The voices of Tax Policy Center's researchers and staff
The magic number for today is 16. That is, remarkably, the number of times Congress has extended the allegedly temporary research and experimentation tax credit since it was first enacted in 1981. The question for philosophy class (this is far beyond economics) is this: Can something that has been extended 16 times over 33 years still be temporary?
And while the R&E credit is far and away the most extended of extenders, it is hardly alone. My Tax Policy Center colleagues Lydia Austin and Eric Toder counted up the Top 10 ever-expiring business subsidies (measured by 2015-2019 revenue loss). And in an article first published in Tax Notes, they reported this: The work opportunity credit has been extended eight times since 1996, the exceptions to Subpart F rules that allow U.S multinationals to defer tax on certain foreign income have been extended seven times since 1998, and increased expensing for business equipment under Sec. 179 has been extended six times since 2002.
If you are a lobbyist, this history represents scalps on your belt (and client fees in your pocket). If you are a member of Congress, it is the gift that keeps on giving—countless Washington reps and their clients attending endless fundraisers, all filling your campaign coffers, election after election.
An indelible image: It is pre-dawn in September, 1986. House and Senate tax writers have just completed their work on the Tax Reform Act. A lobbyist friend sits forlornly in the corner of the majestic Ways & Means Committee hearing room. “What’s wrong,” I naively ask, “Did you lose some stuff?” Oh no, he replies, he got three client amendments in the bill. And that was the problem. After years of billable hours, his gravy train had abruptly derailed. The client got what it wanted. Permanently. And it no longer needed him.
Few make that mistake now. Lawmakers, staffs, and lobbyists have figured out how to keep milking the cash cow. There are now five dozen temporary provisions, all of which need to be renewed every few years. To add to the drama, Congress often lets them expire so it can step in at the last minute to retroactively resurrect the seemingly lifeless subsidies.
It would be operatic, if it wasn’t so stupid.
Building a Potemkin village of temporary tax subsidies has the added benefit of making them look far cheaper than they really are. Take that R&E credit. A one year extension adds only about $5.9 billion to the deficit over a five-year period. But a permanent extension would increase the debt by $70 billion over the same half-decade.
Congress isn’t especially interested in paying for tax cuts these days, but you never know….
The politics of tax reform may be changing the way some lawmakers think about temporary tax cuts. Responding to the odd world of budget accounting, House Republicans now want to make permanent as many of these extenders as they can. Why? Because that would make rate-cutting tax reform easier.
The R&E credit is a perfect example. By congressional scorekeeping, repealing a temporary credit would produce little or no money that could be used to cut rates. But eliminating a permanent version could generate a bundle.
So far, the Senate seems uninterested in playing the House’s game. Thus, come December we may very well see yet another congressional stand-off over the fate of these subsidies. At least we will until Congress extends the R&E credit for the 17th time.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.