• Tax Legislative Outlook for the Lame-Duck Session
  • January 8, 2015
  • Law Firm: Dentons Canada LLP - Toronto Office
  • There has been plenty of speculation as to what will happen in the 114th US Congress, with the House and Senate both under Republican control and President Barack Obama in his last two years in office. But before the new Congress arrives on Jan. 3, 2015, the old Congress is returning for a post-election, "lame-duck" session.

    If one takes at face value all of the statements made by members of Congress and interested parties regarding what they expect (or at least hope) Congress will do in the lame-duck session, the lame-duck session will be a complete 180-degree turn in productivity, with Congress quickly settling disputes and finding common ground on issues and legislation where agreement has previously eluded them.

    In this article, we do not seek to reconcile or evaluate all of those suggestions, threats and vows. Rather, this article observes that, rhetoric aside, lame-duck sessions dealing with expiring tax provisions have become the norm and describes how Congress is expected to deal with tax provisions in the lame-duck session, notwithstanding what may be said or hoped.

    Three basic principles should be kept in mind. First, there is very little time in the lame-duck session to deal with the issues before Congress. "Must-do" items will necessarily take up most of Congress' time and attention, leaving little opportunity for congressional leaders to focus on "discretionary" items.

    Third, there will be strong resistance to doing exactly what was done in previous years. Particularly in light of the election results and a surly electorate that sees the country on the wrong track, there will be a need to demonstrate that this is not "business as usual." So, in dealing with the extenders, members will need to show (or at least credibly say) that the results this time were different. Changes need not be big but they have to be symbolic.

    A Lot to Do and a Short Time to Do It

    Congress must pass a bill continuing to fund the federal government before Dec. 11 and must also deal in the lame-duck session with other expiring (or, in the case of most extenders, expired) provisions of law. Of course, Congress could, assuming the president agreed, pass short-term extensions simply to get them into the next Congress and deal in earnest with spending, taxing and regulatory decisions then. However, statements by Sen. Mitch McConnell and Speaker John Boehner have made clear that Republicans in Congress want to take advantage of their increased numbers in the next Congress to address their own issues and priorities.

    If Republican members want to focus on issues of their choosing, they must clear the decks as much as possible in the lame-duck session because they will not be able to emphasize new matters and legislation while dealing with the distractions of, and mixed communications sent by, the postponed, must-do items. So, there will be a strong incentive for both Republicans and Democrats, albeit for different reasons, to deal substantively with the must-do items and not just punt them to the beginning of the next Congress.

    Because there will be limited legislative days in November and December to deal with these must-do items, they will take up most of the time available for serious negotiating and legislating. That leaves little time for tax measures that require significant negotiation and technical drafting to reflect the results of those negotiations.

    What Can Be Postponed and What Cannot

    The extenders that expired at the end of last year must be dealt with in the lame-duck session. They cannot be postponed to the new Congress without seriously delaying the tax filing season. The expiring Internet tax moratorium does not have the same looming tax return preparation concerns, but Congress is unlikely to let it expire for any significant period of time. The handful of tax provisions that expire at the end of this year do not have the same urgency as those that have expired, but it would be strange for Congress to deal with the bulk of the extenders and not address them as well, at least if the expired provisions are extended for more than one year.

    Moreover, whatever Congress decides regarding the extenders, the drafting changes to existing law to implement those decisions would be minimal. That makes it possible to include extenders in a final legislative package, even if the decisions are made very late in the lame-duck session.

    On the other hand, tax items that proponents hope to have addressed in the lame-duck session, such as the Marketplace Fairness Act, "repatriation" legislation and anti-inversion legislation, do not fall within this cannot-be-postponed category. Further, even if Congress wanted to deal with these issues in the lame-duck session, in contrast to the extenders and Internet tax moratorium, these proposals would require significant technical work once conceptual agreement is obtained. Proponents of these measure should not give up, but they should be realistic in their expectations.

    Doing the Same Thing, But Differently

    For each expired or expiring tax provision, Congress must decide whether to extend it and for how long. Many of these tax provisions have been extended temporarily several times now, leading to their moniker of "extenders." Of course, this shared label obscures the differences among the provisions. Some, like the research credit, have existed in a "temporary" state for decades and are otherwise thought of as part of our permanent tax law. Others, like "bonus depreciation" are newer and were initially intended to be only temporary, but appear to have since earned "extender" status.

    No one thinks it is a good idea to treat all of these disparate provisions the same way, but each time they have come up for extension, the same-size-fits-all approach has been the path of least resistance. None of these provisions is considered important enough to move on its own (if it had, it would have already) and none has been considered to be clearly unworthy of extension (otherwise it would have been allowed to lapse earlier). Giving them all the same extension date is not ideal either; it is widely acknowledged that for those provisions intended to affect long-term behavior, short-term and retroactive extensions significantly diminish their effectiveness. Nonetheless, when the fate of the extenders is not addressed until the end of the legislative session, it is invariably easier to give them all the same extension date than it is to prioritize among them.

    Seeking to break this cycle, the House Ways and Means Committee took a different approach this year, voting to extend only some of the provisions and for those so chosen to make the extensions permanent. The full House ratified this approach, at least for some of the extenders. Meanwhile, the Senate Finance Committee voted to follow the more traditional temporary extension approach. The Senate Finance Committee started with extension of only a subset of extenders, but by the time mark-up was finished, nearly all of the extenders were included.

    This has led some to debate whether the approach taken by the House Ways and Means Committee (fewer items, permanent extensions) will prevail over the approach taken by the Senate Finance Committee (nearly all expired and expiring provisions extended for a temporary period). While there is pressure to handle the extenders differently this year, the House approach is not likely to be adopted.

    First, the administration has threatened to veto permanent extensions that are not paid for. Second, it is not realistic to expect Congress to be able to reach agreement in December as to which extender goes into which category, even if there were agreement as a conceptual matter. At the same time, however, there will be opposition to the Senate approach, which could be pejoratively characterized as "business as usual."

    A compromise between approaches would seem to be the most logical way to address these conflicting pressures. That would mean making some — if only a few — provisions permanent and letting some — if only a few — provisions expire or remain expired. If permanent extension (even if only for a lucky few) is not possible, then a long-term extension (such as five years) could be touted as a victory, at least politically (although any long-term extension would not have the revenue "baseline" implications as a permanent extension).

    Permanent (or sufficiently long-term) extension of even one or two sufficiently symbolic extenders, such as the research credit, could be the means of distinguishing this year from previous years. The hardest aspect of this compromise approach would be deciding which extenders get left on the cutting-room floor. All of the expired and expiring provisions have defenders, and allowing a provision to remain lapsed could be contentious if it is a high-profile one as well. Indeed, some of the provisions that generate the most opposition, such as the production tax credit, also have some of the strongest support.

    So, proponents and opponents of extenders should not delay in making their views known. Most extenders will likely get the same temporary extension as in previous years. But a lucky few may get made permanent and an unlucky few may get left behind. Considering the stakes, it makes sense to weigh in if you feel strongly about a particular provision. The odds of any particular extender getting treated differently than its peers may not be great, but it looks very possible that a few will be singled out. You will want your provision to be singled out for the right reason.