Wall Street Journal
August 02, 2012

Senate Panel Approves Extension of Tax Breaks 19-5

The U.S. Senate's tax-writing panel approved a roughly $205 billion package Thursday that would extend more than 50 expiring tax breaks but allow almost two dozen more to lapse, in the first glimpse of the shape of tax overhaul in an era of tight budgets.

By 19-5, the U.S. Senate Finance Committee approved the package after debating everything from tax breaks for electric golf carts, wind turbines, school books and Whirlpool Corp. (WHR) energy-efficient appliances. The vote brought together Democrats and Republicans who have been fighting over taxes, showing that the two sides still can compromise in spite of a polarized political environment.

"By working together here today, we're proving we still have the capacity to do what our bosses--that is, the American people--sent us here to do: to get things done," said Senate Finance Committee Chairman Max Baucus (D., Mont.)

The effort faces its biggest obstacle in the Republican-controlled U.S. House of Representatives, where a determined group of Tea Party conservatives has suggested they are opposed to almost every tax break. The U.S. Senate is more promising, but still faces problems in the form of lawmakers like Sen. Tom Coburn (R., Okla.), who wanted to cut dozens more tax breaks. "I think we could have done a lot better," Mr. Coburn complained at the Thursday vote.

Companies would be able to take a research and development tax credit through the end of 2013, at a cost of $14.3 billion--one of the few business credits that has broad support on Capitol Hill. Companies would also be able to continue to defer U.S. tax on income earned from overseas financing arms through 2013--costing the U.S. $11.2 billion in taxes. Factories say the deferral is essential to helping overseas customers finance the purchase of U.S. goods.

The Senators put the nail in the coffin of a tax credit for blending ethanol into the fuel supply--oil refiners are already required to add a certain amount of ethanol, and the tax credit seemed redundant to most lawmakers. The lawmakers allowed tax credits for investing in Washington, D.C.--including a tax credit for first-time homebuyers--to lapse. Lawmakers declined to renew a program run by the Treasury Department that so far has handed out almost $13 billion in cash grants instead of tax credits to almost 7,000 companies--mostly solar--that generate electricity from renewable energy.

Mr. Coburn tried to take away a tax credit for the production of energy-efficient appliances that have enabled companies like Whirlpool, based in Benton Harbor, Michigan, to lower their tax bills. "It's the worst form of crony capitalism I know," he said. Sen. Debbie Stabenow (D., Mich.) shot back that "this is about the future in terms of advanced manufacturing." Democrats won, with a 15-9 vote against Mr. Coburn's amendment.

One of the biggest flashpoints was a Republican demand to end the American Opportunity Tax Credit, created by the 2009 stimulus package to broaden to people making up to $80,000 in adjusted gross income an educational tax credit, and to allow the credit to be used to purchase school books. The credit at one point nearly sunk negotiations, since Sen. Charles Schumer (D., N.Y.) wanted to keep it. He lost.

"I cannot tell you how frustrated I am that we have not accepted this measure," Mr. Schumer said. He said he would "work and work and work" to ensure the credit does not expire."I just don't understand the opposition to this," he said.

Horse trading was in evidence everywhere. The package included relief through 2013 from the alternative-minimum tax, the much maligned, decades-old tax intended to ensure that high earners pay some taxes but which threatens to ensnare more middle-class Americans. The $132 billion, two-year tax relief is popular with both Republicans and Democrats, but Mr. Schumer declared inclusion of the measure a victory, saying it would take away from Republicans a bargaining chip in end-of-year negotiations over extending the Bush tax cuts.

Residents in states without an income tax--like Florida and Washington--would be able to continue deducting state and local sales tax instead of state income tax from their federal taxes, at a cost of $4.3 billion.

The wind industry came back from a near-death experience after Republican presidential nominee Mitt Romney's campaign came out in opposition to its key tax credit, known as a production tax credit. After finding themselves in a tough spot, Republicans had trouble extending the expiring credit, and an initial version of the package left it out.

But wind-state Republicans like Sen. Charles Grassley (R., Iowa) were furious, and by Thursday, Mr. Baucus had restored the credit. The lawmakers also made it more generous, allowing companies to take the 10-year credit before producing electricity, and beginning if they start construction on a renewable-energy plant by the end of 2013. The cost: $12 billion.