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Taxes and the Budget: What are extenders?

Tax "extenders" are tax laws that will expire after a certain date. The Congressional Budget Office (CBO) must assume that these laws will be permanently terminated as scheduled when it compiles the budget baseline that serves as a starting point for congressional budget deliberations. This makes the baseline unrealistic, since temporary tax laws very often are extended. Because the vast majority of extenders involve tax cuts, the assumption that these provisions will be terminated tends to make CBO project a healthier budget balance than is likely to occur. There is one exception to the rule: temporary taxes whose revenue is deposited in trust funds are assumed to continue.

  • The most important temporary tax cuts are the Bush tax cuts of 2001 and 2003. They will expire at the end of 2010 unless Congress extends them. If all were extended permanently, the budget surplus that CBO projects for the period 2011-18 would be reduced by a cumulative $3.2 trillion.
  • Congress has recently provided a series of one-year reductions in the burden that would otherwise be imposed by the alternative minimum tax. If the exemption amount of the tax were permanently indexed for inflation, the cumulative budget balance projected by CBO for the period 2009-18 would be worsened by over $900 billion.
  • There are eighty-seven other temporary tax provisions. All but three are temporary tax cuts.
  • The most important of the eighty-seven is the research and experimentation tax credit. It has been enacted for one year at a time and has been extended for eleven straight years.
  • Why does Congress enact so many temporary provisions? It would be nice to think that it was to force the periodic reevaluation of certain tax subsidies. However, it is more likely that Congress wishes to avoid actions that force it to show a significant deterioration in the long-term budget balance. This tendency is strengthened by the Senate’s Byrd rule. It is difficult to pass any legislation in the Senate unless one has the sixty votes necessary to cut off a filibuster. However, that is not true of legislation contained in a reconciliation bill adopted as part of the budget process. This procedure limits debate and allows legislation to be passed with a simple majority of fifty-one votes. But reconciliation may only be used for bills that do not increase the budget deficit beyond the time horizon of the budget resolution. The Bush tax cuts were passed using reconciliation procedures, and that is a major reason that they are temporary.
  • There is a curious asymmetry in the rules that specify how the budget baseline should be constructed. Temporary tax provisions are assumed to be ended on schedule, but entitlements that must be reauthorized periodically, such as farm subsidies, are assumed to continue throughout the ten-year projection period.
  • Pay-as-you-go rules say that any increase in an entitlement or cut in taxes compared with the baseline must be paid for with some other tax increase or entitlement cut. The asymmetric rules used in designing the baseline thus imply that Congress must pay for a routine extension of a temporary tax cut but can avoid paying for an extension of an entitlement. That would seem to create a strong bias in favor of higher entitlements and higher taxes.
  • It is also assumed that appropriations for discretionary programs, most of which last for only one year, are renewed and adjusted for inflation.
  • The asymmetry between the spending and tax sides of the budget could be cured by assuming either that all temporary entitlement, appropriation, and tax laws expire as specified by the law, or that all temporary provisions are continued. Because most temporary provisions are renewed routinely on both sides of the budget, the second option would provide a more accurate view of the future size of government and the path of the budget balance. Such a reform, however, would be strongly resisted by those who dislike the controversial Bush tax cuts, because it would make it easier to extend them.
 
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   Entry 6 of 8