The voices of Tax Policy Center's researchers and staff
There is lots of buzz around Washington about whether a laundry list of expiring tax provisions could be the key to a modest budget agreement.
Sadly, it is hard to see how.
The theory goes like this: Democrats might agree to some cuts in programs such as Medicare if Republicans swallow some new revenues. There is no chance that GOP lawmakers will accept tax increases, but maybe they would accept revenue by passively conceding the quiet death of scores of temporary tax cuts that are due to expire at the end of this year.
In effect, Congress could include some revenues in a fiscal package by doing what it does best—nothing. Simply letting these tax cuts expire would produce those new revenues. This would replay on a smaller scale the events of last year, when Congress allowed the Bush-era tax rates to revert to higher levels.
The logic fails on two counts: dollars and budget scoring.
First, the dollars. While congressional Joint Committee on Taxation counts no fewer than 64 separate tax breaks that are due to expire on December 31, most are very small in budget terms. The budget effects would occur starting in 2014 and we only have official estimates for 2013 and beyond so these are rough. But on the individual side, the sunsetting provisions add up to just $5.9 billion in fiscal 2013 and about $12 billion over 10 years.
Corporate extenders are bigger—JCT expects them to cost Treasury about $63 billion in 2013. However, because so many of the temporary business preferences do little more than encourage firms to change the timing of their decisions, they lose a net of only about $46 billion in revenue over the next decade.
Of course, these estimates assume all these breaks are allowed to die. But some of the biggest are likely to survive the budget process. On the individual side, two that won’t go down without a big fight are the temporary deduction for state and local sales taxes and tax-free distributions from IRAs to public charities. These two provisions alone represent more than half of the revenue cost of all the individual extenders.
Among the business extenders, three of the biggest are the seemingly immortal research and experimentation tax credit, a provision that allows multinationals to defer tax on income they earn from their finance arms (Subpart F), and the provision that allows small businesses to write off in one year the full cost of Sec. 179 business equipment (computers and the like) up to $500,000. Combined, those three provisions account for nearly $24 billion of the $63 billion in business extenders in 2013.
Then, there is the budget accounting problem. Because these tax breaks are already scheduled to expire at the end of the year, their future revenue cost is already excluded from the budget baseline. In other words, since JCT and CBO already assume they will expire, Congress won’t get any revenue by letting that happen.
A year ago, lawmakers of both parties spun their way out of this problem—at least in the public debate (the official budget score did not change). This may have been because the dollars involved were so big and because most people were flummoxed by the multiple budget baselines floating around. It isn’t clear how it would all play out this time.
Finally, there are those lawmakers who prefer to use what revenue there is to pay for rate-reducing tax reform rather than a short-term budget deal.
Add it up, and the extenders are not much of a bargaining chip. It is hard to imagine Democrats bending on Medicare in exchange for the paltry few dollars (in budget terms, at least) the GOP might concede by letting the extenders die. Besides, many of these tax breaks have strong Democratic support.
Similarly, it is hard to see Republicans being willing to take a lot of heat from their tea party wing for agreeing to what would surely be dubbed a tax increase—especially with those few dollars at stake. Why get so many people angry for such a small sum of money?
This is not to suggest the expiring provisions are not worth talking about. They are. And many should, on the merits, be floated out to sea on a burning barge. But it is hard to see how lawmakers can build even a mini-deal around their demise.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.