Temporary Tax Policy in the U.S.

Last week, I testified before the House  Ways and Means Subcommittee on Select Revenue Measures  on the topic of temporary tax policy. The panel called the hearing to examine those tax provisions for which Congress routinely extends the effective dates--the so-called “extenders” or “expiring provisions”, as well as the numerous provisions in the Tax Cuts and Jobs Act that are scheduled to expire, spring up, or change over the next few years.

Temporary tax policy has a long history in the US. I used the investment tax credit experience of the 1960s through 1980s to illustrate this point.

I also noted two other aspects of temporary tax policy.

When Congress paired extensions of tax breaks with measures to offset the foregone revenue with tax increases, it created a healthy tension. The social value of extending the expiring tax provisions was essentially compared to the economic and political cost of raising someone’s taxes to finance the extension of a tax benefit.   

Another issue concerns timing of congressional action. Retroactively restoring already-expired tax provisions blunts whatever incentive effect the provision may have had. In the extreme case, Congress would be rewarding individuals or businesses with a tax benefit for behavior they undertook in the absence of the incentive-- the very definition of ineffective tax policy.

I suggested three ways Congress could improve tax policy. They are:

1. Enact fewer temporary tax provisions;
2. Subject temporary tax provisions to rigorous and objective analysis to determine if they warrant permanent inclusion in the Tax Code; and
3. Do not retroactively extend tax provisions.

These steps, though modest, would at least be a step in the right direction.