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

PDF of this report (5 pp.)

By Chuck Marr, Joel Friedman, and Brandon DeBot

Updated November 20, 2014

Congress is expected during the lame-duck session to address “tax extenders,” a set of primarily corporate tax provisions that policymakers routinely extend for a year or two at a time and that mostly expired at the end of 2013.  While the Senate has pursued temporary extensions, the House has moved to make a number of largely corporate tax extenders permanent.  And the House has gone still further by expanding one of the biggest extenders (the research and experimentation credit) and making the expansion permanent, as well as by making permanent some temporary tax breaks that are not part of the traditional pool of tax extenders — such as bonus depreciation (see box below).  The House has not offset any of these measures’ large costs.  The House approach is ill-advised policy and represents misplaced priorities.

Ill-advised policy.  The House approach to tax extenders 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.  Of these provisions, which primarily benefit corporations, the full House has already approved seven, costing $235 billion.  In addition, House Republicans are pushing to make permanent an expanded version of bonus depreciation as part of an extenders package, even though it is not a traditional extender (and has previously been used only for temporary periods when the economy is weak).  If that provision were included along with the nine Ways and Means provisions, the total ten-year cost would rise to $588 billion, cancelling roughly 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 initiatives, from easing the sequestration 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, unpaid-for tax cuts that would cost much more.
  • Bias tax reform 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 their cost to achieve revenue neutrality.  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 while still claiming revenue neutrality, even though this would lock in substantially larger deficits than under revenue-neutral tax reform that paid for the extenders or let them expire. 

Misplaced priorities.  The House approach places corporate tax provisions ahead of other, more important tax provisions scheduled to expire in coming years — notably, key elements of the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) for low-income working families.  While the House voted this year to expand the CTC for relatively affluent families — and on a permanent basis — the House legislation ignores key provisions of the CTC and EITC that help low-income working families.  It lets three important CTC and EITC provisions in effect through 2017 die at the end of that year.[1]  If that occurs, more than 16 million people in low-income working families, including 8 million children, will fall into — or deeper into — poverty.  Some 50 million Americans, including 31 million children, will lose part or all of their EITC or CTC.[2] 

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

Since the fall of 2010, policymakers have enacted four major pieces of deficit-reduction legislation[3] 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 77 percent to 23 percent.  The revenue contribution to deficit reduction stems almost entirely from the 2012 American Taxpayer Relief Act (ATRA), which raises $770 billion over 2015-2024.

The Ways and Means-approved bills to make nine extenders permanent (and expand the research and experimentation credit) would cut deeply into those deficit savings.  These mostly corporate tax breaks would cost a combined $312 billion over 2015-2024, giving back two-fifths of ATRA’s $770 billion in revenue (see Figure 1).[4]  The House has already passed seven of these provisions, costing $235 billion over ten years.

In addition to making these tax extenders permanent, House Republicans want to make bonus depreciation permanent and expand it, [5] even though it is not a traditional tax extender.  If the House-passed bonus depreciation provision were combined with the nine extenders provisions that the Ways and Means Committee has approved, the ten-year cost would rise to about $588 billion, cancelling roughly three-quarters of the “fiscal cliff” savings.

The argument that policymakers have never paid for the extenders is mistaken.  These measures were extended as part of large budget deals in 1990 and 1993 that shrank deficits overall by hundreds of billions of dollars, effectively offsetting the costs of the extenders.  A smaller stand-alone bill, the 1991 Tax Extension Act, also paid for the extenders it continued.  This practice subsequently fell into disuse, although lawmakers launched some efforts to re-apply “pay-as-you-go” rules to the extenders.  As recently as 2008 and 2009, in fact, the House passed tax extender legislation that was paid for.

Failure to Offset Cost of Extenders Constitutes Fiscal Double Standard

The House approach of not paying for the extenders contrasts sharply with demands from some lawmakers to pay for other budget priorities.  The Bipartisan Budget Act of December 2013 (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, Congress failed to restore emergency federal unemployment benefits, at some human and economic cost, in part due to disagreements over how to offset the $10 billion price tag.  The extenders should certainly be held to the same fiscal standard. 

Costly, Ineffective Bonus Depreciation Isn’t an Extender and Should Stay Expired

In addition to addressing the traditional tax extenders, policymakers are expected to consider reinstating bonus depreciation, which allows businesses to take bigger upfront tax deductions for certain purchases, such as equipment.  Bonus depreciation, however, is not an extender; it’s a costly, ineffective stimulus provision that should remain expired. 

Congress enacted bonus depreciation in 2002, when the economy was weak, and a Republican President, House, and Senate then let it expire after 2004, when the economy was stronger.  Congress enacted bonus depreciation once again as a temporary measure in 2008 to bolster the economy during the Great Recession — not to make it a permanent part of the tax code or extend it year after year like a tax extender.  (Moreover, studies have shown bonus depreciation to be “largely ineffective as a policy tool for economic stimulus,” the Congressional Research Service recently reported.)a

Enacting bonus depreciation late in 2014 and making it retroactive to the start of 2014 — as the pending proposals would do — makes even less sense as an inducement to businesses to speed up equipment and other purchases, since doing so would give taxpayer funds to corporations as a windfall for purchases they have already made.

Bonus depreciation is also very expensive.  Extending it permanently and expanding it, as the House has twice voted this year to do, would cost $276 billion over the coming decade (2015-2024), according to the Joint Committee on Taxation.b   (The cost would be roughly the same over ten years if Congress repeatedly extended bonus depreciation for one or two years at a time so that it never expired, instead of formally making it permanent.)  Making bonus depreciation permanent along with extenders would add considerably to the legislation’s cost and substantially increase deficits.c

a Gary Guenther, “Section 179 and Bonus Depreciation Expensing Allowances,” Congressional Research Service, May 23, 2014.
b Joint Committee on Taxation, “Macroeconomic Analysis for Bonus Depreciation Modified and Made Permanent,” July 3, 2014, https://www.jct.gov/publications.html?func=startdown&id=4652.
c Chuck Marr and Brandon DeBot, “Ineffective ‘Bonus Depreciation’ Tax Break Should Remain Expired,” Center on Budget and Policy Priorities, November 13, 2014, http://www.cbpp.org/cms/index.cfm?fa=view&id=4149.

Permanent Extension Now Biases Tax Reform by Placing Rate Cuts Ahead of Deficit Reduction

Making the tax extenders permanent now would bias future tax reform efforts in favor of lowering the top rate and against reducing long-term budget deficits.

The impact on long-term deficits is a key measure of any tax reform package.  Given the country’s long-term fiscal pressures, the Obama Administration and many other fiscal policy analysts have said that at least part of the 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 tax reform plan from House Ways and Means Committee Chairman Dave Camp call for revenue-neutral tax reform, meaning that all savings from reducing tax subsidies would go to reducing the top tax rate and other taxes. 

But making the extenders permanent now would go even further and lock in long-term deficit increases by redefining revenue neutrality.  The Camp tax reform plan would pay for the temporary tax provisions it chose to make permanent (such as the research and experimentation credit).  If, however, policymakers make the extenders permanent in advance of tax reform, then a future tax reform plan no longer will have to offset the extenders’ significant cost to achieve revenue neutrality.  Policymakers will be able to use savings that otherwise would have been needed to offset that cost to instead cut the top tax rate more deeply and/or to rein in fewer unproductive or lower-priority tax breaks — at the cost of higher deficits. 

Ultimately, such a course also would heighten pressures to cut social programs and public investments in order to help address the long-term fiscal challenges that these fiscally irresponsible tax policy actions would have worsened.

Focus on Extenders Ignores Other Priorities

The House effort to make tax extenders permanent 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.  When policymakers consider which expiring provisions to continue and which to let expire, they should give top priority to three important CTC and EITC provisions scheduled to expire at the end of 2017:  1) a provision allowing more working-poor families to qualify for a full or partial Child Tax Credit (previously, the CTC shut out millions of working-poor families — the very families that most need the credit — or limited them to a very small credit); 2) a provision delivering more adequate EITC “marriage-penalty” relief; and 3) a provision enabling low-income working families raising more than two children to receive a somewhat larger EITC.

Instead, the House passed legislation this year to extend the CTC higher up the income scale so more families with six-figure incomes would benefit — and to do so on a permanent basis — even as it did nothing to maintain these CTC and EITC provisions for low-income working families beyond 2017.[6]

If these CTC and EITC provisions expire:

  • A single mother raising children on full-time, minimum-wage earnings will lose her entire CTC.  A single mother with two children working full time at the minimum wage and earning $14,500 will lose her entire $1,725 CTC, and the annual earnings that a family needs to qualify for the full CTC of $1,000 per child will rise to more than $28,000 for a married couple with two children — up sharply from $16,330 under current policy.  Millions of working-poor families will lose their CTC entirely.  Millions more will see their credit cut dramatically. 
  • Many married couples will face higher marriage penalties.  To reduce EITC-related marriage penalties, the income level at which the EITC begins to phase out is currently set $5,000 higher for married couples than for single filers.  After 2017 it will be set $3,000 higher unless policymakers act.  The change will cut the EITC for many low-income married filers and increase the marriage penalty that many two-earner families face.
  • Larger families will face a cut in their EITC.  The maximum EITC for families with more than two children will be cut over $700 (by lowering it to the level of the maximum EITC for families with two children).[7] 

Letting these provisions expire would have a substantial impact on low- and moderate-income working families, pushing more than 16 million people — including 8 million children — into, or deeper into, poverty.[8]

End notes:

[1] Chuck Marr, Chye-Ching Huang, and Bryann DaSilva, “House Child Tax Credit Bill Leaves Behind Millions of Low-Income Working Families,” Center on Budget and Policy Priorities, July 22, 2014, http://www.cbpp.org/cms/index.cfm?fa=view&id=4171.

[2] Chuck Marr, Bryann DaSilva, and Arloc Sherman, “Letting Key Provisions of Working-Family Tax Credits Expire Would Push 16 Million People Into or Deeper Into Poverty,” Center on Budget and Policy Priorities, November 12, 2014, http://www.cbpp.org/cms/index.cfm?fa=view&id=4228.

[3] 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 the 2014 farm bill.

[4] Over the 11-year period 2014-2024, the research and experimentation credit would cost $156 billion and the Ways and Means bills would cost $321 billion.

[5] Katy O’Donnell, “Bonus Depreciation Remains at Center of Tax Extenders Debate,” CQ Roll Call, November 18, 2014.

[6] Chuck Marr, Chye-Ching Huang, and Bryann DaSilva, “House Child Tax Credit Bill Leaves Behind Millions of Low-Income Working Families,” Center on Budget and Policy Priorities, July 22, 2014, http://www.cbpp.org/cms/index.cfm?fa=view&id=4171.

[7] Currently, the maximum EITC for families raising more than two children is $683 larger than the maximum EITC for families with two children.  These maximum credit amounts are indexed for inflation, so the nominal dollar difference will widen modestly between now and 2017.

[8] Chuck Marr, Bryann DaSilva, and Arloc Sherman, “Letting Key Provisions of Working-Family Tax Credits Expire Would Push 16 Million People Into or Deeper Into Poverty,” Center on Budget and Policy Priorities, November 12, 2014, http://www.cbpp.org/cms/index.cfm?fa=view&id=4228.  

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