tax. This provision is in effect for any calendar quarters beginning after December 31, 2017, and before January 1, 2020.

• The provisions have not previously been extended.

c. Provisions modifying the rates of taxation of wine and certain other rules (sec. 5041)

• Section 5041 imposes an excise tax on wine. Liability for the excise tax on wine arises when the wine is produced or imported but is not determined and payable until the wine is removed from the bonded wine cellar or winery or customs custody for consumption or sale. Excise taxes on wine are imposed on the wine according to the wine's alcohol content and carbonation levels. Wine producers who produce not more than 250,000 wine gallons of wine during the calendar year are allowed a 90-cents-per-gallon credit against the wine excise tax on the first 100,000 gallons of non-sparkling wine domestically produced and removed during a calendar year.¹³⁸

• The 2017 Tax Act temporarily modifies the credit against wine excise tax to a credit, available to all wine producers, domestic or foreign, of $1.00 per wine gallon for the first 30,000 wine gallons, 90 cents per wine gallon on the next 100,000 wine gallons, and 53.5 cents per wine gallon on the next 620,000 wine gallons.¹³⁹

• The 2017 Tax Act also temporarily allows the credit against wine excise tax to be applied to the tax liability on sparkling wine.

• The 2017 Tax Act also temporarily increases the allowed alcohol by volume for the lowest tier of the excise tax on wine from 14 percent of alcohol by volume to 16 percent of alcohol by volume.

• The 2017 Tax Act also temporarily designates mead and certain sparkling, low-alcohol-by-volume wines to be taxed at the lowest rate of excise tax on wine.

• The 2017 Tax Act changes apply for wine removed after December 31, 2017, and before January 1, 2020.

• The provision has not previously been extended.

d. Provisions modifying the rates of taxation of distilled spirits and certain other rules (secs. 5001 and 5212)

• Section 5001 imposes an excise tax on distilled spirits. Liability for the excise tax on distilled spirits arises when the distilled spirits are produced or imported but is not determined and payable until bottled distilled spirits are removed from the bonded premises of the distilled spirits plant or from customs custody for consumption or sale.

• The 2017 Tax Act temporarily reduces the excise tax on distilled spirits from $13.50 per proof gallon to $2.70 per proof gallon on the first 100,000 proof gallons of distilled spirits produced, $13.34 for all proof gallons in excess of that amount but below 22,130,000 proof gallons, and $13.50 thereafter. The reduced excise tax on distilled spirits applies to distilled spirits, produced domestically or abroad, removed after December 31, 2017, and before January 1, 2020.

• Section 5212 allows distillers to transfer bulk distilled spirits between bonded premises without payment of tax. The 2017 Tax Act temporarily allows distillers to transfer distilled spirits in bond in containers other than bulk containers without payment of tax, for distilled spirits transferred in bond after December 31, 2017, and before January 1, 2020.

• The provisions have not previously been extended.

e. Simplification of rules regarding records, statements, and returns (sec. 5555)

• The provision imposes a requirement that persons liable for the excise tax on beer, wine, and distilled spirits keep certain records, render statements, and make returns as prescribed by regulation. The Bipartisan Budget Act temporarily modifies this provision by allowing brewers to employ a unified system for any records, statements, and returns required to be kept, rendered, or made under the section, for calendar quarters beginning after February 9, 2018 (the date of enactment), and before January 1, 2020.

• The provision has not previously been extended.

6. Oil Spill Liability Trust Fund financing rate (sec. 4611)

• Before December 31, 2018, the Oil Spill Liability Trust Fund financing rate (the “oil spill tax”) was nine cents per barrel and generally applied to crude oil received at a U.S. refinery and to petroleum products entered into the United States for consumption, use, or warehousing.

• The oil spill tax was enacted at five cents per barrel by the Omnibus Budget Reconciliation Act of 1989.¹⁴⁰ The tax applied from January 1, 1990, through December 31, 1994.

• The oil spill tax was temporarily reinstated at five cents per barrel by the Energy Policy Act of 2005.¹⁴¹ The tax took effect on April 1, 2006, and was scheduled to expire after December 31, 2014. The Emergency Economic Stabilization Act of 2008¹⁴² extended the tax through December 31, 2017, and increased the rate generally to eight cents per barrel and, for calendar year 2017 only, to nine cents per barrel.

• The oil spill tax was most recently extended by the Bipartisan Budget Act.

G. Disaster Tax Relief

Congress has often provided targeted tax relief for individuals and businesses affected by certain major disasters. The form of tax relief has varied, but generally disaster-relief tax provisions attempt to provide monetary relief to affected taxpayers and to encourage investment in areas with affected taxpayers.

By simultaneously increasing a taxpayer's expenses (e.g., by damaging or destroying a taxpayer's property) while decreasing a taxpayer's income (e.g., by damaging or destroying a taxpayer's place of employment), disasters may leave many taxpayers with limited resources in a time of need. For that reason, for many recent major disasters, Congress has provided individual income tax relief, such as allowing penalty-free withdrawals from retirement plans, providing more generous treatment of personal casualty losses, and allowing income smoothing for determining earned income for purposes of the earned income tax credit (“EITC”) and the additional child tax credit (“ACTC”).

As disasters may damage or destroy businesses and homes in affected areas, various disaster-relief tax provisions have attempted to direct investment to areas affected by disasters to support rebuilding efforts. For example, both the Gulf Opportunity Zone Act of 2005¹⁴³ and the Heartland Disaster Tax Relief Act of 2008¹⁴⁴ had provisions relating to tax-exempt bonds and the low-income housing tax credit (“LIHTC”), which were tied to specific areas affected by major disasters.

One question is whether Congress should address each disaster individually or whether the Code should include a set of permanent disaster-relief tax provisions. An argument against permanent provisions is that each disaster is unique and may affect taxpayers and local economies in different ways, requiring in each case a targeted approach. Additionally, the appetite for tax expenditures may differ across time. For example, the Gulf Opportunity Zone Act of 2005 had provisions relating to tax-exempt bonds, LIHTC, penalty-free withdrawals from retirement plans, personal casualty losses, and income smoothing for purposes of the EITC and ACTC (all described above), as well as special rules for expensing and net operating loss carrybacks for small timber producers, among many others. By contrast, the Disaster Tax Relief and Airport and Airway Extension Act of 2017,¹⁴⁵ which similarly applied to hurricanes affecting the Eastern United States, enacted only the provisions dealing with penalty-free withdrawals, casualty losses, and income smoothing.

An argument for a set of permanent disaster-relief tax provisions is that taxpayers would know with certainty what tax relief to expect in the event they were affected by a disaster. Permanent provisions triggered by executive declarations of major disasters also would accelerate the provision of relief; in the absence of permanent provisions, taxpayers must wait for Congressional action, which may, for many reasons be delayed. Finally, the more recent disaster-relief tax provisions have been substantially identical. For example, the disaster-relief tax provisions in the Bipartisan Budget Act of 2018¹⁴⁶ are the same as those in the Disaster Tax Relief and Airport and Airway Extension Act of 2017, but applicable to different major disasters.

Another consideration is whether tax relief is the most efficient way to provide disaster relief. While disaster-relief tax provisions can be viewed as complementary to Federal Emergency Management Agency (“FEMA”) individual assistance and other forms of Federal disaster relief, the tax system in particular may not be the best or fastest way to provide cash to affected individuals and businesses. While those individuals with tax liability may be able to adjust withholding to take immediate advantage of tax relief, refundable tax credits are paid only after filing a tax return the next year. Provisions that allow individual taxpayers to access their own tax-advantaged accounts without penalty, such as retirement funds, only assist those with sufficient funds in tax-advantaged accounts and may undermine the original purpose of the tax-advantaged account (i.e., to encourage saving for retirement). If cash assistance is the most direct way to address short-term liquidity constraints of affected individuals and businesses, policymakers may want to direct Federal resources to increase the amount and speed of delivery of individual assistance paid by FEMA or reduce the interest rate on low-interest disaster loans from the U.S. Small Business Administration, rather than using Federal resources for tax relief.

A third consideration is finding the appropriate trigger for disaster-relief tax provisions. Congress has generally provided disaster relief only to disasters for which a major disaster has been declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the “Disaster Relief Act”). There may be smaller-scale events that do not receive major disaster status or do not receive any Federal disaster declaration. While those events may affect fewer taxpayers, they may nonetheless greatly affect certain taxpayers. In such cases losses to affected taxpayers may be as large as those caused by major disasters.

The provisions discussed below are standard provisions that have been enacted in response to several recent major disasters. The provisions use certain terms such as qualified disaster area, qualified disaster zone, qualified disaster, and incident period.¹⁴⁷ A qualified disaster area is an area with respect to which a major disaster has been declared by the President during a specified time period under section 401 of the Disaster Relief Act. A qualified disaster zone is that portion of the applicable qualified disaster area that has been determined by the President to warrant individual or individual and public assistance from the Federal government under the Disaster Relief Act by reason of the applicable qualified disaster. A qualified disaster is, with respect to the applicable qualified disaster area, the disaster by reason of which a major disaster was declared with respect to such area. The incident period is, with respect to the applicable qualified disaster, the period specified by FEMA as the period during which such disaster occurred.

1. Special disaster-related rules for use of retirement funds (secs. 72(t), 165, 401-403, 408, 457, and 3405)

• A distribution from an eligible retirement plan¹⁴⁸ generally is included in income in the year distributed. In addition, unless an exception applies for distributions before retirement, an additional 10-percent early withdrawal tax applies to the distribution.¹⁴⁹ Employer-sponsored retirement plans may also provide loans to participants that are subject to various requirements in both form and operation (to avoid treatment as deemed distributions from the plan), including that the loan amount generally must not exceed the lesser of 50 percent of the participant's account balance or $50,000 (taking into account outstanding balances of previous loans), and that the loan's terms must provide for a repayment period generally not exceeding five years (except for a loan to purchase a home) and for level amortization of loan payments to be made not less frequently than quarterly.¹⁵⁰

• The provision provides various relief as follows. First, eligible retirement plans may permit “qualified disaster distributions,” and such distributions are excepted from the 10-percent early withdrawal tax. A qualified disaster distribution only applies to a “qualified individual” (an individual whose principal place of abode at any time during the incident period is located in the qualified disaster area and who has sustained an economic loss as a result of the qualified disaster) and must be made during the period beginning on or after the first day of the incident period and ending 180 days after the provision becomes effective. Qualified disaster distributions cannot exceed $100,000 for any taxable year, less any such amounts received by the individual for all prior taxable years. Second, unless an individual elects otherwise, the individual includes income attributable to a qualified disaster distribution ratably over three years. Third, an individual may recontribute the amount of previously received qualified disaster distributions to an eligible retirement plan within three years. Fourth, if an individual received a distribution that is subject to certain requirements during a certain period (beginning 180 days before the first day of the incident period and ending 30 days after the last day of the incident period) that was to be used to purchase or construct a principal residence in a qualified disaster area, but such residence was not so purchased or constructed on account of the qualified disaster, then during the period beginning on the first day of the incident period and ending 180 days after the provision becomes effective, the individual may recontribute such amounts to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made. Fifth, the provision increases the permitted maximum amount of plan loans for a qualified individual to the lesser of 100 percent of the participant's account balance or $100,000, for loans made during the 180-day period after the provision becomes effective, and the loan continues not to be treated as a distribution. Finally, in the case of a qualified individual who has an outstanding plan loan on or after the first day of an incident period with a repayment due date that occurs during the period beginning on or after the first day of the incident period and ending 180 days after the last day of such incident period, the provision delays the repayment due date for one year and adjusts any subsequent repayments to reflect such delay (but the repayment delay is disregarded in determining the five-year repayment period and term of the loan).

• Versions of this provision have been enacted in connection with specific disasters, including: Hurricanes Katrina, Rita, and Wilma;¹⁵¹ the 2007 Kansas storms and tornadoes;¹⁵² the 2008 Midwestern floods;¹⁵³ certain disasters occurring in 2016;¹⁵⁴ Hurricanes Harvey, Irma, and Maria;¹⁵⁵ and certain California wildfires.¹⁵⁶

2. Employee retention credit for employers affected by qualified disasters (sec. 38)

• The provision provides a credit of 40 percent of the qualified wages (up to a maximum of $6,000 in qualified wages per employee) paid by an eligible employer to an eligible employee. The credit is treated as a current year business credit under section 38(b) and therefore is subject to the tax liability limitations of section 38(c).

• An eligible employer is any employer that (1) conducted an active trade or business in a qualified disaster zone at any time during the incident period of the qualified disaster with respect to such qualified disaster zone and (2) with respect to which the trade or business described in (1) is inoperable on any day during the period beginning on the first day of the incident period of the qualified disaster and ending on a specified date, as a result of damage sustained by reason of the qualified disaster. An eligible employee is, with respect to an eligible employer, an employee whose principal place of employment, determined immediately before the qualified disaster, with such eligible employer was in the qualified disaster zone. An employee may not be treated as an eligible employee for any period with respect to an employer if such employer is allowed a credit under section 51, the work opportunity credit, with respect to the employee for the period.

• Qualified wages are wages¹⁵⁷ paid or incurred by an eligible employer with respect to an eligible employee during the period (1) beginning on the date on which the trade or business first became inoperable at the principal place of employment of the employee immediately before the qualified disaster and (2) ending on the earlier of (i) the date on which such trade or business has resumed significant operations at such principal place of employment or (ii) a date that is a specified number of days after the end of the disaster period. Qualified wages include wages paid without regard to whether the employee performs no services, performs services at a different place of employment than such principal place of employment, or performs services at such principal place of employment before significant operations have resumed.

• Versions of this provision have been enacted in connection with specific disasters, including: Hurricanes Katrina, Rita, and Wilma;¹⁵⁸ the 2008 Midwestern floods;¹⁵⁹ Hurricanes Harvey, Irma, and Maria;¹⁶⁰ and certain California wildfires.¹⁶¹

3. Other disaster-related tax relief provisions

a. Temporary increase in limitation on qualified contributions (sec. 170)

• Taxpayers generally are permitted to deduct charitable contributions for federal income tax purposes. Charitable contributions by an individual taxpayer for a year are limited to a specified percentage of the individual's contribution base, which is the taxpayer's adjusted gross income for the year computed without regard to any net operating loss carryback to the year. The specified percentage ranges from 20 percent to 60 percent, depending on the type of property contributed and the type of donee organization. Charitable contributions by a corporate taxpayer generally are limited to 10 percent of the corporation's taxable income for the year.

• The provision temporarily suspends the applicable percentage limits for qualified contributions. A qualified contribution generally means a charitable contribution (within the meaning of section 170(c)) if: (1) the contribution is paid in cash during the specified time period to an organization described in section 170(b)(1)(A) (generally, a “public charity”), other than a contribution to a supporting organization described in section 509(a)(3) or a donor advised fund as defined in section 4966(d)(2); (2) the contribution is made for relief efforts in one or more qualified disaster areas; (3) the taxpayer obtains appropriate substantiation of the contribution; and (4) the taxpayer has elected application of the provision with respect to the contribution. Excess qualified contributions in a year generally may be carried forward to the next five succeeding years.

• Versions of this provision have been enacted in connection with specific disasters, including: Hurricanes Katrina, Rita, and Wilma;¹⁶² the 2008 Midwestern floods;¹⁶³ Hurricanes Harvey, Irma, and Maria;¹⁶⁴ and certain California wildfires.¹⁶⁵

b. Special rules for disaster-related personal casualty losses (sec. 165)

• An individual taxpayer may claim an itemized deduction for a personal casualty loss only if such loss was attributable to a disaster declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act. All other personal casualty losses are deductible only to the extent that such losses do not exceed the individual's personal casualty gains. Personal casualty losses attributable to a Federally-declared disaster are deductible only if they exceed $100 per casualty. In addition, aggregate net losses attributable to a Federally-declared disaster are deductible only to the extent they exceed 10 percent of the individual taxpayer's adjusted gross income.

• The provision provides that, in the case of a personal casualty loss that arose in a qualified disaster area on or after the first day of the incident period of the qualified disaster and that was attributable to such qualified disaster, such losses are deductible without regard to whether aggregate net losses exceed 10 percent of a taxpayer's adjusted gross income. In order to be deductible, however, the losses must exceed $500 per casualty. Finally, such losses may be claimed in addition to the standard deduction and may be claimed by taxpayers subject to the alternative minimum tax.

• Versions of this provision have been enacted in connection with specific disasters, including: Hurricanes Katrina, Rita, and Wilma;¹⁶⁶ the 2008 Midwestern floods;¹⁶⁷ Hurricanes Harvey, Irma, and Maria;¹⁶⁸ and certain California wildfires.¹⁶⁹

c. Special rule for determining earned income (secs. 24 and 32)

• Individual taxpayers may be eligible to claim the earned income tax credit (“EITC”) and the child tax credit (“CTC”). The amount of the EITC is in part based on the earned income of the taxpayer. The amount of the additional child tax credit (i.e., the refundable portion of the CTC) is also based on the earned income of the taxpayer. For purposes of both the EITC and additional child tax credit, earned income generally includes wages, salaries, tips, and other employee compensation, plus net earnings from self-employment.

• The provision permits qualified individuals to elect to calculate their EITC and additional child tax credit for an applicable taxable year using their earned income from the prior taxable year. Qualified individuals are permitted to make the election with respect to an applicable taxable year only if their earned income for such taxable year is less than their earned income for the preceding taxable year. Qualified individuals are (1) individuals who, at any time during the incident period of a qualified disaster, had their principal place of abode in the qualified disaster zone or (2) individuals who during any portion of such incident period were not in the qualified disaster zone but whose principal place of abode was in the qualified disaster area and were displaced from such principal place of abode by reason of the qualified disaster. An applicable taxable year is any taxable year that includes any portion of the incident period of a qualified disaster.

• Any election to use the prior year's earned income under the provision applies with respect to both the EITC and additional child tax credit. For administrative purposes, the incorrect use on a return of earned income pursuant to an election under this provision is treated as a mathematical or clerical error. An election to use the prior year's earned income is disregarded for purposes of calculating gross income in the election year.

• Versions of this provision have been enacted in connection with specific disasters, including: Hurricanes Katrina, Rita, and Wilma;¹⁷⁰ the 2008 Midwestern floods;¹⁷¹ Hurricanes Harvey, Irma, and Maria;¹⁷² and certain California wildfires.¹⁷³