Bad Decisions on Tax Extenders Will Haunt Us in Tax Reform

Wonkblog today notes that the debate over making the corporate tax breaks known as “tax extenders” permanent and not paying for them “is really about tax reform.”  More specifically, it’s about how much a future tax reform package could lower the top marginal rate and still qualify as revenue neutral, even though deficits would be higher.

Our recent analysis explained the issue:

Making the tax extenders permanent now would bias future tax reform efforts further in favor of lowering the top rate — and against reducing budget deficits — than House Ways and Means Chairman Dave Camp’s tax reform proposal.

The impact on deficits is a key measure of any tax reform package.  Given the country’s long-term fiscal pressures, the Obama Administration and others argue that some savings from reducing inefficient tax subsidies should go to reducing deficits and debt.  In contrast, the budget of House Budget Committee Chairman Paul Ryan and the Camp tax reform plan call for “deficit-neutral” tax reform, meaning that all savings from reducing tax subsidies would go to reducing the top tax rate and other taxes.

Making the extenders permanent now would tilt tax reform further against deficit reduction by redefining “revenue neutrality.”  The Camp plan paid for the temporary tax provisions it chose to make permanent (such as the research and experimentation credit), a fiscally responsible approach.  But if policymakers make the extenders permanent in advance of tax reform, a future tax reform plan would no longer have to offset the extenders’ cost — $560 billion over ten years — in order to achieve revenue neutrality.  Policymakers could instead use this money to lower the top tax rate further, at the cost of higher deficits and additional pressure to reduce only spending programs to address the nation’s long-term fiscal challenges.

Wonkblog cites our report, then points out that tax rates “were a huge problem for Camp when he was drafting his tax reform plan”:

Though he had promised to get the top income tax rate down from the current 39.6 percent to 25 percent, he was forced to maintain a top rate of 35 percent for the very richest Americans in order to raise enough cash (and to avoid a big tax cut for the wealthy).

Camp, who is retiring in January, confirmed in an interview that making tax extenders permanent would make it easier for his successor (presumably Rep. Paul Ryan (R-Wis.)) to push rates down further.

Unfortunately, making the extenders permanent and not paying for them wouldn’t make it easier to address our long-term fiscal challenges.