[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





                    FRAMEWORK FOR EVALUATING CERTAIN
                        EXPIRING TAX PROVISIONS

=======================================================================

                                HEARING

                               BEFORE THE

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                                 OF THE

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              June 8, 2012

                               __________

                          Serial No. 112-SRM07

                               __________

         Printed for the use of the Committee on Ways and Means








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                      COMMITTEE ON WAYS AND MEANS

                     DAVE CAMP, Michigan, Chairman

WALLY HERGER, California             SANDER M. LEVIN, Michigan
SAM JOHNSON, Texas                   CHARLES B. RANGEL, New York
KEVIN BRADY, Texas                   FORTNEY PETE STARK, California
PAUL RYAN, Wisconsin                 JIM McDERMOTT, Washington
DEVIN NUNES, California              JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio              RICHARD E. NEAL, Massachusetts
GEOFF DAVIS, Kentucky                XAVIER BECERRA, California
DAVID G. REICHERT, Washington        LLOYD DOGGETT, Texas
CHARLES W. BOUSTANY, Jr., Louisiana  MIKE THOMPSON, California
PETER J. ROSKAM, Illinois            JOHN B. LARSON, Connecticut
JIM GERLACH, Pennsylvania            EARL BLUMENAUER, Oregon
TOM PRICE, Georgia                   RON KIND, Wisconsin
VERN BUCHANAN, Florida               BILL PASCRELL, Jr., New Jersey
ADRIAN SMITH, Nebraska               SHELLEY BERKLEY, Nevada
AARON SCHOCK, Illinois               JOSEPH CROWLEY, New York
LYNN JENKINS, Kansas
ERIK PAULSEN, Minnesota
KENNY MARCHANT, Texas
RICK BERG, North Dakota
DIANE BLACK, Tennessee
TOM REED, New York

                   Jennifer Safavian, Staff Director

                   Janice Mays, Minority Chief Cousel

                                 ______

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                   PATRICK J. TIBERI, Ohio, Chairman

PETER J. ROSKAM, Illinois            RICHARD E. NEAL, Massachusetts
ERIK PAULSEN, Minnesota              MIKE THOMPSON, California
RICK BERG, North Dakota              JOHN B. LARSON, Connecticut
CHARLES W. BOUSTANY, Jr., Louisiana  SHELLEY BERKLEY, Nevada
KENNY MARCHANT, Texas
JIM GERLACH, Pennsylvania








                            C O N T E N T S

                               __________
                                                                   Page
Advisory of June 8, 2012 announcing the hearing..................     2

                              WITNESS LIST

Dr. Jim White, Director, Tax Issues, Government Accountability 
  Office.........................................................    11
Dr. Donald B. Marron, Director, Tax Policy Center, The Urban 
  Institute......................................................    32
Mr. Alex Brill, Research Fellow, American Enterprise Institute...    42
Mr. Aaron Gornstein, Undersecretary for Housing and Community 
  Development, Department of Housing and Community Development, 
  Commonwealth of Massachusetts..................................    52

                       SUBMISSIONS FOR THE RECORD
Honorable Richard Neal...........................................     6
Honorable Doc Hastings...........................................    82
ABM Energy.......................................................    84
Alliance to Save Energy..........................................    86
American Cleaning Institute......................................    88
American Council for an Energy Efficient Economy.................    90
American Farm Bureau Federation..................................    93
American Public Transportation Association.......................    97
Business Council for Sustainable Energy..........................    99
Center for Fiscal Equity.........................................   101
City of Cleveland Department of Law..............................   104
ClearStack LLC...................................................   107
Efficiency First.................................................   109
Feeding America..................................................   111
Financial Executives International...............................   115
Food Donation Connection LLC.....................................   119
Fuel Cell and Hydrogen Energy Association........................   125
National Association of Manufacturers............................   129
National Biodiesel Board.........................................   134
National Education Association...................................   139
National Governors Association...................................   142
National Preservation Working Group..............................   144
National Restaurant Association..................................   146
Ohio Grantmakers Forum...........................................   154
One Voice........................................................   156
R and D Credit Coalition.........................................   160
Radian...........................................................   165
Rebuild America's Schools........................................   170
Residential Energy Efficient Tax Credit Industry Coalition.......   173
Sustainable Energy and Environment Coalition (Congressional 
  Coalition).....................................................   180
The Council on Foundations.......................................   185
The Jewish Federations of North America..........................   192
True Blue........................................................   201

 
                    FRAMEWORK FOR EVALUATING CERTAIN
                       EXPIRING TAX PROVISIONS

                              ----------                              


                          FRIDAY, JUNE 8, 2012

             U.S. House of Representatives,
                       Committee on Ways and Means,
                   Subcommittee on Select Revenue Measures,
                                                    Washington, DC.

    The subcommittee met, pursuant to call, at 9:30 a.m., in 
Room 1100, Longworth House Office Building, Hon. Pat Tiberi 
[chairman of the subcommittee] presiding.
    [The advisory of the hearing follows:]

Hearing Advisory

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                  Chairman Tiberi Announces Hearing on

                    Framework for Evaluating Certain

                        Expiring Tax Provisions

Friday, June 8, 2012

    Congressman Pat Tiberi (R-OH), Chairman of the Subcommittee on 
Select Revenue Measures, today announced that the Subcommittee will 
hold a hearing on how Congress should evaluate certain tax provisions 
that either expired in 2011 or will expire in 2012 (also known as ``tax 
extenders''). The hearing will take place on Friday, June 8, 2012, in 
Room 1100 of the Longworth House Office Building at 9:30 A.M.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing. A list of invited 
witnesses will follow.
      

BACKGROUND:

      
    On September 22, 2011, the Subcommittee held a joint hearing with 
the Subcommittee on Oversight on the topic of the intersection of 
energy policy and tax policy. At that hearing, witnesses testified on 
the effectiveness of a number of energy-related tax extenders. On April 
26, 2012, the Subcommittee held a hearing on Member proposals related 
to tax extenders, at which Members of Congress testified both in favor 
of and in opposition to numerous tax extenders.
    As with the Subcommittee's April 26, 2012 hearing, for purposes of 
this hearing, a ``tax extender'' is any tax provision:

    1.  Extended in Title VII of the Tax Relief, Unemployment Insurance 
Reauthorization, and Job Creation Act of 2010 (Public Law No. 111-312; 
``TRUIRJCA''), or
    2.  Expiring between the end of calendar year 2011 and the end of 
calendar year 2012, other than any provision:
         Addressed in Titles I through VI of TRUIRJCA, or
         Related to a transportation trust fund.

    In announcing the hearing, Chairman Tiberi said, ``As part of the 
Ways and Means Committee's ongoing effort to review dozens of tax 
provisions that either expired last year or expire this year, we need 
to consider carefully the principles that we should use to evaluate the 
merits of these policies. Having recently heard from our House 
colleagues about their views on many of these extenders, it is time for 
the Subcommittee Members to roll up their sleeves and see how the 
provisions stack up against what experts consider the principles of 
sound tax policy.''
      

FOCUS OF THE HEARING:

      
    The hearing will explore ideas on the framework that Congress 
should use to evaluate tax extenders, the principles of good tax policy 
that Congress should apply during this evaluation, and the specific 
metrics against which Congress should test the merits of particular 
provisions. While the hearing is not intended to focus on specific tax 
extenders, individual provisions may be discussed for the purpose of 
illustrating how to use such principles and metrics.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
written comments for the hearing record must follow the appropriate 
link on the hearing page of the Committee website and complete the 
informational forms. From the Committee homepage, http://
waysandmeans.house.gov, select ``Hearings.'' Select the hearing for 
which you would like to submit, and click on the link entitled, ``Click 
here to provide a submission for the record.'' Once you have followed 
the online instructions, submit all requested information. ATTACH your 
submission as a Word document, in compliance with the formatting 
requirements listed below, by the close of business on Friday, June 22, 
2012. Finally, please note that due to the change in House mail policy, 
the U.S. Capitol Police will refuse sealed-package deliveries to all 
House Office Buildings. For questions, or if you encounter technical 
problems, please call (202) 225-3625 or (202) 225-2610.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word format and MUST NOT exceed a total of 10 pages, including 
attachments. Witnesses and submitters are advised that the Committee 
relies on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
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review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons and/
or organizations on whose behalf the witness appears. A supplemental 
sheet must accompany each submission listing the name, company, 
address, telephone, and fax numbers of each witness.
      
    The Committee seeks to make its facilities accessible to people 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
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materials in alternative formats) may be directed to the Committee as 
noted above.
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://www.waysandmeans.house.gov/.
      

                                 

    Chairman TIBERI. This hearing will come to order. Good 
morning. Thank you for joining us today for another in a series 
of hearings on what are commonly referred to as tax extenders.
    As most of you know, during member day hearing in April, we 
had the opportunity to hear from a number of our colleagues 
about the merits of extending or in some cases not extending 
many of these tax policies. By all accounts, it was a 
productive exercise, and I commend our chairman of the full 
committee, Chairman Dave Camp, for his leadership in providing 
the opportunity then and now and in the future to examine these 
tax provisions.
    His leadership in setting forth a transparent process for 
reviewing the tax extenders is what the American people expect 
from their congressional representatives. I think that it is 
likely accurate to say that the days of simply rubber stamping 
and extending an entire package of extenders is now behind us, 
and today we pivot to exploring what we hopefully will hear, 
and that is ideas to providing a framework that Congress should 
use in evaluating these tax extenders.
    Our witnesses today will share their views on principles of 
good tax policy and the specific merits and metrics against 
which Congress should test the merits of particular provisions.
    I look forward to their testimony and the ensuing 
conversation.
    Before we begin, I would like to take a moment to thank 
Congressman Mike Thompson from California for serving as our 
ranking member today. Unfortunately, Congressman Richie Neal 
couldn't be with us today because he is attending a funeral in 
Springfield for a fallen police officer.
    I now yield to Mr. Thompson for his opening statement.
    Mr. THOMPSON. Thank you, Mr. Chairman. And I think I can 
speak for everyone when we say that our thoughts and prayers 
are with the family of those in Mr. Neal's district who lost a 
police officer today, and I know as a father of a detective, I 
know that is something that all of us care a great deal about, 
and we are mindful of just how dangerous those public servants' 
jobs are.
    And I thank the chairman for convening this hearing today. 
We appreciate that the subcommittee has decided to begin 
consideration of certain expired and expiring tax provisions as 
this consideration is long overdue. Businesses have been 
desperate for certainty in the tax law when attempting to make 
decisions that can help to grow the economy.
    However, many may view today's hearing as actually 
increasing uncertainty for businesses and for individuals that 
use these tax benefits.
    As we learned in our last hearing, so many of these 
benefits enjoy broad, bipartisan support. Their extension 
should not be difficult. As we learned from the recent jobs 
report, our economy is struggling and job creation is still too 
slow in coming. Unfortunately, proven job creation programs 
have not received adequate consideration in this Congress.
    Press reports indicate that the highway conference may be 
stalled and possibly gridlocked and provisions on the 
President's to-do list to create jobs have not made it to a 
vote. The public is losing faith in Congress' ability to act 
and act quickly to turn this economy around. Frankly, I don't 
blame them.
    We have had a hard time finding an agreement on a lot of 
things, but it is important to remember that there are things 
we can do in this committee that can help alleviate some of the 
pressures people are feeling and the uncertainties facing 
businesses.
    As we learned from the last subcommittee hearing, so many 
expired provisions that are under consideration today enjoy 
broad, bipartisan support. In fact, many of us are lead 
sponsors of important job-creation provisions, including the 
new markets tax credit, the R&D tax credit, the conservation 
easement credit, and the list goes on.
    We have all worked well together on these provisions, and 
we should now work to get them across the finish line.
    I appreciate the testimony from the witnesses today. 
Evaluation of temporary provisions is as important as 
evaluating all provisions in the Tax Code. There are a number 
of loopholes that can be closed or provisions that provide 
windfalls to certain industries that should be examined 
particularly close.
    The temporary nature of provisions should not automatically 
make it more eligible for termination than some of the 
provisions in the Tax Code that are permanent. Many of these 
provisions were enacted on a temporary basis due to budgetary 
constraints. That does not automatically detract from the merit 
of the provisions themselves.
    But today, we are talking about provisions that have 
already expired. Businesses, large and small, rely on these 
provisions when making investment decisions. We have allowed 
almost 18 months of the 112th Congress to pass without doing 
our job to move legislation providing extension of these 
provisions. I mentioned in detail at the last hearing--the last 
time we had a tax extender hearing a few weeks ago just how 
important some of these extenders are to my district and to my 
constituents. I won't go into detail again but will mention 
that Mr. Gerlach and I have a bill to make permanent the 
enhanced conservation easement incentive. It is one of the most 
successful tools we have to support preservation of open space 
and family farms, which protects our watershed and ensures food 
security. Today, it has 308 cosponsors, including the chairman, 
which I appreciate very much, and wish that we were marking 
that bill up today or, better yet, had it on the suspension 
calendar.
    I couldn't agree more with our chairman that this committee 
has a duty to ensure that the Tax Code is working to create 
jobs and grow our economy. It is an exercise that is necessary 
and takes time. But so much of the rest of Congress is 
gridlocked. This committee can act quickly and do so in a 
bipartisan way to extend expired provisions that need to be 
extended and help kick start our job creation and get the 
economy going.
    I believe that such legislation should include not only job 
creating provisions that expired in 2011, but also proven job 
creating provisions that were allowed to expire in 2010, such 
as the Build America bonds and the 48(c) Advanced Manufacturing 
Investment Tax Credit.
    The committee should engage in proper oversight and review 
of all of the tax provisions to identify those that are 
meritorious based on their economic performance and find ways 
to strengthen them and make them permanent. But this oversight 
should not come at the cost of inaction on important job-
creating provisions.
    I hope that the subcommittee and the full committee can get 
to doing our work and get these in front of the full House for 
a vote and in front of the President for his signature so we 
can help to improve the economy.
    I thank the chairman for allowing me to read this 
testimony.
    Chairman TIBERI. Thank you, Mr. Thompson. All that and no 
mention of grapes or vineyards. Inside joke.
    Mr. THOMPSON. Could I get unanimous consent?
    Chairman TIBERI. Speaking of unanimous consent, can I have 
unanimous consent to allow for the reading or the submission of 
Mr. Neal's opening statement?
    Without objection.
    [The prepared statement of Mr. Neal follows:]


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    Chairman TIBERI. Well, next it is my pleasure to introduce 
the witnesses here today, and we have an excellent panel of 
witnesses seated before us.
    Today's witnesses bring both tax policy and oversight 
experience to us. Today's witnesses begin with from my left to 
the right, we would like to welcome back Dr. Jim White from the 
General Accounting Office, where he is the Director for Tax 
Issues. Dr. White is responsible for GAO's work pertaining to 
the IRS tax administration and tax policy. Thank you for being 
here, sir.
    Second, we welcome back Dr. Donald Marron, the Director of 
Tax Policy Center at the Urban Institute here in Washington, 
DC. Dr. Marron's research at the Tax Policy Center has focused 
on tax reform as he has previously served as the Acting 
Director of the Congressional Budget Office and as a member of 
the President's Council of Economic Advisers. Thank you for 
being here today, sir.
    Third, we will hear from Mr. Alex Brill, a Research Fellow 
at the American Enterprise Institute here in Washington, DC. 
Mr. Brill is an alum of the Ways and Means Committee staff, and 
he has also served on the President's Council on Economic 
Advisers and has served as an adviser to the President's Fiscal 
Commission in 2010. Welcome back to the room, sir. Glad to have 
you here.
    Finally, we will hear from Alex Gornstein, the Under 
Secretary for Housing and Community Development for the 
Commonwealth of Massachusetts. Go, Celtics. And being from 
Ohio, there is even an added little emphasis on that.
    Thank you for being here today, folks. The subcommittee has 
received from each of you written statements, and they will be 
made part of the formal hearing record, as you know.
    Each of you will be recognized for 5 minutes for oral 
testimony, and then we will have questions.
    With that, Dr. White, the floor is yours.

    STATEMENT OF DR. JAMES R. WHITE, DIRECTOR, TAX ISSUES, 
                GOVERNMENT ACCOUNTABILITY OFFICE

    Dr. WHITE. Thank you. Mr. Chairman, acting ranking member, 
and members of the subcommittee, I am pleased to be here to 
discuss how to evaluate the expiring tax provisions, sometimes 
called tax extenders. Most are tax expenditures, so I will 
focus on those. However, the evaluation principles I discuss do 
apply more broadly.
    Tax expenditures are special credits, deductions, 
deferrals, and so on, that reduce a taxpayer's tax liability 
from what it would have been under a normal tax--under a 
``normal tax.''
    Tax expenditures often have policy goals similar to those 
of spending programs. They may promote economic development, 
energy efficiency, or research and development. Because tax 
revenue is foregone, such provisions may, in effect, be viewed 
as spending channeled through the tax system. Like decisions 
about spending, decisions on whether and how to extend tax 
provisions involve tradeoffs between policy goals and costs. My 
written statement summarizes factors commonly used to evaluate 
government policy, including tax policies such as the expiring 
provisions.
    First is the effect of extending the provisions on revenue. 
Tax expenditures shrink the tax base. They either reduce 
funding available for other Federal activities or require 
higher tax rates to raise the same amount of revenue from the 
smaller base. Put another way, revenue the government would 
have collected absent the tax expenditure could have been used 
to fund other programs, deficit reduction, or tax rate 
reductions.
    Second is the effect on equity, the economy, and taxpayers' 
compliance burden. Equity or fairness is a subjective judgment, 
but asking questions about who benefits from a provision and 
how ability to pay tax is affected can help policymakers reach 
conclusions about it.
    The effect on the economy is what my statement calls 
economic efficiency; lightly taxing one activity shifts 
resources to it and away from less tax favored activities. The 
overall effect depends on whether the favored activity provides 
greater benefits than the less favored activity.
    The effect on taxpayers' cost to comply with the provision 
depends on its simplicity and transparency. Can taxpayers 
understand the provision? What kinds of records will they need 
to keep? And, of course, simplicity and transparency affect 
IRS's ability to administer and enforce a provision.
    A third factor to consider when evaluating the expiring 
provisions is whether the tax system is the best way to deliver 
the benefit or whether some other tool of government, such as 
spending, a loan or a loan guarantee, could provide the same 
benefit at lower costs.
    Tax expenditures may have a cost advantage when benefits 
are means tested.
    One goal is to prevent fragmentation, overlap or 
duplication among programs, not just to save money, but also to 
avoid confusing the public. Also important is the choice of tax 
policy tool. The choice of a credit versus a deduction, for 
example, affects incentives and the distribution of the 
benefits.
    A final factor is measurement. Too often programs are 
implemented with little attention to how we will measure the 
results. In the case of tax provisions measuring results is 
complicated because IRS administers the provisions, but it is 
not the agency with functional responsibility for energy 
efficiency or community development or any of the other goals 
of the expiring provisions. Thus, decisions are needed about 
what agency should evaluate tax provisions, who should collect 
necessary data, and so on.
    Now, I want to briefly illustrate how GAO has applied these 
factors in our reports.
    Regarding the credit for ethanol, we found that while the 
credit helped create the industry during its formative years, 
having both a tax credit and a renewable fuel standard now is 
duplicative. Thus, we suggested that Congress consider 
modifying or phasing out the credit. Our reports on higher 
education tax assistance raised transparency questions. There 
are multiple such complex provisions, and we found many 
eligible taxpayers either failed to claim anything or claimed 
one that did not maximize their financial benefit.
    We looked at the efficiency of the research credit. While 
economists tend to support a subsidy for research because the 
social returns exceed the private returns to firms, we found 
the current design introduces inefficiency because incentives 
are distributed unevenly across firms and estimated that more 
than half of the regular credit is a windfall for research that 
would have been done anyway. We suggested changes to improve 
the bang per buck of the credit.
    We also looked at whether the new markets tax credits 
succeeded in moving resources as intended. The credit did 
appear to increase investment in low income communities. 
However, we also reported that its complexity makes it 
difficult to complete smaller projects and results in less 
money flowing through to low-income community businesses than 
might be possible with alternative designs. We suggested that 
Congress consider offering grants instead of tax credits with 
one option being a side-by-side test of the two approaches.
    Mr. Chairman, acting ranking member and other members, we 
have done a number of other such assessments all intended to 
provide Congress with factual information about the evaluation 
factors I outlined up front. How to use the information and 
make tradeoffs between the factors is up to policymakers.
    I would be happy to answer questions.
    [The prepared statement of Mr. White follows:]


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    Chairman TIBERI. Thank you, Dr. White.
    Dr. Marron, you have 5 minutes.

STATEMENT OF DR. DONALD B. MARRON, DIRECTOR, TAX POLICY CENTER, 
                      THE URBAN INSTITUTE

    Mr. MARRON. Great. Thank you.
    Chairman Tiberi, Ranking Member Thompson, and members of 
the subcommittee, thank you for inviting me to appear today to 
discuss the perennial challenge of the tax extenders which 
might be better called the tax expirers.
    As you know, the United States faces a sharp fiscal cliff 
at year end when numerous policy changes occur. If all these 
changes happen, they will reduce the fiscal 2013 deficit by 
about $500 billion, according to the Congressional Budget 
Office, before taking into account any negative feedback from a 
weaker economy. About one-eighth of that cliff, $65 billion, 
comes from the expiring and expired tax cuts that are the focus 
of today's hearing.
    In deciding their fate, you should consider the larger 
problems facing our tax system. That system is needlessly 
complex, economically harmful, and widely perceived as unfair. 
It is increasingly unpredictable, and it fails at its most 
basic task--raising enough money to pay our bills.
    The expirers often worsen these problems. They create 
uncertainty, complicate compliance, and cost needed revenue. 
Some make the Tax Code less fair, some more fair. Some weaken 
our economy while others strengthen it. Fundamental tax reform 
would, of course, be the best way to address these concerns, 
but such reform isn't likely soon, so you must again grapple 
with the expirers.
    As a starting point, let me note that they come in three 
flavors.
    The first are tax cuts that were enacted to address a 
temporary challenge such as a recession, the housing meltdown, 
or regional disasters.
    The second are tax cuts that have reached a sunset review. 
Prolonged economic weakness and recent omnibus extensions mean 
that there aren't that many of these at the moment, but they do 
exist.
    And third, there are tax cuts that expire to game budget 
rules. These appear to be the most common. Supporters intend 
these provisions to be long-lived or permanent, but they 
haven't found the budget resources to do so.
    To determine which of these policies should be extended and 
which not, you should consider several factors: Does the 
provision address a compelling need for government 
intervention? Does it accomplish its goal effectively and at 
reasonable cost? Does it make the Tax Code more or less fair? 
Do its potential benefits justify the revenue loss or the need 
for higher taxes elsewhere in the economy?
    In short, you should subject these provisions to the same 
standards you apply to other policy choices, and in this case 
you should keep in mind, as Jim said, that most of the so-
called tax extenders are effectively spending through the Tax 
Code. You should thus hold them to the same standards as 
equivalent spending programs.
    You should also reform the way you review expiring tax 
provisions. First, I think you ought to flip the burden of 
proof. Today's standing presumption is that most of these 
provisions will ultimately be extended. That is why they are 
called the extenders even after they have expired. Ultimately, 
though, we should move to a system in which the presumption, 
rebuttable to be sure, is that expiring provisions will expire 
unless supporters can justify their continuation. In short, 
they should be the expirers.
    Second, you should divide them up. Like musk oxen, the 
beneficiaries of these provisions have realized that there is 
safety in numbers. They must do their best to coalesce as a 
single herd, the extenders, and try to migrate across the 
annual legislative tundra with as little individual attention 
as possible. You should break up the herd. Reviewing each 
provision in detail may not be practical in a single year given 
how many there are, but you can identify specific groups for 
careful review.
    For example, you can separate out the stimulus provisions, 
the charity provisions, the energy provisions, and so on. You 
should also try to spread scheduled expirations out over time. 
If few are expiring in any given year, you will be able to give 
each one more attention.
    Third, I think you ought to change budget rules for 
temporary tax cuts. Pay-as-you-go budgeting creates crucial 
discipline but has an unfortunate side effect. Long-term tax 
policies often get chopped into 1-year segments. In addition, 
10 years of offsets can be used to pay for a single year 
extension. To combat this, you could require that any temporary 
tax provision be assumed to last no less than 5 years in the 
official budget baseline. Proponents would then have to round 
up enough budget offsets to pay for those 5 years. In addition, 
you could require that offsets happen over the same span of 
years as an extension. That would eliminate situations in which 
10 years of offsets pay for 1 year of extension.
    Thank you for inviting for me to appear today. I look 
forward to your questions.
    [The prepared statement of Mr. Marron follows:]


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    Chairman TIBERI. Thank you, Dr. Marron.
    Mr. Brill, you are recognized.

 STATEMENT OF ALEX BRILL, RESEARCH FELLOW, AMERICAN ENTERPRISE 
                           INSTITUTE

    Mr. BRILL. Thank you very much, Chairman Tiberi, 
Congressman Thompson, and members of the subcommittee, for the 
opportunity to appear before you this morning to discuss the 
regularly expiring tax provisions commonly known as tax 
extenders.
    I believe today's hearing is on an important topic as the 
number and budgetary magnitude of these regularly expiring tax 
provisions have ballooned in recent years. Some of these 
policies can serve an appropriate goal, but many have crept 
into the Tax Code over the years with little evaluation.
    For example, in 2001, 13 tax provisions were set to expire 
that year or the next year. A decade later, 129 tax provisions 
were set to expire in 2011 or 2012.
    The budgetary consequences of extenders have increased as 
well. For example, in September of 2004, Congress enacted a 1-
year extension of 23 tax extenders for a cost of $13 billion. 
In 2010, a 2-year extension of these policies cost over $55 
billion. And if Congress were to extend those policies again 
this year, the cost would be even higher.
    Let me summarize three key conclusions from my written 
testimony.
    First, no tax policy should be intentionally temporary. Any 
tax extenders deemed appropriate should be made permanent, and 
the rest should be allowed to expire.
    Second, each of the tax extender provisions must be 
considered individually on its own merits and against a clearly 
defined policy objective. Each extender must be shown to meet 
an objective such as promoting economic efficiency or tax 
equity.
    And third, a successful evaluation of the tax extenders--
keeping the good and eliminating the bad or inefficient--may 
set a useful precedent for the bigger challenges of tackling 
tax expenditures broadly and ultimately tax reform.
    To guide the evaluation of tax extenders, policymakers, I 
believe, need to answer simply two questions. First, intent. 
Does the intent of the provision improve economic efficiency, 
increase growth, promote fairness, or achieve some other 
desirable goal? For example, the R&D tax credit is intended to 
increase the aggregate level of research and development 
because R&D generates benefits to society beyond those realized 
by the firm.
    But one key point I would like to stress is that with any 
tax extender that is intended to subsidize a given activity, 
special care must be taken to evaluate its net economic 
benefit. Most subsidies will increase the subsidized activity. 
But that does not mean that it will produce such a net benefit 
or improve overall economic efficiency.
    In the absence of externalities, a credit for any given 
activity will lead to a misallocation of resources, more of the 
subsidized activity but less of everything else. And a 
provision that encourages more of a particular activity does 
not necessarily promote overall economic growth.
    The second question, after determining the intent, that 
policymakers should ask is would the policy be effective if it 
were permanent and evaluate the effectiveness on a permanent 
basis, regardless of the fact that it has frequently in the 
past been a temporary provision.
    Let me next quickly highlight four harmful consequences 
that I see from the constant expiration and reinstatement of 
tax extenders.
    First, tax extenders distort the fiscal budget baseline and 
complicate revenue and deficit forecasts over the future 
period.
    Second, tax extenders create financial reporting problems 
for publicly traded companies.
    Third, and importantly, tax extenders exacerbate the 
uncertainty facing businesses as they don't know whether they 
can depend on these policies once they have expired.
    And fourth, tax extenders may be designed to encourage 
oversight, but they are generally extended without much 
consideration.
    Obviously, this subcommittee has held a number of hearings 
on this topic of oversight, but a review historically would 
indicate that, more often than not, these policies are extended 
without serious review.
    And allow me to conclude by observing, as this committee 
knows well, that the tax base has eroded over the last 25 
years. A proliferation of tax credits, deductions, and 
exclusions has left a system that misallocates resources, 
creates complexity and introduces compliance problems. Reducing 
the number of tax extenders offers an opportunity to reduce 
this complexity and uncertainty and to promote efficiency.
    I hope that such an effort could set a positive precedent 
for the greater challenges that this committee will face as it 
embarks on broader tax reform.
    Thank you.
    [The prepared statement of Mr. Brill follows:]


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    Chairman TIBERI. Thank you, Mr. Brill.
    Mr. Gornstein, you are recognized for 5 minutes.

 STATEMENT OF AARON GORNSTEIN, UNDER SECRETARY FOR HOUSING AND 
  COMMUNITY DEVELOPMENT, DEPARTMENT OF HOUSING AND COMMUNITY 
           DEVELOPMENT, COMMONWEALTH OF MASSACHUSETTS

    Mr. GORNSTEIN. Thank you, Chairman Tiberi, Congressman 
Thompson, and members of the subcommittee. Thank you for the 
opportunity to testify today.
    I am here to urge you to extend certain critical programs 
that support economic development, housing, and community 
development. Some of these successful job-creating programs 
expired in 2011, while others were deemed not traditional 
extenders in 2010 regardless of their proven effectiveness.
    The new markets tax credit, Build America bonds, 
empowerment zones, and the low-income housing tax credit have 
created hundreds of thousands of jobs in housing units across 
the country. These programs play a vital role in encouraging 
investment in our communities.
    As we continue our steady climb out of the great recession, 
now is the perfect time to extend these programs and the 
critical work that they support.
    Let me briefly describe each program's impact.
    The first new markets tax credit allocations were awarded 
only 9 years ago, yet this well-designed program has achieved 
excellent outcomes: $45 billion invested, 92 million square 
feet of retail, commercial, and office space developed, over 
300,000 jobs created. These investments in each of your 
congressional districts are restoring abandoned buildings to 
the tax rolls, revitalizing small business districts, and 
creating momentum for further development.
    I wanted to provide a few examples from Massachusetts.
    Holyoke is a western Massachusetts city, once the world's 
largest paper manufacturer, but now one of the poorest 
communities in the State. New markets generated $9 million in 
debt financing for a full service health care center in the 
heart of downtown, a project that created 350 jobs. A few 
blocks away, a world-class computer technology center, a $168 
million project, is under construction with 600 jobs already 
created. Universities, including Harvard and MIT, are actively 
supporting this initiative.
    The new markets tax credit expired at the end of 2011, but 
it is not too late to extend it. Because of its importance, I 
ask the committee and Congress to take three actions: First, 
make the program permanent; second, extend the program for 5 
more years at an annual allocation level of $5 billion, and we 
thank Congressman Neal and Congressman Gerlach for their 
sponsorship of H.R. 2655 in this regard, and three, allow new 
markets to be used to offset taxes paid under the alternative 
minimum tax.
    In the short time Build America bonds were available, less 
than 3 years, Massachusetts issued close to $5 billion in 
bonds, with over $3 billion supporting our accelerated bridge 
program and creating 12,000 construction jobs for bridge 
repair.
    Empowerment zone bonds have also been very important in 
many cities, including the City of Boston, which issued $130 
million in tax-exempt bonds to help several blighted 
neighborhoods, creating 14,000 jobs and stimulating retail and 
commercial development where none had occurred in years.
    Reinstating the Rebuilding Bonds program could put hundreds 
of thousands back to work nationwide, and I encourage you to 
include it in any extenders package that the committee 
considers.
    Finally, the low-income housing tax credit program has 
created or preserved over 2.5 million units of rental housing. 
No other Federal housing program equals this record. But the 
credit is not just a housing program. It creates jobs, restores 
abandoned properties, and supports retail and commercial 
opportunities nearby. It is highly flexible, and it supports 
new construction, rehab, and renovation. It serves families, 
seniors, persons with disabilities, veterans, and former 
homeless families.
    On a specific matter, we urge Congress to extend the so-
called fixed 9 percent credit established in the Housing and 
Economic Recovery Act of 2008. When HERA replaced a floating 
tax credit rate with the fixed 9 percent rate, Congress brought 
consistency and clarity to the program.
    Chairman Tiberi, we appreciate your leadership on this 
issue with your introduction, along with Ranking Member Neal, 
of H.R. 3661 to make the flat 9 percent credit permanent.
    In conclusion, these community development tax credits 
provide many important benefits. They leverage private sector 
funds for economic development in housing. They create jobs, 
rebuild infrastructure, and transform distressed neighborhoods.
    I urge you to extend these credits on a long-term basis so 
that we can use them to continue to build the road to economic 
recovery. And as you consider ways to streamline and reform the 
Tax Code, please take into consideration the important 
contributions that these programs have made, especially while 
undertaking efforts to lower the top corporate and individual 
rates.
    Thank you very much.
    [The prepared statement of Mr. Gornstein follows:]


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    Chairman TIBERI. Thank you, sir. Thanks for the testimony. 
Thank you all.
    Dr. Marron, Mr. Brill, in your written testimony and as 
well as your oral testimony today, you both talk about how we 
should change the automatic nature of extending the extenders, 
which is the goal of Chairman Camp.
    How do you think--can you focus a little bit more 
operationally from your perspectives on how we should put the 
burden on having supporters of each extender provide us and how 
we should therefore proceed in separating the different types 
of extenders and their worthiness of staying in the law?
    Dr. Marron.
    Mr. MARRON. Certainly. So I think actually the last time I 
appeared before you I thought it was a good start, which was to 
take a category of tax preferences and focus on them directly. 
So in that case, it was energy provisions. You can imagine 
doing similar things, right? While the tax extenders or 
expirers list is very long, you can group it into categories of 
charity, community development, energy, stimulus, and try to 
sort of focus on those as a group, figure out which ones make 
sense, which ones don't.
    Chairman TIBERI. Should supporters be providing certain 
data points, economic development, jobs numbers, any thoughts 
on that?
    Mr. MARRON. Actually that would be great if they could. You 
know, our friends at GAO sometimes have data on this as well, 
or if not to add to Jim's workload, but it can be asked to 
provide such information as available.
    I should note, by the way, on that particular issue, I 
don't want to over emphasize these particular provisions. There 
are a lot of provisions in government policy in general and the 
Tax Code in particular that don't get enough review. So, you 
know, certainly there are things that are in the permanent tax 
system that deserve more review than they currently get as 
well.
    But some way of kind of separating them out, giving them 
attention requiring some data and justification for what they 
are doing.
    And then also I think the other point is if you can spread 
them out in time, right? So if a typical tax extender lasts 5 
years, then on average you are only going to have one-fifth as 
many to look at every year, and you are going to be able to 
give those closer attention.
    Chairman TIBERI. Mr. Brill.
    Mr. BRILL. Thank you. I think you are raising really a 
critical issue. One is the burden of proof question. Is it the 
responsibility of the constituent and the advocate to prove to 
Congress the worthiness of these policies, or does the burden 
rest with Congress itself or other Federal agencies to prove 
the policies are not working?
    I think that we would be well-served by trying to pursue 
both of those agendas.
    As Jim noted in his remarks, there is oftentimes not a lot 
of--there may be oversight but--on the administrative side but 
not a lot of evaluation by the government on the effectiveness 
of these programs.
    These are really hard questions, however, because simply 
observing that a subsidized activity, that that activity is 
doing well doesn't prove the effectiveness of the policy 
itself. And so for any given credit, for example, there may be 
lots of energy production, but that doesn't mean that on the 
margin we are encouraging that investment or activity. Rather, 
we may just be providing a windfall.
    And so the analysis necessarily requires that you develop a 
``but for'' case in the absence of this policy, what would be 
the outcome. These are really hard economic problems to figure 
out because we don't have a control case. And I think that the 
conclusion there is that the bar needs to be very high. In 
order to have a policy that distorts from what would otherwise 
be happening, we need to set a very high expectation for the 
outcome.
    Chairman TIBERI. Thank you.
    Dr. White, some of the work that GAO has done on the new 
market tax credit suggests that we should consider converting 
the credit into a grant program. So I have two questions 
related to that.
    First, since 2003, the program's cost to the treasury has 
been about $51/4 billion. In exchange, the treasury has 
allocated roughly $29 billion in tax credits that have resulted 
in what Mr. Gornstein has said is roughly $45 billion in new 
market investments. So that is a leverage of about 8 to 1.
    In addition, some estimates are that 300,000 jobs are 
created or retained at a cost of about $17,000 per job.
    So the question, first question is can you elaborate on how 
GAO's perspective on obtaining that same sort of leverage would 
work through, that ratio would work through a grant program in 
place of a tax credit program?
    Mr. WHITE. Yes. The question we were looking at with the 
grant program was the amount of money that is flowing through 
from the treasury ultimately to the beneficiary businesses, the 
community-based businesses, and because of the way the tax 
credit is structured, credits are allocated and then they are 
sold to investors, and there is a fairly complex process for 
raising the funds from the private sector; in effect the tax 
credits are sold to them. And in that process, not all of the 
money is flowing through to the ultimate beneficiary businesses 
in the community.
    And so the question we had was whether a grant would allow 
for the same cost to the treasury, more money to flow through 
to the beneficiary businesses. What we actually suggested was 
running an experiment--divide up the funding for this and have 
some of it run as a grant program, some run as the traditional 
tax credit program and test which one is more effective at 
getting money through to the community businesses.
    Chairman TIBERI. Well, it seems to me that one of the 
driving factors in GAO's conclusion of the grant program 
operation is that the tax credits are running at a discount. 
But certainly, the economy and the recession have probably 
intensified that issue.
    And so Mr. Gornstein suggested that maybe one way of 
improving that is to treat the new market tax credit program 
like the low-income housing tax credit program and the historic 
tax credit by entering into exempting from the alternative 
minimum tax as we do for low-income housing tax credit and 
historic tax credit. What are your thoughts on that?
    Mr. WHITE. Well, I think you still have the basic question 
of whether there is some alternative design to a tax credit 
that would allow more money to flow through to the beneficiary 
businesses. And then a whole separate issue from what we are 
talking about here is how much of the assistance from the 
treasury actually flows through. And the separate issue is the 
effectiveness of these programs overall, and we have tried to 
look at that.
    Our work on that suggested that there was some increase in 
the amount that investors were investing in this sort of 
program. And those are kind of two separate questions. One is 
the effectiveness of the money from the treasury flowing 
through, and the other one is the effectiveness of the program 
overall.
    Chairman TIBERI. My time has expired, but Mr. Gornstein, 
since you brought it up and I asked the question, do you have 
any thoughts on that?
    Mr. GORNSTEIN. Yes, I do. Let me get to the--answer the 
grant versus tax credit issue if I can, very briefly. As you 
point out, the tax credit attracts significant private 
investment which otherwise would not have been made in very 
targeted low-income communities within the new markets credit. 
And I think GAO's own study found a survey of the investors, 88 
percent, would not have made the investment without the tax 
credit. So a grant program is not going to give you that 
private leverage that is so important to getting funding into 
these communities.
    Second, it brings private sector participation in both the 
underwriting of the projects and the ongoing matter, which you 
would not have under a grant program.
    And finally, I think converting to a grant program 
obviously brings the appropriation risk. And as there is so 
much pressure on the domestic programs, we are certainly going 
to run into that I think as you convert to a grant program.
    So those are some of the concerns we would have with 
converting to a grant program.
    The program is working well. It is becoming more efficient, 
as you point out, since the recession. After the 2-year 
extension that Congress provided to the new markets, we have 
seen the yields going up. We have seen the investments 
increasing, record levels in 2011. So I think we are on the 
right path and a permanent extension would even build on that 
momentum.
    Chairman TIBERI. Mr. Neal would be proud of your testimony 
today.
    Mr. GORNSTEIN. Thank you very much.
    Chairman TIBERI. Mr. Thompson is recognized.
    Mr. THOMPSON. Thank you, Mr. Chairman.
    I want to follow up on the new market stuff on behalf of 
Mr. Neal. I have a couple of specific questions for him.
    But I just want to note a couple of things.
    One, all of the issues that have been explained, everything 
from uncertainty to the difficulty in the Code are clearly 
important. And the effect that the work that this committee 
does on both the Tax Code and on the economy I don't think can 
be overlooked. I think we are in a very unique position here. 
You know, a lot of this stuff is just a math problem, bottom 
line. It is the political side that gets in the way. And I 
think that is where this committee's responsibility really 
needs to be stepped up because we need to get beyond some of 
that, the political bickering, and focus on what tax policy is 
going to improve our economy and improve the lives of the 
American people.
    We need to have honest debate.
    I know that, Mr. Marron, you mentioned in your written 
statement, you didn't talk about it, the whole issue of the 
NASCAR provision. And you said that it adds to the perception 
that the Tax Code is riddled with special interest giveaways, 
when in fact that was merely done to correct an administrative 
action by IRS that would have treated one theme park different 
than another theme park, to put it basically.
    We went through the same thing a couple of years ago where 
it was media fodder over the arrows. There was a company, I 
think it was in San Diego, that made aluminum arrows, and they 
were going to move offshore because the Tax Code made it more 
lucrative for them to make the arrows in Korea rather than in 
the United States of America because they assembled, they could 
make them one place and assemble them here and get a tax break.
    When that was fixed, it kept a bunch of jobs in the United 
States. And we handled aluminum arrows the same way we handled 
aluminum baseball bats. But the press went wild with this 
stuff. They talked about it being a giveaway to the bow and 
arrow people, which was ridiculous.
    So I think we all have a responsibility to make sure that 
the debate is honest. So I appreciate you bringing that up, and 
I hope that we can get to that honest debate to make sure that 
we have tax policy that is effective, that is efficient, that 
is fair, and that meets all of the criteria that a couple of 
you had mentioned.
    On the new market tax credit, I think this deserves a lot 
more discussion. Not only has it worked in Massachusetts, where 
there has been historic building preservation and jobs 
associated with that, it is being used all over.
    I have a clinic on the North Coast of California that is 
one of the main health care providers on the North Coast, and 
they are looking at it to do their expansion. And not only is 
this a growth in construction jobs, but it is a growth in 
medical jobs. You know this. Doctors, nurses, nurse 
practitioners, all of the folks who not only are good jobs, but 
when you are all done, you have got good infrastructure and you 
have got a healthier community, which saves us money in the 
future as well.
    So on behalf of Mr. Neal, Mr. Gornstein, I would like to 
ask you his question. And you have talked about the new market 
tax credit quite a bit. But he would like you specifically to 
comment on the GAO's recommendation on this issue. Could you 
please do that.
    Mr. GORNSTEIN. Yeah. As I had said before, we certainly 
have to look for every way to make the new markets tax credit 
more efficient and effective. And I think the community 
development field welcomes the scrutiny, the evaluation, and 
appreciates all that the GAO has done to point out areas where 
the program could be strengthened. But, we do have concerns 
about shifting to a grant program, as I mentioned, and that 
would really be around the issue of leveraging private sector 
investment and how critical that is to get the private sector 
involved in these distressed communities, in investing in low-
income neighborhoods. This is a highly targeted tax credit that 
is benefiting thousands of low-income people in low-income 
neighborhoods around the country, as you had said in California 
as well.
    And it is a program that also brings oversight from that 
private sector around underwriting. This is true in the low 
income housing credit.
    So you are getting the market discipline imposed and having 
another set of eyes on these projects both in underwriting and 
then once they are built and occupied, ongoing monitoring to 
ensure that the benefits continue going forward.
    Again, new markets and the housing credits score very high, 
I believe, in that regard, and the very nature of the tax 
credit is a big reason for that.
    Mr. THOMPSON. Thank you. Thank you, Mr. Chairman.
    Chairman TIBERI. Dr. Boustany is recognized for 5 minutes.
    Mr. BOUSTANY. Chairman Tiberi, I want to thank you for the 
series of hearings we are having on these temporary tax 
provisions and the thoughtful approach you are taking to it, as 
well as thanking Chairman Camp for his leadership on these 
issues as well.
    Gentlemen, I chair the Oversight Subcommittee for Ways and 
Means, and we have been looking very intensively at a number of 
tax credits and the administration problems, the propensity for 
fraud and abuse and those kinds of things.
    And Dr. White, it is fairly easy to dissect down on that 
particular aspect. But you have mentioned a number of other 
areas, metrics that we ought to be looking at and some of the 
challenges. And I am kind of curious, help us figure out what 
we should be looking at when we try to make distinctions 
between a tax provision that is very well written but yet hard 
to measure versus one that may be flawed in the way it is 
written, and of course that creates measurement problems and 
distortions as well.
    Could you give us a little more insight how we might 
approach that dilemma as policymakers?
    Mr. WHITE. Yes. And a couple of things I would emphasize. 
First would be, as I think some of the panelists have 
discussed, first would be setting clear goals for the program, 
spelling out what the, what the effect is that you are looking 
for.
    Mr. BOUSTANY. Would you do that in the statute?
    Mr. WHITE. It could be done in the statute. And you know, 
is the community development program focused on construction or 
is it focused on jobs, and is it focused on jobs for existing 
residents or just new jobs in that community that might come in 
from the outside.
    And then a second issue would be focusing on evaluation. 
And there, one issue, especially in the case of tax provisions, 
is what agency ought to be responsible for the evaluation. IRS 
administers these tax provisions, but IRS is not the Federal 
agency, the executive branch agency responsible for housing 
programs or energy programs or community development programs. 
And so what happens with tax provisions are they are 
administered by IRS, the agency with a functional 
responsibility in many cases doesn't pay much attention to the 
program. So assigning responsibility for actually doing some 
assessment of the programs I think would help.
    Mr. BOUSTANY. Thank you. Any of you want to comment further 
on this? Mr. Brill.
    Mr. BRILL. I would just add briefly to Jim's comment.
    The evaluation of the effectiveness of any given tax policy 
extender needs to also occur while recognizing other programs 
on the other side of the ledger. And so we need to think about 
the net consequences not only of our tax policy geared, say, 
for example, towards housing but also due to our spending 
policies, bring those together in a single framework and then 
make a determination and evaluation.
    Mr. BOUSTANY. Thank you.
    If I could shift gears for a moment. Mr. Brill, you 
mentioned no tax policy should be intentionally temporary, and 
as we go through tax reform, clearly we want to simplify, 
streamline the Code, hopefully see more permanency so that you 
create an environment of certainty. And that sounds all great, 
but if we are going to have provisions that sunset gives me--I 
mean what is a reasonable timeframe? Clearly, 1 year makes it 
very difficult when you are doing things year after year. 
Several of you highlighted that. It also creates problems for 
oversight. What is a reasonable timeframe for a temporary 
provision?
    Mr. BRILL. I think the answer probably depends on the 
policy itself. But I know that the committee has thought in the 
past about how to create a temporary policy that is convincing 
to the beneficiaries that it's permanent. That is, in essence, 
how do you work around the budget constraint systems in the 
Budget Act, yet still convince the users that this is something 
they can rely on?
    Certainly only reinstating policies retroactively is to 
create windfall benefits. On the other hand, I would look back 
to 2003 when the dividend/capital gains rates were lowered on a 
temporary basis due to a budget process issue, not a cost 
issue, but budget process. At that point, it was viewed that 5 
years would give that amount of certainty, some confidence to 
the market. And other policies were considered at that time 
that would have been much shorter and not pursued because of 
the importance of convincing beneficiaries or constituents, 
taxpayers, that the intent is to create policy that is 
permanent.
    Mr. BOUSTANY. Thank you. My time has expired. Thank you, 
Mr. Chairman.
    Chairman TIBERI. Thank you. Mr. Marchant is recognized for 
5 minutes.
    Mr. MARCHANT. Thank you, Mr. Chairman.
    Mr. Brill, over the years various industries have urged the 
adoption of tax provisions with the stated purpose of 
incentivizing investment in certain types of energy.
    In selling the merits of these incentives to Congress, it 
was indicated that these taxpayer supports would only be 
required for the amount of time necessary for these industries 
to mature. To date, very few, if any, of these industries have 
independently determined that these subsidies are no longer 
necessary.
    Could you address the methods and criteria that Congress 
should use to make its own evaluation as to whether the 
originally stated objectives of these subsidies has been 
achieved and what the appropriate means of discontinuing this 
taxpayer benefit?
    Mr. BRILL. Thank you. This goes to one of perhaps the 
hardest questions for Congress or the private sector to grapple 
with, which is the rate of technological progress. And so while 
many will be hopeful that their nascent technology will quickly 
mature and that cost of production will fall quickly in such a 
way that it will no longer need government support, these are 
really hard issues to ultimately predict ahead of time how well 
those markets will mature.
    We have seen a lot of policies work their way into the Code 
on exactly that argument. ``We only need this relief, this 
encouragement, for a limited period of time.''
    Ultimately, the industry can grow to become dependent on 
these policies. And the economics for any given activity will 
rely on the availability of a taxpayer subsidy. And the ability 
to wean an industry, particularly the energy industry, off of 
these credits is obviously proving very difficult.
    I would suggest that to the extent the committee pursues a 
policy, an effort to reduce these credits, you need to think 
carefully perhaps about a transition, a phaseout of some of 
these policies that might allow the market to understand how 
things are going to, over time, step down and ultimately end.
    Mr. MARCHANT. So a strategy for an energy source that is 
heavily relying on these subsidies, a strategy for this to come 
to this committee would be to demonstrate very clearly at what 
point they feel like they would not need the subsidy any more 
and then codify that and put that into law?
    Mr. BRILL. That is exactly right. And if you codified the 
stepdown or the phaseout of that policy instead of having them 
hit a wall where a large benefit goes away overnight, both as a 
policy matter and I also would suggest politically, that might 
make it more likely that the policy will actually terminate.
    Mr. MARCHANT. And then in the investor community, an 
investor would look at that and make a decision whether that 
investment was in fact, you could tie the risk of the 
investment to the stepdown of it and it might more 
realistically reflect--the investment level might more 
realistically reflect how actually feasible that industry was?
    Mr. BRILL. That is exactly right.
    Mr. MARCHANT. Mr. White, you mentioned in your written 
statements that with some tax expenditures, it is difficult or 
impossible to determine whether a provision is having its 
intended effect. Should Congress decide to extend a given tax 
expenditure, what steps should it take to facilitate measuring 
its impact?
    Mr. WHITE. As I said earlier, I think setting goals, 
assigning responsibility to an executive branch agency for 
actually doing the evaluations, and I think that ought to be 
the agencies with functional responsibility, not IRS. IRS is a 
tax agency. I don't think they should be in the business of 
assessing a housing program or an energy program. And then that 
agency then would make some determinations about the type of 
data that would be needed to actually conduct the evaluations.
    So, right now, the only data that is collected on many 
provisions is data that IRS needs for ensuring compliance with 
the law. IRS is not collecting information suitable for 
assessing the effectiveness of many provisions.
    Mr. MARCHANT. Okay.
    Thank you, Mr. Chairman.
    Chairman TIBERI. Thank you, Mr. Marchant.
    As a follow-up, Mr. Brill, to Mr. Marchant's question on 
energy, I am sure you were glued to your computer screen when 
we had the last hearing--it was a very highly rated session we 
had--with Members on both sides of the aisle, for example, 
talking about the production tax credit. And we had a lot of 
consensus from not just Members but supporters on this issue of 
phasing out the tax credit over the period of the next several 
years, which was kind of interesting.
    And as just a side question to what Kenny talked about, I 
also heard that, since this has already expired, that it is 
having an impact on reinvestment. Because folks don't know 
whether or not we are going to re-extend it.
    So, as we look at this, how does that impact the policy, 
the fact that it is already expired and the fact that you have 
advocates now saying we will phase it out?
    Mr. BRILL. Yes, there is no question in my mind that many 
of these policies in the extenders package have real, 
measurable, observable consequences in the market. The 
taxpayers act or don't act depending on whether or not they are 
getting these policies.
    And so if it is a determination that the subsidy is 
desirable, that we want more of that activity, there are many 
of them that work that way. And it is observable for sure in 
the energy sector, with a host of the credits, how the levels 
of investment have increased and decreased over time as the 
credits have changed or expired.
    In particular with regard to letting them lapse and then 
going back or promising to go back or then arguing about 
whether or not you are going to go back and reinstate them, it 
is going to have a big consequence, too, and create an 
additional uncertainty for that community, for that industry.
    And so, to the extent that we are trying to develop a set 
of policies where Washington is freeing the private sector to 
do as it wishes or to set a set of policies that encourages it 
without constantly interfering, we are failing that test when 
we let those policies expire and then go back and reinstate 
them.
    Chairman TIBERI. Thank you.
    Mr. THOMPSON. Mr. Chairman, would you yield?
    Chairman TIBERI. I will yield for a minute.
    Mr. THOMPSON. That is all I need. I just want to get some 
certainty. When we are talking about the energy tax provisions, 
we are talking about all of them, not just the renewables, 
correct? So the 199 deduction for gas and oil? We are talking 
about everything?
    Mr. BRILL. Well, the 199 is not an expiring provision. I 
was speaking generally of tax credits to encourage activity in 
a given sector, including in the energy sector.
    Mr. THOMPSON. So the 199 deduction for gas and oil would be 
one that you are talking about?
    Mr. BRILL. Well, section 199 is not an expiring provision.
    Mr. THOMPSON. I understand it is not expiring. But if you 
are going to talk about energy tax provisions, I don't know how 
you talk about one side without talking about the other side.
    Mr. BRILL. So, section 199, which applies for manufacturing 
income, including income derived through energy production, may 
have an effect on the allocation of resources toward those 
activities and away from activities----
    Mr. THOMPSON. Similar to tax expenditures' effect on the 
allocation of resources as it pertains to renewable energy.
    Mr. BRILL. That is correct.
    Mr. THOMPSON. Thank you.
    Chairman TIBERI. I was actually trying to be helpful.
    Mr. THOMPSON. Me, too.
    Chairman TIBERI. Mr. Gerlach is recognized for 5 minutes.
    Mr. GERLACH. Thank you, Mr. Chairman.
    First of all, thank you both, Mr. White and Mr. Gornstein, 
on your thoughts, further thoughts, on this issue of the New 
Markets Tax Credit. And particularly, Mr. Gornstein, I share 
your view on keeping the program as is and growing it in terms 
of the amount of allocation that is available each year over a 
longer period of time. I think it does a pretty terrific thing 
in a lot of communities with these projects.
    Mr. White, if I can, however, go back to your testimony or 
your GAO report that gets into, again, the criteria for good 
tax policy. And I am interested very much in the terminology 
you use, criteria including equity, economic efficiency, 
simplicity, transparency, and administrability, as well as 
relationship to other policy tools.
    Interestingly, as we were talking about what should stay in 
or what should be taken out of the Tax Code as we go through 
this process of hopefully simplifying it, you would think and 
most of the conversations we have had center around job growth, 
making it more easy to grow capital that makes itself available 
then for investment in the economy. But you term it as economic 
efficiency.
    And can you describe a little bit more fully that term 
relative to jobs, relative to capital formation, as a criteria 
for how we ought to look at a lot of these provisions down the 
road?
    Mr. WHITE. Yes. Essentially what you are doing with these 
tax provisions--and this applies not just to tax provisions; 
this applies more broadly to spending programs or other types 
of programs--you are shifting resources, you are providing 
incentives to move resources from one area in your economy to 
other activities in your economy. And the question is whether 
there is a net gain or not from doing that. And, in some cases, 
there may be a net gain from that.
    So with the research credit, for example, it is argued that 
private businesses will underinvest in basic research because 
they can't capture all of the benefits of that research. And so 
there is a justification there for some government subsidy to 
shift additional resources into basic research. Tax provisions 
are one way to do that but not the only way to do that.
    Mr. GERLACH. Uh-huh. And does that roll into this issue of 
relationship to other policy tools? For example, let's take the 
New Markets Tax Credit that can be used in an older community 
in my district to undertake renovation of older housing stock 
and turn it around for affordable housing projects. And yet you 
could find umpteen other Federal programs that are grant 
programs that might do the same thing, say, HUD programs.
    So is it better, from a policy standpoint, to allow a more 
private-sector, market-based approach, to use a credit but then 
allow also the formation of cap to do that project, or just 
have some entity go and file a grant application with HUD and 
get it done that way?
    Or take a look at a situation where you might have an R&D 
tax credit or a section 179 business expensing. Or, rather than 
a Tax Code approach, just have them go get an SBA 7(A) loan to 
do something.
    So shouldn't we be looking at these Tax Code extenders as 
well as reform issues not only from the context of what would 
happen reaction-wise in the private sector based on what the 
Code says, but also what is available out there on the 
programmatic side that is also available to people? And maybe 
even think about whether those programmatic approaches to doing 
what we want to see happen in the private sector--those ought 
to be maybe reduced and provide better opportunities in the Tax 
Code so individual companies can make decisions based on the 
Tax Code without having to go through the bureaucratic process 
of filing an application, go through a grant review, maybe get 
the grant, maybe not get the grant.
    Mr. WHITE. Yes.
    Mr. GERLACH. But rather then relying on government to give 
them some benefit through a bureaucracy, have a Tax Code that 
can be more responsive to what they can do in our communities 
to improve the quality of life in our communities.
    Mr. WHITE. There are some different advantages and 
disadvantages to using these different, I call them tools of 
government--spending programs versus tax programs, for example. 
With the Low-Income Housing Tax Credit, for example, the way 
that is structured, the private sector does have some incentive 
over time to ensure that the projects that are built stay in 
compliance with the rules. So it was a way to bring in some 
private-sector management experience there.
    Another example of what we are talking about here is the 
assistance provided to higher education, where you have Title 
IV spending programs and a number of tax programs at the same 
time, and what you would like to do is apply these evaluation 
criteria across the board to all of those programs.
    One of the things we found in our work right now is that it 
appears that the mix of these programs is just not very 
transparent to many people. They are either not claiming 
anything at all even when they are eligible or they are using 
the wrong program. They seem to be overwhelmed by the choice 
here. And it has resulted in confusion and people making bad 
decisions from their own financial self-interest perspective.
    Mr. GERLACH. Yeah.
    Does anybody else on the panel have a thought on that, in 
terms of the relationship of current grant loan programs that 
are administered through a massive bureaucracy in Washington 
versus just allowing the Tax Code to be a better tool to 
stimulate private-sector investment in our economy and our 
communities?
    Mr. GORNSTEIN. Yeah, just one more point about that.
    The grant programs are extremely important, but it is the 
tax credits--Low-Income Housing Tax Credit, New Markets--that 
are the engine that drive these deals. So the grant programs 
alone are not enough to move forward on most development 
projects in most communities. You need a combination, 
typically.
    But the biggest resource, the most powerful one, is the tax 
credit. So I think if we lose the tax credit or it is not 
extended or there is uncertainty and we are not getting the 
yields we need, it is going to have a detrimental effect on our 
ability to do more projects in very targeted communities.
    Mr. GERLACH. Thank you.
    Any others?
    Okay. If not, thank you, Mr. Chairman.
    Chairman TIBERI. Thank you, Mr. Gerlach. And thank you for 
your leadership on the New Markets Tax Credit.
    And, Dr. White, just an aside to add to what Mr. Gerlach 
was talking about, I know in my district, which is urban/
suburban in my current district, the fact is, if you and I 
drove through it and saw the differences of housing policy at 
the Federal level between a housing authority, a HUD property, 
versus Low-Income Housing Tax Credit policy or go to a New 
Markets Tax Credit policy that has private-sector involvement 
and oftentimes local support from cities and counties, the 
differences are unbelievable.
    And I would love to see you all do a study on how those 
different policies at the Federal level impact, in the end, 
what the bricks and mortars are built on the ground and how it 
impacts communities. I don't know if you have ever done that 
before. Have you?
    Mr. WHITE. I don't think we have done as comprehensive a 
look as you are asking about. I have been involved with our 
past reviews of Low-Income Housing Tax Credits and have visited 
projects myself. So I have seen that difference, as well.
    And I think, you know, ultimately it boils down to 
questions of, if you are comparing programs, does one deliver 
more bang for the buck than another one; and then also the 
overall effect of the combination of programs----
    Chairman TIBERI. Right.
    Mr. WHITE [continuing]. For example, to what extent are the 
programs crowding out private-sector investment in an area. 
That would be part of the evaluation.
    One of the things we found in our reviews of the New 
Markets Tax Credit was that it did appear to increase overall 
investment in the targeted communities.
    Chairman TIBERI. So you probably wouldn't answer this 
question. You probably couldn't come out and support Mr. 
Gerlach's amendment to the appropriations bill to zero out HUD 
grants and transfer them to the tax credit--just kidding.
    Mr. Berg is recognized for 5 minutes.
    Mr. BERG. I had better cut in there. Thank you, Mr. 
Chairman.
    And I thank the panel for being here. I mean, this is an 
important, great discussion that is really the next step.
    You know, I mean, there is no question the problems we have 
with the Tax Code. The uncertainty, the unpredictability, I 
mean, it has just caused so much doubt throughout our economy. 
I mean, I think that is just one of the key things that we need 
to get fixed if we are going to get our economy turned around. 
There is absolutely no question about it.
    You know, having said that, you know, there has been a lot 
of discussion about a comprehensive tax reform. And, you know, 
I think that is something that many of us in this committee 
would like to see happen.
    And so I would like to kind of ask the panel just kind of 
briefly, you know, we have the extenders. If we do that outside 
of the box of a comprehensive tax reform, you know, really, 
what are we accomplishing? Or should they not be part of this 
comprehensive tax reform when we get that?
    You know, I think everyone that is a beneficiary of these, 
you know, the discussion today is make them stand up, make them 
say, you know, ``Here is why this is important,'' let them 
stand on their own merit, and I think that is important. I 
think the comment about, so many of these are short-term 
because of the budget problem--well, these are some long-term 
decisions that, quite frankly, need to be made, as well as 
long-term comprehensive tax reform.
    So my question is, can we do this outside this, or should 
they all be part of this comprehensive tax reform?
    Mr. White.
    Mr. WHITE. I think you want to do both. You want to look at 
the merits of individual provisions or the package of programs 
targeting a specific area, such as assistance for higher 
education, but then you also, on tax reform, you have broader 
issues.
    With tax expenditures as a whole, not just the expiring 
provisions, but tax expenditures as a whole are so large that 
that affects what tax rates have to be. There is so much 
revenue given up from shrinking the base that tax rates on the 
remaining base have to be higher. Well, there are economic 
consequences to those higher tax rates. And so there is a 
tradeoff there that needs to be taken into account at a more 
macro level.
    Mr. BERG. Thank you.
    Mr. MARRON. I would absolutely agree. The optimal would be 
to do fundamental tax reform and clean up everything. So there 
are a bunch of expiring provisions that really ought to be 
permanent features of law, either because they are good tax 
policy--Mr. Thompson gave an example where one might correct an 
error that is out there. You know, those kinds of things ought 
to just be addressed permanently as part of overall reform.
    The challenge, as you know better than me, is that the 
clock of legislation doesn't suggest that we are going to have 
such tax reform before people deserve some resolution in the 
near term about what is going to happen to these provisions, 
particularly those that have already expired but are still 
under consideration. And you have sort of an opportunity to let 
some of them die permanently and maybe keep them out of the 
next discussion of tax reform. But, frankly, I think the 
legislative clock will require that you address a whole bunch 
of these for another year or 2 as sort of another bridge to the 
hoped-for tax reform of 2013 or 2014.
    Mr. BRILL. I would just note that many of the policies in 
the tax extender package are tax expenditures. And there has 
been a dialogue over the last 2 years or so more focused on the 
notion of broadening the tax base, curtailing these tax 
expenditures, whether they are temporary or a permanent part of 
the Tax Code today.
    And then with a broader tax base that is more efficient, 
less distortionary, there is an opportunity to reduce tax 
rates, which would be pro-growth, and/or potentially reduce the 
deficit in some combination that policymakers will need to 
wrestle with.
    But I think that we should consider these tax extenders and 
the distortionary effects that many of them have, just as we 
have had a debate about tax expenditures generally in the Code.
    Mr. GORNSTEIN. Well, given the urgency and the need to 
extend the expiring credits, I would hope Congress would move 
quickly on that, you know, as soon as possible and not wait for 
the broader reform package, which, as has been pointed out, may 
or may not happen by the end of the session.
    So, New Markets in particular, the flat 9 percent fix terms 
of the Low-Income Housing Tax Credit--two very, very high 
priorities.
    Mr. BERG. All right. Thank you.
    Thank you, Mr. Chairman.
    Mr. THOMPSON. Would the gentleman yield?
    On the issue of the comprehensive tax reform and doing away 
with the tax expenditures to get the rate down, do you all 
agree that--I know we need to do it, and I think you all agree 
that we need to do it, but do you agree that it needs to be 
revenue-neutral?
    You don't think we should grow the debt and the deficit in 
order to do this?
    Mr. WHITE. Well, certainly, you know, the United States is 
on a long-term budgetary path that is not sustainable----
    Mr. THOMPSON. I get all that. I am just wondering, should 
tax reform be revenue-neutral?
    Mr. WHITE. I think that has to be answered in the context 
of how you are going to reduce the debt, bring down the 
deficit.
    Chairman TIBERI. They all weren't prepared to testify on 
tax reform, so you got them, Mike.
    So you may answer if you want. Go ahead, guys. Go ahead, if 
you want.
    Mr. MARRON. Sir, again, as you experience as much as I do, 
unfortunately the phrase ``revenue-neutral,'' now there is 
enormous debate about what on earth that means and does it 
include the extenders, whatever. So it is easy to say ``yes'' 
or ``no'' to that without.
    I would say, the way I would summarize your point is that 
we need a tax revenue target for tax reform. And my reading of 
the tea leaves is, as you look into the future, the Federal 
Government is going to have to raise more revenue than it has 
historically in the past, given the spending pressures that are 
building and continue to build.
    Chairman TIBERI. Anybody else want to answer? Mr. 
Gornstein. Mr. Brill.
    Mr. BRILL. I agree with Donald's comments, that we need to 
think about what that revenue level needs to be, given all of 
the spending objectives that we have, and we need to find a 
balance. And so it is a question that needs to be answered both 
considering the outlay side and the spending side. And, 
obviously, there are significant spending pressures.
    Chairman TIBERI. All right. The gentleman's time has 
expired.
    The gentleman from Texas?
    Mr. MARCHANT. Thank you, Mr. Chairman. I will be very 
brief.
    I would like for our committee to also interject another 
aspect of the extenders and the viability of them, and that is 
the probability of that program or extender having the same 
ability to attract investment and the proper amount of 
investment in a, in fact, reformed Tax Code; where if I am at 
39 percent and I am an investor, I am looking at deals based on 
the tax effect on my personal tax return. I am looking at the 
income credits. And, at that point, the value of all those 
credits and the value of that investment is worth X.
    If we follow through--and I believe we will--as a committee 
and lower the tax rate, simplify the Code, then in 1 year or 2 
years many of the programs that we renew or put back on the 
books will not have the same level of viability in the investor 
community because they simply won't have the horsepower to 
attract the investment that they will at the higher rates.
    So I would just like to interject that as another criteria 
when we look at these extenders----
    Chairman TIBERI. Thank you. Thank you.
    Mr. MARCHANT [continuing]. And see if there is some----
    Chairman TIBERI. Excellent point.
    Mr. MARCHANT. Thank you.
    Chairman TIBERI. Excellent point.
    Well, this concludes today's hearing, right on cue with the 
bell. I really appreciate the four of you today. You have 
really provided some excellent testimony. And I appreciate the 
dialogue and the give and take and even some of the questions 
outside the area to which we attracted you here to give your 
expert opinions.
    And we are going to continue as a committee and as a 
subcommittee to go through this process and try to determine 
what extenders should be extended and what should not be 
extended and what, maybe, should be part of a permanent form of 
tax reform. So we appreciate your input.
    Please be advised that Members may submit written questions 
to the witnesses. Those questions and the witnesses' answers 
will be made part of the official record.
    Chairman TIBERI. Again, I would like to thank you all for 
taking time out of your busy schedule. Thank our Members for 
being here today for this great discussion.
    This hearing is adjourned.
    [Whereupon, at 10:51 a.m., the subcommittee was adjourned.]
    [Submissions for the Record follow:]



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