Hiding at the bottom of the stack

You will recall from the discussion of the mortgage interest deduction that where a credit or deduction appears on the tax form can matter deeply for how it works in practice. To some extent, it reveals how high-priority the law is.

The pros refer to this as the stacking order. Something low on the order gets taken into account after everything else, and so may demonstrate funny interactions and side-effects with items earlier in the order.

As I covered over the course of two columns, Form 3800 lists a few dozen credits, but the total general business credits one can take are limited. The first two pages of Form 3800 calculate that limit, so it’s complicated, but let’s just say that the credits are limited to 25% of taxes otherwise owed.

So say that you have 300k in investment credits, 300k in low-sulfur diesel credits, and 100k in miner rescue training, but are limited to taking only half a million in credits.

This is where the stacking order comes in. You are deemed to have taken the 300k in investment credits, 200k in diesel credits, and that’s it. The rest (100k diesel, 100k miner rescue), you can carry over to next year and maybe use then.

This means that, in practice, the credits at the bottom of the stacking order are less likely to be taken.

The difference between a credit taken and a credit not taken can be subtle. As far as the taxes for the business this year go, all that matters is that credits were taken, not what their names were.

If the firm has the same finances next year, it’ll claim the same higher-in-the-stack credits, and over time it may wind up carrying an increasing amount of diesel credits. Recall how past losses can carry over and eventually be used, or make the company a more valuable asset. The same is true of a firm carrying unused credits, with the caveat that companies that are already hitting their limit on credits have no need for more.

Or, the credits may just atrophy. They aren’t inflation adjusted, and so lose value the way anything else earning 0% interest will. Or, Congress may cancel the credit entirely. Many of these credits are renewed every year, so if Congress forgets to do its homework, or the miner rescue industry loses favor, the credit is cancelled and it’s unclear what happens to potentially years’ worth of saved-up credits.

On the other side, credits carried forward have no real, present cost. That means that the earlier credits look bigger to Congressfolk and pundits. When you read CRS reports listing total costs for different credits, a credit carried over has zero cost, so it’s the higher-up credits that are brighter blips on the radar.

In short, credits at the bottom of the stacking order are cheap, economically and politically.If you’re feeling positive, this means that the credits are very well-targeted: small companies that fit the quirk the credit addresses will get their credit, while big companies exhaust their credit usage by the time they get to line 1c, so any carryover from the credit on line 1y effectively drifts away.

This is the eighth and last essay in a series on tax subsidies that divide the population between people who benefit from the subsidy and people who have no idea that the subsidy exists (which started here). Now you know where to find a few dozen of these sorts of subsidies, and see how the system is built so that even in the cost accounting, they maintain as invisible a presence as possible.

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