Congress is expected during the lame-duck session to address “tax extenders,” a set of tax provisions (mostly for corporations) that policymakers routinely extend for a year or two at a time. While the Senate has pursued temporary extensions, the House has taken a far different approach that’s flawed on both policy and priorities grounds, as our updated paper explains.
The House has: made a number of extenders permanent; permanently expanded one of the biggest extenders, the research and experimentation credit; and permanently extended some temporary tax breaks that aren’t extenders — such as “bonus depreciation,” which lets businesses take larger upfront tax deductions for purchases like machinery. (A temporary measure to help revive a weak economy, bonus depreciation is largely ineffective.) But it hasn’t offset any of the considerable costs.
The House approach would:
- Undo a sizeable share of the savings from recent deficit-reduction legislation. At a combined ten-year cost of $312 billion, the nine extenders provisions that the House Ways and Means Committee has passed this year would give back two-fifths of the $770 billion in revenue raised by the 2012 “fiscal cliff” legislation. (The full House has already approved seven of these, costing $235 billion.) House Republicans also are pushing to make permanent an expanded version of bonus depreciation in an extenders package; adding this to the nine Ways and Means provisions pushes the total ten-year cost to $588 billion, or roughly three-quarters of the revenue raised in the “fiscal cliff” legislation.
- Constitute a fiscal double standard. Failure to pay for making the extenders permanent would contrast sharply with congressional demands to pay for other budget initiatives, from easing the sequestration budget cuts to extending emergency unemployment benefits for long-term unemployed workers. While demanding that spending measures be paid for, the House is pushing for permanent, unfinanced tax cuts that would cost much more.
- Bias tax reform against reducing deficits. If policymakers make the extenders permanent before they enact tax reform, a tax reform plan wouldn’t have to offset their cost to be revenue neutral. This would free up hundreds of billions of dollars in tax-related offsets over the decade that policymakers could then channel toward lowering the top tax rate. The resulting package would lock in substantially larger deficits than under revenue-neutral tax reform that paid for the extenders or let them expire.
- Place corporate tax provisions ahead of other, more important tax provisions scheduled to expire. Most notably, key elements of the Earned Income Tax Credit and Child Tax Credit will die at the end of 2017 unless policymakers act, pushing more than 16 million people in low-income working families, including 8 million children into — or deeper into — poverty. When policymakers consider which expiring tax provisions to continue, they should give top priority to making those key low-income provisions permanent.