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A battle over billions in business tax incentives

Deep in the $1.1 trillion dollar spending bill that Congress has to pass by Dec. 11 to avoid a government shutdown are 50 annual "tax extenders" that would provide tens of billions of dollars in tax relief for the private sector.

Advocates say these measures, which have been around for years, are essential for U.S. businesses to compete globally. Critics claims that they're nothing more than a form of corporate welfare paid for with deficit spending.

Congress's Joint Committee on Taxation calculates that the measures would cost a total of $97 billion over two years. But just four of these proposed tax breaks account for close to two-thirds of the revenue lost to the government from all of the provisions combined.

The most generous tax relief item for "bonus depreciation." It lets businesses lower their taxes by significantly accelerating the rate at which they can deduct the depreciation of any new asset, such as machinery, they purchase. Without this provision, that depreciation could have to be taken over several years, tracking in real time the actual decline in value of the underlying asset.

Passed during President George W. Bush's tenure, the tax break was enacted in the aftermath of the Sept. 11, 2001, terrorist attacks in hopes of stimulating business investment. At the end of his term, in hopes of heading off what turned into the Great Recession, Bush signed the Economic Stimulus Act of 2008, which reinstated the bonus depreciation provision, which had lapsed in 2005.

Does it work? A 2012 Congressional Research Service study surveyed all the available research that tried to quantify the provision's actual economic impact. It found that "the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy."

Still, some business owners and advocates vouch for the tax break.

"For small and midsize companies, it encourages investment that just wouldn't happen otherwise," said Jeffrey Scheininger, CEO and president of Flexline, a New Jersey-based manufacturer of specialized metal hoses for several sectors including aerospace and pharmaceuticals.

Scheininger said the combination of help from his state's Economic Development Authority and being able to accelerate depreciation on his new plant and equipment made all the difference. "We were able to double the size of our plant to 20,000 square feet," he said.

Others also attest to the tax item's importance.

"Provisions targeted toward quick cost recovery, including bonus depreciation, put cash in the pockets of business to create jobs and make capital investments," said Caroline Harris, chief tax policy counsel and executive director of tax policy at the U.S. Chamber of Commerce. "Failure to act on these hurts the ability of businesses to grow and expand."

But not all businesses advocates agree with that position. "This is hugely expensive and really should be reserved only for times of extreme economic crisis like in 2008," said David Levine, CEO of the American Sustainable Business Council, a nonprofit that represents 200,000 companies that support socially responsible business practices.

The second of the big four provisions is the "research tax extender," which has been around since 1981. This tax break aims to encourage companies to conduct scientific research as part of developing new products. A 10-year extension of this provision would cost the Treasury $109 billion.

The Chamber of Commerce argues that this R&D tax relief provision is essential for American business to remain innovative and compete globally. But Bob McIntyre, executive director for Citizens for Tax Justice, said allowing corporations to retroactively apply the credit to past spending contradicts the provision's underlying premise. "How can you encourage research that was done in the past?" McIntyre asked.

"This has potential to really be a great stimulus to move our economy toward breakthrough innovations that will grow existing businesses, as well as spawn new businesses to create jobs -- but only if it's targeted that way," said Levine of the American Sustainable Business Council. "All too often it's used to merely reinvent packaging for the same old products."

Perhaps the most controversial of all the business tax extenders are the "active financing exception" and the "controlled foreign corporations look-through rule." U.S. multinationals rely on these provisions to reduce their tax liability through various ways of shifting income to offshore subsidiaries.

Before Congress takes on comprehensive tax reform, it has no choice but to sign off on the all the tax extenders, the Chamber of Commerce's Harris said. "Inaction on these provisions is damaging across the entire business community. For example, certain provisions, including active finance and the R&D credit, ensure companies have the tools to compete globally."

In 2013, however, corporate giants such as Apple (AAPL), General Electric (GE) and Google (GOOG) were investigated by the Senate's Permanent Subcommittee of Investigations for using these provisions. Senators Carl Levin, D-Michigan, and John McCain, R-Arizona, who chaired the panel, blasted the practices as tax avoidance, saying they cost the government billions of dollars in lost revenue.

In testimony before the Senate panel, corporate officers defended these tax practices as sound business strategies promoted by the existing tax code, which they pointed out also includes a 35 percent corporate tax rate, one of the highest in the world.

A 2014 report by the Citizens for Tax Justice, a nonprofit advocacy group, explored this offshoring strategy and found that 288 of the Fortune 500 companies that were profitable between 2008 and 2012 paid an average effective tax rate of just 19.4 percent over that five-year period, while 26 companies paid no federal taxes at all.

"Since the 1950s the share of federal income tax revenue paid by corporations has dropped from 40 percent down to around 19 percent these days," McIntyre of Citizens for Tax Justice told CBS MoneyWatch.

"We are looking for a taxation policy that's rooted in fairness and an even playing field for businesses of all sizes," Levine said. "Our concern is that some of these provisions, which make it possible for U.S. multinationals to shift their income offshore and avoid U.S. taxes, actually shifts the tax burden to businesses that have made a commitment to stay in the U.S."