Letter to Congress: Tax Extenders Extend Deficits

Letter to Congress: Tax Extenders Extend Deficits

Budget & Tax  | Quick Takes
Dec 3, 2014  | 8 min read

December 3, 2014

 

 

Dear Representative:

Taxpayers for Common Sense is a national non-partisan budget watchdog that has been working on behalf of the nation’s taxpayers since 1995. The House has now voted to – yet again – extend the temporary tax provisions known as “tax extenders.” This represents yet another missed opportunity for the 113th Congress to leave a lasting legacy of fiscal responsibility and set the stage for comprehensive tax reform. The package the House adopted is less costly and concerning than the $450 billion proposal that made some of the extenders permanent and extended others, but was shelved because of a potential veto threat. However, instead of rushing through an ill-considered mish-mash of tax provisions, Congress should have used the tax extenders debate to begin the difficult task of weeding out wasteful tax subsidies.

Extenders legislation includes a smorgasbord of breaks for special interests ranging from benefits for NASCAR track owners and oil and gas companies to rebates of a rum excise tax and deductions for corporations that give their old equipment to charity. Many of these extenders and other tax expenditures are distortions in the tax code that function as subsidies and corporate welfare. Many work at cross purposes: because of concerns that subsidizing parking discouraged the use of mass transit, Congress decided to subsidize equally. We give tax breaks for renewable energies to help them compete with fossil fuels, which also get special tax breaks.

The episodic renewal of the extenders package hides their true cost. When scoring the ten-year cost of extenders legislation, the Congressional Budget Office assumes the provisions will permanently expire after the duration of their extension, which has typically been two years. History demonstrates that they will likely be extended over the entire ten-year budget window. Even if Congress included offsets for the scored cost, it would only represent a fraction of the true ten year cost.

Enacting extenders legislation is bad practice, not least because it represents short-sighted, indecisive, and ineffectual policymaking. The process by which tax extenders become and remain law fuels cynicism about the ability of Congress to address fiscal problems in a serious, pragmatic way. This is the exact opposite of what Congress should be doing with our tax code, and it has contributed to the inexorable growth of government debt to $18.0 trillion.

America Needs Economically Efficient Tax Policy

The solution to the problem of enacting temporary tax law is not, as some have suggested, to simply make the extenders permanent. Earlier this Congress, the House Ways and Means Committee voted to make permanent, among others, an expanded credit for research and development (R&D) expenditures, the deduction for state and local sales taxes, and the deduction for depreciable business assets, at a cost in excess of $260 billion over the next ten years. Similar provisions were reported to be part of bipartisan tax extenders package that was scuttled by a veto threat. Further scrutiny reveals problems and arguments against each of these provisions:

  • Expanding the Research and Experimentation tax credit (also known as the R&D credit) flies in the face of serious reform efforts like the Tax Reform Act of 1986 and the proposed Tax Reform Act of 2014, both of which reduced the credit’s size. The Government Accountability Office has detailed that the provision is poorly targeted and in many cases funds activities that would have occurred regardless of its existence.[1] It also disproportionately benefits the largest corporations. In 2009, roughly 57 percent of the total amount of claims for the overall credit were made by manufacturing corporations with $250 million or more in business receipts, according to the Congressional Research Service.[2]
     
  • The deduction for state and local sales taxes exemplifies how the tax code has become cluttered and inefficient. After being eliminated in the Tax Reform Act of 1986, the provision was added back temporarily in 2004 and has been extended ever since.  It serves to benefit only a fraction of states and does little to boost economic activity. 
     
  • The deduction for certain depreciable assets (Section 179) is redundant to other provisions that allow businesses to recover their capital expenditures. Expanding the deduction by including heating and air conditioning units as qualified property, like the measure that passed the House in June, would be contradictory to the deduction’s intent and completely superfluous.

Toward Comprehensive Tax Reform

Since President Reagan and a Republican-controlled Senate cooperated with a Democratic-controlled House to pass the comprehensive Tax Reform Act of 1986, the tax code has become a confusing thicket littered with tax breaks for a litany of special interests. Little by little, Congress has enacted provisions that create economic inefficiencies and market distortions, cost more to administer, and make it harder for Americans to comply. Tax extenders embody the worst of such practices.

Tax policy, like federal spending, must help maximize the benefits of economic growth. In the pursuit of comprehensive tax reform, Congress needs to evaluate each provision by its economic efficiency. Adopting a “blank slate” approach whereby every tax break is eliminated and added back into the code only if it can be justified is the correct approach. Every provision should be judged by a set of criteria including its economic efficiency, equity, simplicity, transparency, and administrability.

Passing legislation to extend a group of more than 50 provisions for yet another year is the opposite of comprehensive tax reform. One of the major goals of tax reform is to eliminate the narrow parochial provisions like those in the extenders package, simplify the code, and generate increased revenue to drive down rates and reduce deficits. Temporarily extending dozens of provisions creates uncertainty, perpetuates complexity, and hides the true cost of the extenders to taxpayers. How Congress acts with regard to tax extenders can set the tone for the bigger reforms still ahead. 

Sincerely,

Ryan Alexander
President

 


[1] Government Accountability Office. “The Research Tax Credit's Design and Administration Can Be Improved.” December 2009. http://www.gao.gov/products/GAO-10-136

[2] Congressional Research Service. “Tax Expenditures: Compendium of Background Material on Individual Provisions.” December 2012. Page 101.

 
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