CRS Lists Tax Provisions Expiring in 2011

A number of temporary tax provisions are scheduled to expire at the end of 2011. Notably, the temporary two-percentage-point reduction in the payroll tax rate for individuals was enacted, at the end of 2010, as a one-year temporary provision. Other provisions scheduled to expire at the end of 2011 include the Alternative Minimum Tax (AMT) "patch," as well as a number of previously extended temporary provisions known as "tax extenders."

This report provides a concise overview of tax provisions scheduled to expire at the end of 2011. Table 1 below lists all provisions scheduled to expire at the end of 2011. CRS products providing additional information and analysis related to specific provisions are noted in footnotes to the tables and text. Some of these provisions, including the two-percentage-point payroll tax cut, were enacted as temporary measures during the 111^th Congress. Other provisions, such as the tax credit for research and experimentation expenditures, have been extended numerous times as part of tax extender legislation. In addition to listing all provisions expiring at the end of 2011, Table 1 notes which provisions have previously been extended as part of a tax extender package.

Tax Provisions Expiring in 2011

The Joint Committee on Taxation (JCT) has identified 67 tax provisions that are scheduled to expire at the end of 2011.¹ These provisions are listed in Table 1, which also notes the expiring provisions previously extended as part of a "tax extender" package.

The Two-Percentage-Point Payroll Tax Reduction

The Social Security payroll tax is 12.4% of taxable earnings, with 6.2% paid by the employer and 6.2% paid by the employee. Under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act of 2010; P.L. 111-312), the employee's share of the Social Security payroll tax was reduced to 4.2% for 2011.² The payroll tax reduction was enacted as an economic stimulus measure, increasing the take-home pay of employees.³ The budgetary cost in terms of foregone revenues for the one-year, two-percentage-point payroll tax reduction was estimated at $111.7 billion.⁴

Provisions Related to the Alternative Minimum Tax (AMT)

The structural components of the Alternative Minimum Tax (AMT), notably the AMT exemption amount, are not indexed for inflation.⁵ Congress regularly enacts legislation increasing the exemption amount, preventing inflation from causing the real value of income tax liabilities to increase. Most recently, the AMT was patched (the exemption amount indexed for inflation) as part of the Tax Relief Act of 2010. In recent years, AMT patch legislation has also extended provisions allowing nonrefundable personal credits to fully offset AMT tax liability. The one-year AMT patch enacted under the Tax Relief Act of 2010 was estimated to result in $136.7 billion of foregone tax revenues.

"Tax Extenders" and Other Expiring Provisions

Table 1 provides a list of all tax provisions scheduled to expire in 2011. Provisions other than those providing a temporary reduction in the payroll tax rate and those related to the AMT are presented in five categories: those related to individuals, businesses, charitable giving, energy, community development, and disaster relief.

Individual

Several temporary tax provisions affecting individuals are scheduled to expire at the end of 2011. Of these provisions, a number have been extended more than once as part of tax extender packages. These include the deduction for elementary and secondary school teacher expenses,⁶ the deduction for state and local sales taxes,⁷ the above-the-line deduction for qualified tuition and related expenses,⁸ and the estate tax look-through for certain regulated investment company (RIC) stock held by nonresidents.

Two other provisions, one related to the tax treatment of employer-provided mass transit and parking benefits and the other allowing for mortgage insurance premiums to be deducted as qualified interest, were extended through 2011 as part of the Tax Relief Act of 2010.

Business

Several temporary tax provisions that benefit businesses are also scheduled to expire at the end of 2011. Notable is the tax credit for research and experimentation expenditures.⁹ The research tax credit has been a part of the Internal Revenue Code (IRC) since the 1980s as a temporary provision. The credit has regularly been extended, most recently as part of the Tax Relief Act of 2010. This retroactive extension (the credit had been allowed to expire at the end of 2009), cost an estimated $13.3 billion in terms of foregone tax revenue.

Provisions allowing for an exception from Subpart F rules for "active financing income" have also regularly been extended in recent years. The active financing exception applies to active income earned by banking, financing, and insurance business operation abroad.¹⁰ The exception under Subpart F for active financing income had been allowed to expire at the end of 2009. The exception was extended through 2011 as part of the Tax Relief Act of 2010, with an estimated cost of $9.2 billion in foregone tax revenue.

Other business-related provisions that have regularly been extended in recent years include the rum excise tax cover-over,¹¹ provisions allowing for "Brownfield" environmental remediation cost expensing,¹² the Work Opportunity Tax Credit (WOTC),¹³ and incentives related to Indian employment and property investment on Indian reservations. Several other temporary provisions scheduled to expire at the end of 2011 were temporarily extended as part of the Tax Relief Act at the end of 2010, including the employer wage credit for activated military reservists, special expensing rules for film and televisions production, certain special rules for regulated investment companies, and special rules for small business stock.

Provisions allowing for additional enhanced expensing and bonus depreciation are scheduled to be scaled back at the end of 2011.¹⁴ A 100% bonus depreciation allowance is in effect through the end of 2011. This allowance is set to decrease to 50% for 2012, and expire after December 31, 2012.¹⁵ Under current law, the maximum expensing allowance is $500,000 for investments in qualified assets. This allowance is scheduled to drop to $125,000 in 2012, and $25,000 thereafter.

Charitable

Several temporary provisions designed to support charitable giving have been included in previous tax extender packages.¹⁶ The provisions expanding the enhanced charitable deductions for contributions of food and book inventory were enacted as relief provisions following Hurricane Katrina.¹⁷ Amongst the charitable provisions, allowing for tax-free distributions from IRAs for the purposes of charitable donations has the largest revenue cost. The retroactive extension from 2009 through 2011, enacted as part of the Tax Relief Act of 2010, was estimated to cost $1 billion in terms of foregone tax revenues.

Energy

Several of the temporary energy-related tax provisions that are scheduled to expire at the end of 2011 were first enacted as part of the Energy Policy Act of 2005 (EPACT05; P.L. 109-58).¹⁸ These include the credit for construction of energy efficient new homes, the credit for energy efficient appliances, and the credit for nonbusiness energy property (also known as the tax credit for energy efficiency improvements for existing homes).¹⁹ Certain tax incentives for alternative technology vehicles and alternative fuel vehicle refueling property were also included in EPACT05. Since first being enacted in 2005, these temporary incentives have been extended and often modified.

The majority of revenue losses attributable to energy-related provisions in the Tax Relief Act of 2010 came from three provisions: incentives for biodiesel and renewable diesel, incentives for alcohol fuels, and grants in lieu of tax credits for renewable energy property.²⁰ The retroactive extension for biodiesel and renewable diesel incentives through 2011, which had been allowed to expire at the end of 2009, resulted in an estimated revenue loss of nearly $2.0 billion. A one-year extension of the tax incentives for alcohol fuels (primarily, ethanol) resulted in an estimated revenue loss of $4.9 billion,²¹ while a one-year extension of the Section 1603 grants in lieu of tax credit program cost an estimated $3.0 billion.

Community Development

Several provisions designed to promote community development are also scheduled to expire at the end of 2011. Qualified zone academy bonds are tax credit bonds available to state and local governments for elementary and secondary school renovation, equipment, teacher training, and course materials.²² New markets tax credits (NMTC) are designed to promote investment in low-income and impoverished communities.²³ Tax incentives are also available to encourage economic activity in empowerment zones,²⁴ the District of Columbia (DC), and in the American Samoa.

Disaster Relief Provisions

A number of temporary disaster-related provisions are also scheduled to expire at the end of 2011. They include provisions designed to help redevelopment of the New York Liberty Zone, the Gulf Opportunity (GO) Zone,²⁵ as well as provisions to provide relief following the Midwestern storms and Hurricane Ike in 2008.

               Table 1. Tax Provisions Expiring in 2011

Several temporary tax provisions were allowed to expire at the end of 2009. Ultimately, many of the provisions that had been allowed to expire were retroactively extended through 2011 as part of the Tax Relief Act of 2010. Table 2 provides information on the cost of extending provisions that are scheduled to expire at the end of 2011 in the Tax Relief Act of 2010. The cost of extending provisions as part of the Tax Relief Act of 2010 provides some information as to the potential cost of further extension.²⁶

Various versions of tax extender legislation were passed in both the House and the Senate before the Tax Relief Act was signed into law in December of 2010.²⁷ Prior to the expiration of these provisions at the end of 2009, the House passed the Tax Extenders Act of 2009 (H.R. 4213). A Senate proposal was offered as a substitute amendment. The Senate-proposed American Workers, State, and Business Relief Act of 2010 (the Senate version of H.R. 4213) passed in March of 2010. In May 2010, the House passed revised legislation (the American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213)). The Senate began consideration of this House revision in June of 2010, but in the face of objections to certain revenue offsets, the legislation was tabled. Ultimately, H.R. 4213 was stripped of all tax extender provisions. The final version of H.R. 4213 that was passed by both the Senate and House, and became P.L. 111-205, included only a provision to temporarily extend unemployment benefits.

In September 2010, a revised tax extender bill was introduced in the Senate (the Job Creation and Tax Cuts Act of 2010 (S. 3793)). Ultimately, a number of tax extender provisions were included alongside an extension of the 2001/2003 tax cuts in S.Amdt. 4753 to H.R. 4853, the Reid-McConnell Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This legislation was signed into law on December 17, 2010 (P.L. 111-312).

                    Table 2. Revenue Cost of Extending Expiring

² For more information, see CRS Report R42103, The Temporary Payroll Tax Reduction: A Brief Description and Economic Analysis, by Donald J. Marples.

³ For more information, see CRS Report R41648, Social Security: Temporary Payroll Tax Reduction in 2011, by Dawn Nuschler.

⁴ To protect the Social Security trust fund, funds equal to the loss in payroll tax receipts resulting from the temporary payroll tax rate reduction are transferred from the general fund to the Social Security trust fund.

⁵ For more information, see CRS Report RL30149, The Alternative Minimum Tax for Individuals, by Steven Maguire.

⁶ For more information, see CRS Report RS21682, The Tax Deduction for Classroom Expenses of Elementary and Secondary School Teachers, by Linda Levine.

⁷ For more information, see CRS Report RL32781, Federal Deductibility of State and Local Taxes, by Steven Maguire.

⁸ For more information, see CRS Report R41967, Higher Education Tax Benefits: Brief Overview and Budgetary Effects, by Margot L. Crandall-Hollick and Mark P. Keightley.

⁹ For more information, see CRS Report RL31181, Research Tax Credit: Current Law, Legislation in the 112th Congress, and Policy Issues , by Gary Guenther.

¹⁰ For more information, see CRS Report R41852, U.S. International Corporate Taxation: Basic Concepts and Policy Issues, by Mark P. Keightley.

¹¹ For more information, see CRS Report R41028, The Rum Excise Tax Cover-Over: Legislative History and Current Issues, by Steven Maguire.

¹² "Brownfields" are real property, where the use or development of the property may be complicated by the presence of hazardous substances or pollutants.

¹³ For more information, see CRS Report RL30089, The Work Opportunity Tax Credit (WOTC), by Christine Scott.

¹⁴ For more information, see CRS Report RL31852, Small Business Expensing Allowance: Current Law, Legislative Proposals in the 112^th Congress, and Economic Effects, by Gary Guenther.

¹⁵ For analysis of business tax cuts and economic stimulus, see CRS Report RL31134, Using Business Tax Cuts to Stimulate the Economy, by Jane G. Gravelle.

¹⁶ For more information, see CRS Report RL34608, Tax Issues Relating to Charitable Contributions and Organizations, by Jane G. Gravelle and Molly F. Sherlock.

¹⁷ Food inventory is generally eligible for an enhanced deduction for contributions made by C corporations. The temporary provisions first enacted following Hurricane Katrina extended this benefit to other types of businesses, including S corporations, partnerships, and sole proprietorships. For more information, see CRS Report RS22269, Katrina Emergency Tax Relief Act of 2005, by Erika K. Lunder.

¹⁸ For more information on energy tax provisions generally, see CRS Report R41769, Energy Tax Policy: Issues in the 112^th Congress, by Molly F. Sherlock and Margot L. Crandall-Hollick.

¹⁹ For more information, see CRS Report R42089, Residential Energy Tax Credits: Overview and Analysis, by Margot L. Crandall-Hollick and Molly F. Sherlock.

²⁰ For more information on the Section 1603 grants in lieu of tax credits, see CRS Report R41635, ARRA Section 1603 Grants in Lieu of Tax Credits for Renewable Energy: Overview, Analysis, and Policy Options, by Phillip Brown and Molly F. Sherlock.

²¹ The 112^th Congress voted to repeal the tax incentives for ethanol in an amendment identical to the Ethanol Subsidy and Tariff Repeal Act of 2011 (S.Amdt. 476). The Senate failed to advance the legislation underlying the amendment (S. 782).

²² These bonds were first created as part of Taxpayer Relief Act of 1997 (P.L. 105-34).

²³ For more information, see CRS Report RL34402, New Markets Tax Credit: An Introduction, by Donald J. Marples.

²⁴ For more information, see CRS Report R41639, Empowerment Zones, Enterprise Communities, and Renewal Communities: Comparative Overview and Analysis, by Oscar R. Gonzales and Donald J. Marples.

²⁵ For more information, see CRS Report RS22344, The Gulf Opportunity Zone Act of 2005, by Erika K. Lunder.

²⁶ The Congressional Budget Office (CBO) also provides information on the estimated cost of extending expiring tax provisions as background about policy alternatives that affect CBO's budgetary projections and baseline. See Congressional Budget Office, The Budget and Economic Outlook: An Update, August 2011, available at http://www.cbo.gov/doc.cfm?index=12316.

²⁷ For a detailed review of legislation in the 111^th Congress, see CRS Report RL32367, Certain Temporary Tax Provisions that Expired in December 2009 ("Extenders"), by James M. Bickley.