Because of partisan gridlock in Washington, D.C., the magnitude of important economic issues that will have to be dealt with in a lame duck session of Congress could be staggering. Lame duck sessions are convened after a general election so the outgoing—or “lame duck”—Congress can wrap up must-pass legislation in December before the new Congress takes office in January of the next year.
This year the White House, U.S. House of Representatives and one-third of the U.S. Senate are up for election Nov. 6. Regardless of what happens, the current set of incumbents will have to tackle a “to-do” list in December that will include:
- whether to extend Bush-era tax cuts for marginal rates, capital gains and dividend rates, the marriage penalty and child tax credit
- whether to extend the 2 percent Social Security payroll tax cut for employees
- renewal of a one-year “patch” on the Alternative Minimum Tax, so millions of middle-class taxpayers don’t get swept in
- renewal of the current estate-tax formula with a $5 million exemption and maximum 35 percent tax rate, so it doesn’t revert back to a $1 million exemption with a top rate of 55 percent
- whether to extend IRC Sec. 179, expensing provisions for small businesses that include a 50 percent bonus depreciation for assets placed in service in 2012
- whether to extend 60 tax credits covering a variety of activities that expired at the end of 2011.
Two of the expired credits involve residential construction: the homeowner energy-efficiency tax credit (IRC Sec. 25C) and the energy-efficient new home tax credit (IRC Sec. 45L). It is not unusual for Congress to renew these credits as part of a tax-extenders package retroactively, but it would obviously be better for the remodeling industry if they were renewed as soon as possible, particularly 25C.
The “stimulus bill” had boosted the 25C credit to 30 percent of the cost of a qualified item not to exceed $1,500 for 2009-10, but the December 2010 “tax deal” agreed to by the White House and Republicans only extended it through 2011 at pre-stimulus levels (10 percent not to exceed $500). IRS data indicates the $1,500 level for 25C was a market mover, generating a total of $25.1 billion of qualified expenditures in 2009. According to the Residential Energy Efficient Tax Credit Industry Coalition, in 2009 taxpayers claimed nearly $5.9 billion in 25C and 25D (for qualified solar, small wind, geothermal and fuel cell property) tax credits and, because of the $1,500 limit, 25D usage and other tax rules, $5.172 billion was allowed as realized 25C tax credits.
The positive impact of 25C is further illustrated by IRS data showing 93 percent of 25C (and 25D) tax credit claims for 2009 were made by taxpayers who have an adjusted gross income of no more than $200,000, which is the essence of a middle class tax program. In addition, data from the National Association of Home Builders show remodeling expenditures performed much better than new home sales from 2008 through 2011. It is fair to conclude from a chart of such activity that the 25C tax credit program provided a floor for remodeling activity, which declined only 32 percent since its peak during that period compared to a 76 percent decline for new home sales.
Although new home sales continue to struggle, the down market did not hinder use of the energy-efficient new home tax credit (45L). This tax credit program provided a $2,000 credit per home for builders of new energy-efficient homes that use 50 percent less energy per the International Energy Conservation Code’s 2004 supplement. It went into effect in 2006 and, according to the Residential Energy Services Network, last year 32,000 (or 11 percent) of new homes sold were verified for the credit.