Revised December 21, 2001


Proposal Would Widen Budget Debts in Coming Years
by Robert Greenstein, Richard Kogan, and Andrew Lee

PDF of the report

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On December 19, the Joint Congressional Committee on Taxation, Congress' official scorekeeper on tax legislation, issued an estimate of the cost of the plan which Rep. Bill Thomas and House leaders brought to the House floor yesterday and the House subsequently passed. The Joint Tax estimate confirms that this package is largely a multi-year tax-cut package, rather than a measure primarily aimed at stimulating the economy now.

Many Tax Cut Provisions are Backloaded
Costs in billions of dollars
Provision Five-year cost Share of the five-year cost occurring in 2002 Share of the five-year cost occurring in 2003-2006
Tax cut for financial corporations with foreign operations $6.5 4% 96%
Depreciate leasehold improvements over 15 rather than 39 years $1.9 4% 96%
All other extensions of expiring tax provisions $3.7 11% 89%
Corporate and individual AMT reductions $10.0 13% 87%
Accelerate rate reductions in the 27.5% tax bracket and increase the exemption from the individual AMT so the rate reductions do not subject more filers to the AMT $60.0 23% 77%

Over ten years, the cost with interest is more than $270 billion, but that number may be deceptively low; it assumes that every one of the multi-year tax cuts in the bill ends on schedule, with none of those tax cuts being extended. That must be regarded as an unlikely scenario.

For example, the package's principal depreciation provision — which would allow businesses to take immediate deductions for 30 percent of the cost of equipment and certain other items they purchase — would be in effect for three years rather than one. As analyses from the Brookings Institution have shown, making this provision effective for three years lessens its stimulative effect, because doing so enables firms to wait a year or more to see what the economy looks like before making purchases; firms would be able to defer making purchases and still secure the tax break. The likely reason for making this provision effective for three years rather than one appears to be that doing so would make it more likely this provision would come to be seen as a normal feature of the tax code and thus would make extension of the provision at the end of the three-year period more probable. Indeed, this tax break is designed so it would expire on September 11, 2004 — shortly before the elections — making it even more likely it would be extended at that time. If this tax break is extended and remains in effect throughout the decade, its cost — according to the Joint Tax Committee — will climb by more than $200 billion over ten years, on top of the costs shown for this provision in the new Joint Tax Committee estimates.