The Terrible, Horrible No Good Tax Policy Buried In The Budget Deal

There is so much bad policy in the massive two-year budget agreement being debated by Congress that it is hard to know where to begin. But here is a place: Why would lawmakers restore more than 30 special interest tax subsidies for 2017?

That isn’t a typo. Most of these provisions expired at the end of 2016 and Congress would bring them back, but only for last year. In other words, lawmakers would spend billions of dollars to subsidize activity that already happened.

Think about that for a minute: If the purpose of a tax preference is to encourage businesses or individuals to change behavior, what possible purpose is served by subsidizing activities that already have occurred? By doing so, Congress creates no new economic activity and no new jobs. It is just passing out $15 billion in free money. Cash, by the way, that it does not have and must borrow.  

Of course, that’s just the cost of a one year extension. If Congress extends these tax breaks year-after-year, as it has in the past, the 10-year cost likely will approach $200 billion.  

But that’s only part of what’s wrong here. Lawmakers of both parties love nothing more than to rail against “special interest loopholes.” When they began the exercise that concluded in December as The Tax Cuts and Jobs Act, Congress and President Trump vowed to eliminate nearly all tax deductions, both for individuals and businesses.

Trump’s campaign plans, the House leadership’s “Better Way” June 2016 tax blueprint, and even the House-passed version of the TCJA would have made modest dents in tax preferences (though all would have fallen far short of eliminating them).

But the final version of the TCJA failed utterly. It ditched a few preferences—miscellaneous itemized deductions, a tax break for employers of commuters and a special deduction for US-based business production. And it scaled back a few others, most notably the federal itemized deduction for state and local taxes. But, for the most part, it preserved nearly all credits, exclusions, and deductions.

Now Congress is bringing back more than 30 “special interest loopholes” that have been dead for more than a year. While Washington shorthand calls them extenders, this language is seriously misleading. Congress is not extending provisions that are in danger of expiring. It is restoring tax breaks that already have expired. Some taxpayers may have even filed their returns, assuming the tax breaks had lapsed permanently.

Finally, there are the merits: Should a nation facing $1 trillion+ budget deficits provide more generous deprecation rules for racehorses, NASCAR racetrack owners, or movie producers. Will these subsidies Make America Great Again? How about special tax credits for maintaining railroad tracks (isn’t that what a railroad is supposed to do anyway?)

Even after all these years, Washington sometimes leaves me speechless. And this is one of those times.