The voices of Tax Policy Center's researchers and staff
‘Tis the season for bad tax policy…
In what has become an annual ritual, Congress is struggling with what to do with the 70 or so “temporary” tax provisions that expired in 2013 or will expire in 2014. For a brief moment last week, there was word of a deal to make permanent the biggest of the “extenders.” That plan was apparently quashed by a presidential veto threat, but the issue has not gone away. Now would be a good time for Congress and the White House to stop treating these holiday baubles as a sacred vessel that is above policy oversight.
The now-defunct deal would have restored and made permanent the research and experimentation tax credit (which also would have become partially refundable for small businesses), expensing for small businesses, the state and local sales tax deduction, the refundable American Opportunity Tax Credit for higher education expenses, the exclusion for employer-provided transit and parking benefits, and half a dozen others. It would also have extended retroactively a raft of other dubious provisions, including tax breaks for owners of NASCAR race tracks. Lawmakers were unwilling to make permanent alternative energy tax incentives and enhanced tax credits for low-income working families,which are scheduled to expire in a few years.
The Center on Budget and Policy Priorities estimates this unlamented deal would have added $409 billion to the deficit over 10 years (not accounting for interaction effects that would be in an official estimate). CBPP points out this is more than half of the much-touted revenue savings from the fiscal cliff deal.
In one sense, it's a surprise that Congress was working on a substantive bill rather than simply retroactively restoring everything for a year (although that's still the most likely outcome). But it also illustrates how bad extender tax policy is. Many of the provisions slotted for revival are regressive, fiscally irresponsible, and inefficient.
In theory, allowing tax provisions to expire periodically could precipitate a careful reexamination of the effectiveness of each program in light of our fiscal situation and priorities. In practice, the expiration of popular temporary provisions such as the R&E credit creates a vehicle for all sorts of budget-busting mischief.
When I was at Treasury during the Clinton Administration, we explicitly tried to tie less popular provisions to the expiration of R&E credit or the Alternative Minimum Tax patch. Arguably, once Congress permanently fixed the AMT’s inflation problem, it derailed a powerful engine from the extender gravy train.
The research credit is surely less effective as a temporary provision since an uncertain credit is less valuable than a predictable one. If Congress is always going to extend the credit—and it is—then it would be better to make it permanent (as the President has proposed) and pay for it.
Some other provisions that Congress wants to make permanent are there because of fairness concerns: People in states with income taxes can deduct them, so why leave out taxpayers in states where there is only a sales tax? Drivers get tax-free parking, so why not a similar deal for mass transit commuters? (Treasury staff used to joke that there should be a sneaker tax credit for those who walk or run to work).
But rather than endlessly grafting new tax breaks onto the code, Congress could be smarter and more fiscally responsible by doing radical pruning. For example, why not let the sales tax and transit benefits die, repeal the state and local income tax deduction, and tax the value of employer-provided parking (which would be neutral with respect to all forms of commuting, including running and walking)?
In contrast to the dubious tax breaks that Congress included in last week’s doomed deal, lawmakers ignored other tax provisions that are successful. For instance, temporary expansions of the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC), which expire at the end of 2017, help working families with kids, encourage work, and reduce marriage penalties.
They seem like good candidates for bipartisan support. Conservatives who argue that tax credits are a better option than raising the minimum wage might note that the CTC expansion is targeted at families earning at or near the minimum wage. Under current law, a single parent with two kids earning the minimum wage receives the equivalent of a 15 percent wage subsidy on all but $3,000 of her earnings. If the expansion is allowed to expire in 2017, that parent would lose roughly $1,800 of tax credits if she works full time.
Admittedly, the low-income provisions don't have the same urgency as provisions expiring this year, but without the R&E credit as a vehicle, it could be harder to win support for extending them or making them permanent in 2018.
The best option would be for Congress to decide which provisions are worth making permanent and pay for them by cutting unproductive tax expenditures. Given the short time remaining in the lame duck session, that seems optimistic. Alternatively, legislators could pledge that the perennial tax extender boondoggle will end this year (although there’s no practical way that this Congress can commit the next one to follow through).
But the more likely option is that they’ll play another round of kick-the-can, and we can recycle our tax extenders stories again this time next year.
[If my somewhat dour assessment of tax expenditure policy making leaves you in need of comic relief, check out TPC lyricist Bob Williams's new musical tribute to tax extenders, "My Favorite (Expired) Tax Breaks"]
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