Senate Finance Committee members this week supported seeminglycontradictory goals by voting to extend narrow tax breaks as theytouted an overhaul of the tax code that would imperil some of thosesame benefits.

A $205.1 billion proposal, approved yesterday by the panel on a19-5 bipartisan vote, would provide benefits for corporateresearch, wind energy producers and financial-services companiesdoing business outside the U.S. It also would prevent the expansionof the alternative minimum tax for 2012 and 2013.

“Tax reform is so monumental, is like the earth being hit by ahuge asteroid,” said Senator Jay Rockefeller, a West VirginiaDemocrat who distinguished the bill from the trade-offs that wouldbe part of an eventual tax overhaul. “We all know that we're goingto have to do some things that we don't want to do at all, and Ithink people are kind of prepared to.”

During and after the panel's discussions, committee membersagreed that an overhaul of the U.S. tax code is necessary. Theysplit on whether yesterday's effort shows that the committee cantackle tax policy across party lines or that lawmakers weren't boldenough in letting tax incentives lapse.

“This was a pitiful effort at trying to reduce the number ofcredits that we had out there in a time of fiscal crisis in thecountry,” said Senator Richard Burr, a North Carolina Republicanwho voted against the proposal. “If it's a practice round, it'scertainly not going to bode very well for tax reform.”

Senator Max Baucus, the committee's chairman, wrote the proposalalong with Senator Orrin Hatch, a Utah Republican. Baucus, aMontana Democrat, added several provisions before the vote,including a one-year extension of the production tax credit forwind energy through 2013 and an extension of a benefit for ownersof motorsports tracks.

“By working together here today, we're proving we still have thecapacity to do what our bosses, that is the American people, sentus here to do,” Baucus said. “That is: Get things done.”

Hatch, while saying he wanted to reduce more breaks, emphasizedthat the committee had declined to extend many others. Among taxbenefits that the measure would allow to lapse are those forinvestment in the District of Columbia, Gulf Coast incentivescreated after Hurricane Katrina in 2005 and a benefit forrehabilitating contaminated sites.

The committee continued some breaks for individuals, including adeduction for teachers' out-of-pocket expenses and an optionaldeduction for state sales taxes.

'Dry Run'

Hatch said yesterday's debate was a “dry run” for a taxoverhaul. Other lawmakers called it a “beginning,” a “prelude,” the“prelims” and a “warm up.”

All of the Democrats on the committee voted for the proposal,along with Hatch and five other Republicans. Burr voted no, as didJon Kyl of Arizona, Mike Enzi of Wyoming, John Cornyn of Texas andTom Coburn of Oklahoma.

An overhaul of the tax code probably would include ratereductions as well as changes to tax breaks. The bill approvedyesterday would extend the lapsed provisions through 2013, givingCongress time to pursue a rewrite without affecting businesses andhouseholds that rely on the breaks.

“If we're looking at a reform which is hopefully a permanentchange in the tax code, the short-term extenders is more of ashort-term economic issue for stimulating business activity here inthe United States,” Senator Mike Crapo, an Idaho Republican, saidAug. 1.

A proposal from Coburn to remove a tax credit for manufacturingenergy-efficient appliances illustrated some of the difficultiesthat Congress will face if it tries to eliminate narrow provisionsthat have constituencies and detractors.

“Let's call it what it is: a subsidy for appliance makers,”Coburn said. “It's the worst form of crony capitalism I know.”

Whirlpool Corp. and General Electric Co. are among thebeneficiaries of the tax break, which expired at the end of 2011.Because of the credit, Whirlpool has received a net tax benefit inseveral recent years.

Senator Debbie Stabenow, a Michigan Democrat, defended thebreak, maintaining that appliances qualify only if they exceedcertain efficiency standards. Whirlpool is based in Benton Harbor,Michigan.

“It keeps those jobs in America,” she said before Coburn'sproposal failed on a 9-15 vote.

Congressional Recess

Turning the committee's product into law won't happen quickly.Congress is leaving for a recess that will last until Sept. 10.

The House of Representatives has been conducting an examinationof the list of expired breaks and doesn't expect to considerextensions before the Nov. 6 election.

The parties are split on whether to extend refundable taxcredits for college tuition and low-income families that werecreated in the 2009 stimulus law. Democrats want to keep thosebreaks while Republicans say they are failed spending programs.

That discussion is separate from the broader debate over whetherto extend the George W. Bush-era income tax cuts for all taxpayersor allow the cuts on top earners to expire.

The Finance Committee didn't consider broad issues that wouldhave prevented lawmakers from reaching the bipartisan agreement. Ina tax-code overhaul, politically divisive questions about theprogressivity of the tax code and the amount of revenue it shouldraise can't be avoided.

Lawmakers need to be practical and have the broader debate, saidSenator Ron Wyden, an Oregon Democrat who has a plan that wouldlower rates and broaden the tax base.

“You can't also sit in the corner with your arms crossed and sayto your constituents: I'm not going to do anything until we havetax reform,” he said. “So you have to find a way to respond to yourconstituents that's consistent with broader reforms.”

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.