House Efforts to Make “Tax Extenders” Permanent Are Ill-Advised

PDF of this report (5 pp.)

By Chuck Marr and Joel Friedman

May 7, 2014

The House on May 7 is expected to consider a bill to permanently extend —and expand — the research and experimentation tax credit, the first of six bills that the House Ways and Means Committee recently approved to make permanent various “tax extenders.”  There is widespread bipartisan support for continuing the research and experimentation credit, as well as some of the other extenders (so named because Congress routinely extends them for only a year or two at a time).  But the Way and Means bills, which wouldn’t offset the costs of making these provisions permanent (by, for instance, scaling back or eliminating other tax subsidies that litter the tax code), are seriously flawed, as they would: 

  • Undo a sizeable share of the savings from recent deficit-reduction legislation.  At a combined ten-year cost of $301 billion (or $310 billion over 11 years, 2014-2024), the six bills would give back two-fifths of the $770 billion in revenue raised by the 2012 “fiscal cliff” legislation.  If policymakers go further and make permanent all of the roughly 80 extenders, the ten-year cost would rise to about $560 billion, cancelling nearly three-quarters of the “fiscal cliff” savings.
  • Constitute a fiscal double standard.  Failure to pay for making the extenders permanent would contrast sharply with congressional demands to pay for other budget priorities, from easing the sequestration cuts to providing permanent relief from cuts in doctor payments under Medicare to restoring emergency federal unemployment insurance. 
  • Leave out other priorities.  The process to date cherry picks several of the most heavily lobbied corporate tax extender provisions, while leaving behind expired provisions for hard-hit homeowners, teachers, and distressed communities, as well as alternative energy.  Moreover, the push for permanence would mean that these corporate provisions would leap-frog over more important tax provisions that are scheduled to expire in coming years — notably key improvements to the Earned Income Tax Credit and Child Tax Credit for low-income working families and the American Opportunity Tax Credit for college students.
  • Bias future tax reform efforts against reducing deficits.  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 to achieve revenue neutrality (much less meet the more appropriate goal of raising revenue to reduce deficits).  This would free up hundreds of billions of dollars in tax-related offsets over the decade that policymakers could then channel towards lowering the top tax rate, while still claiming revenue neutrality, even though deficits would be higher. 
  • Violate budget enforcement rules.  Both last December’s Murray-Ryan deal and the House-passed budget resolution require policymakers to pay for any tax extenders that they continue or for any new tax cuts.  The Ways and Means bills violate this requirement and also undercut a widely touted feature of the House-passed budget — its claim to balance the budget in 2024 — by adding to deficits.  

Unpaid-for Extensions Would Reverse Large Share of Recent Deficit Gains 

Policymakers have enacted four major pieces of deficit-reduction legislation since the fall of 2010[1] that will cut projected deficits over fiscal years 2015-2024 by a combined $4.1 trillion.  Those legislative changes consist mostly of program cuts, which outweigh revenue increases by 77 percent to 23 percent.

The Ways and Means legislation, however, to make six tax extenders permanent and expand the research and experimentation credit without offsetting the cost would cut deeply into those deficit savings.  The bill that the House is considering to extend and expand the research and experimentation credit would cost $151 billion between 2015 and 2024.  All six Ways and Means bills would cost $301 billion and, if enacted, they would erode two-fifths of the $770 billion in revenue raised by the 2012 “fiscal cliff” legislation (see Figure 1).[2] 

If policymakers go further and make permanent all of the roughly 80 extenders, the ten-year cost would rise to about $560 billion, cancelling nearly three-quarters of the “fiscal cliff” savings.[3]

Were policymakers to make permanent all of the current tax extenders without offsetting the costs, they would increase by one-quarter the already substantial rise that’s projected between now and 2040 in the ratio of federal debt to gross domestic product (i.e., the “debt-to-GDP ratio”).

The conventional view that policymakers have never paid for the extenders is mistaken.  Tax extenders were part of large budget deals in 1990 and 1993 that shrank deficits by hundreds of billions of dollars, as well as a smaller stand-alone bill — the 1991 Tax Extension Act — that paid for the extenders it continued.  This practice subsequently fell into disuse, although lawmakers launched some efforts to re-apply the pay-as-you-go rules to the extenders.  In fact, the House passed tax extender legislation that was paid for as recently as 2008 and 2009.

Failure to Offset Cost of Extenders Constitutes Fiscal Double Standard

By not paying for permanently extending the six corporate tax breaks, the Ways and Means bills contrast sharply with congressional demands to pay for other budget priorities.  The Bipartisan Budget Act of last December (the Murray-Ryan deal) partly and temporarily eased the deep sequestration cuts that were damaging important programs and services (and slowing the economy) on the condition that Congress fully offset the costs.  In addition, House and Senate members have reached bipartisan agreement on a proposal to make permanent relief from severe cuts in Medicare payments to doctors,also conditioned on fully offsetting the costs (although they have not yet agreed on how to do that).

And, at substantial human and economic cost, Congress has not restored urgently needed unemployment benefits in part due to disagreements over how to offset the $10 billion cost.  This legislation clearly cannot pass without such offsets. 

Focus on These Six Extenders Ignores Other Priorities

In choosing to approve a subset of corporate tax extenders — including the research and experimentation credit and a substantial tax subsidy for the foreign profits of large financial institutions — the Ways and Means Committee ignored other extenders.  These include a deduction for teachers’ school expenses, a tax exemption for relief that banks provide to homeowners with underwater mortgages, incentives for alternative energy development, and the New Markets tax credit for distressed communities.

Moreover, by voting to make six tax extenders permanent, the Ways and Means Committee has turned the traditional extenders debate — about continuing these provisions for a year or two — into a discussion about which expiring tax provisions to make permanent.  In that context, policymakers should give priority to improvements to the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), as well as the American Opportunity Tax Credit (AOTC), due to expire at the end of 2017.

Letting the EITC and CTC improvements expire would have a significant impact on low- and moderate-income families, pushing 12 million people (including 7 million children) into — or deeper into — poverty.[4]  A mother with two children who works full time at the minimum wage would lose $1,725 a year in her CTC beginning in 2018.  Marriage penalties would be higher for many working married couples, and many working families with three or more children would lose part of their EITC.  Similarly, absent action on the AOTC, college will become even more expensive for millions of students.

Biases Tax Reform by Placing Rate Cuts Ahead of Deficit Reduction

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.

Unpaid-for Tax Extender Legislation Violates Key Budget Rules

The Murray-Ryan deal provided that revenues would remain at current-law levels going forward; consequently, Congress would have to pay for any tax extenders that it extended.  The House-passed budget resolution, which claimed to balance the budget by 2024, included the same requirement.  Further, Chairman Ryan filed these current-law revenue levels in the Congressional Record on April 29 to ensure they are used to enforce budget rules in the House.

Because the costs of the Ways and Means bills — including the extension and expansion of the research and experimentation credit — are not offset, they would breach these current-law revenue levels and violate budget enforcement rules, requiring a waiver of the Congressional Budget Act.  Further, by adding to the deficit, these tax bills would undercut a widely touted feature of the House-passed budget — its claim to balance the budget in 2024.

The Ways and Means bills would also violate the Statutory Pay-As-You-Go Act, which requires that policymakers offset all entitlement expansions and tax cuts.  If policymakers do not take steps to override this “paygo” statute (or to offset the cost of these tax bills), the bills would trigger sequestration of certain mandatory spending programs.  This would mean even deeper cuts in Medicare, student loans, social service grants to states, vocational rehabilitation grants, and other mandatory programs that are already being cut by the sequestration required by the Budget Control Act.

End notes:

[1] The Budget Control Act of 2011, the American Taxpayer Relief Act of 2012, the Bipartisan Budget Act of 2013 (also known as the Murray-Ryan deal), and this year’s farm bill.

[2] Over the 11-year period 2014-2024, the research and experimentation credit would cost $156 billion and the six Ways and Means bills would cost $310 billion.

[3] This total excludes making permanent “bonus depreciation,” which Congress enacted as a temporary measure to boost a weak economy and which we have argued has not been cost-effective and should not be extended.  If that provision were also made permanent, as some policymakers suggest, then the combined cost of making all these tax extenders permanent would eliminate all of the “fiscal cliff” savings.  See Chuck Marr, “Time to Let ‘Bonus Depreciation’ Expire Permanently,” Off the Charts blog, January 13, 2014, http://www.offthechartsblog.org/time-to-let-bonus-depreciation-expire-permanently/.

[4] See Chye-Ching Huang, “Ways and Means Legislation Prioritizes Corporate Tax Cuts Over Keeping Working Families from Falling Into — or Deeper Into — Poverty,” Off the Charts blog, April 29, 2014, http://www.offthechartsblog.org/ways-and-means-legislation-prioritizes-corporate-tax-cuts-over-keeping-working-families-from-falling-into-or-deeper-into-poverty/.

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