"TAX EXTENDERS" BILL THE LATEST TEST
OF CONGRESS’S COMMITMENT TO FISCAL DISCIPLINE

“Tax extenders” legislation now before the Senate has become the latest battleground in the intensifying debate over whether Congress should abide by its “pay-as-you-go” (PAYGO) rules and pay for new tax and budget measures so they don’t expand the deficit.  Opposition to abiding by PAYGO is also impeding congressional action to extend Alternative Minimum Tax relief and to avert a scheduled cut in Medicare payments to doctors, and it will be central to the coming debate over extending the 2001 and 2003 tax cuts.

Unfortunately, key congressional Republicans are now arguing that any extension of existing tax provisions should be deficit financed, on principle.  This claim will make it much tougher for Congress to live up to its pledge of fiscal discipline and could ultimately lead to multi-trillion dollar increases in the national debt.

Congress should pay for the tax extenders, as its budget rules require.

• On May 21, the House adopted legislation extending for one year various tax cuts that expired at the end of 2007, including the Research and Development Tax Credit, the state and local sales tax deduction, and the tuition deduction.  The legislation does not add to deficits because it fully offsets the cost of these provisions (as well as other tax cuts it contains [1]) with revenue-raising measures.
  
  According to news accounts, the Senate will soon take up and attempt to pass the House bill or a similar measure.  However, Senate Republican leaders and the White House are urging the Senate to instead extend the expiring tax provisions without offsets.

• Congress’s PAYGO rules, which require it to offset the cost of new tax cuts, extensions of existing tax cuts, or expansions of entitlement programs, reflect the simple reality that all tax cuts and program increases must eventually be paid for.  As the Administration’s own Treasury Department has found, tax cuts do not pay for themselves; nor can they be financed with higher deficits forever.  Given that the nation already faces massive fiscal challenges in coming decades, it is irresponsible to foist the cost of new budget and tax legislation on to future taxpayers.

• If enacted without offsets, the tax cuts in the House-passed extenders bill would add $54 billion to deficits and debt.  Moreover, failure to pay for this year’s extenders bill could set a precedent for further unpaid-for extensions of these provisions, which could add as much as $500 billion to deficits and debt over the next decade.

• Adopting the principle that extensions of expiring tax provisions need not be paid for would also encourage policymakers to create even more new “extenders.”  Supporters of new tax cuts would know that, if they could just enact these tax cuts for as short a period as one year, the tax cuts could then be made permanent without any offsets.  This could lead to an even greater explosion in temporary tax provisions than has already occurred and to even larger increases in deficits and debt.

• Last fall, Senate Minority Leader Mitch McConnell declared that to offset the cost of extending expiring tax provisions would be “offensive” to Senate Republicans.  This position — that extensions of tax provisions should be deficit financed as a matter of principle — is difficult to comprehend.  It implies, for example, that even if Senate Republicans support a particular revenue-raising measure, they will oppose using it to pay for extending a tax provision.

• The other offset in the bill would effectively roll back a tax cut for multinational corporations that was enacted in 2004 but has not yet taken effect.  The 2004 provision (known as “worldwide interest allocation”) allows firms to use a more favorable formula for apportioning certain tax deductions between U.S. and foreign income.

• The tax code already treats firms operating abroad very generously.  In fact, the current tax system appears, on average, to subsidize U.S. firms operating abroad:  the Joint Committee on Taxation has estimated that fully exempting the foreign earnings of U.S. firms from tax would actually raise revenue.  This is in large part because current law effectively allows multinational firms to defer tax on their foreign earnings indefinitely while still claiming immediate tax deductions for foreign business expenses they incur in generating these earnings; they are able to apply these deductions to reduce tax on their U.S. earnings.   The 2004 provision would make the tax treatment of multinational corporations even more generous, without addressing any of the opportunities for tax avoidance the current tax rules create.

• Much of the business community itself appears to believe that the offsets in the House bill would have little impact on business activity and are reasonable as part of the overall legislation.  In fact, some in the business community have expressed resentment of Senate policymakers who oppose the House-passed offsets and plan to block extension of “extenders” legislation that includes these or other offsets.  As one lobbyist told Congress Daily, “A number of companies are expressing a certain resentment that they’re going to [lose tax benefits like the Research and Development Tax Credit] in the name of protecting hedge funds.”  Such comments from business lobbyists suggest that much of the opposition to the House offsets stems from the Republican leadership’s commitment never to pay for any tax-cut extensions, rather than from concerns about the particular measures in the House bill.