Update 368 — Midsummer’s Budget Stunner;
Niche of Living Dead/Tax Extenders Near You
A deal to fund the government and raise the debt ceiling is in sight. The Pelosi/Mnuchin agreement will raise fiscal year 2020 spending caps for defense and non defense discretionary, about $320 billion total. From here, appropriators have until September 30 to draft, process, and pass spending bills. Left out of the deal — tax extenders.
The perennial process of renewing ostensibly temporary tax provisions is a problem. And a haven for lobbyists seeking tax breaks for very narrow special interests. Now that the White House and Congress have reached a deal, many expired and expiring tax extenders will likely have to hitch a ride on a must-pass bill.
To see the curious sight of left-center-and-right advocating in united opposition to the practice, see here. And read more below…
The practice of passing temporary tax provisions — now referred to as “extenders” — dates from the 1980s. Individual extenders take the form of credits tailored to particular industries and production methods, designed for annual or biennial reauthorization.
Today in Congress: Extended Limbo
A tax extender package is currently moving through Congress that includes 28 tax provisions which expired at the end of 2017 — referred to as the ‘“zombie extenders.” Former extenders have been made permanent by legislation, most recently by the 2015 PATH Act and the 2017 Tax Cuts and Jobs Act (TCJA). The Bipartisan Budget Act of 2018 reauthorized the remaining provisions through the end of 2017, so, currently, none of the 28 are in effect.
While extenders vary in size, scope, and purpose, many of the provisions currently expired or expiring are business-friendly tax expenditures. For a sense of their budgetary impact, a retroactive extension through 2019 of the expired extenders would cost over $33 billion over the next 10 years, per the Joint Committee on Taxation. If made permanent, these provisions would add around $150 billion to the national debt according to the Committee for a Responsible Federal Budget.
In May 2019, a dozen politically diverse economic organizations, from the Progressive Policy Institute to Heritage Action, sent a letter to Congress urging chamber leaders not to revive the tax extenders that expired at the end of 2017. Continued reliance on temporary and often retroactive tax policy makes the tax code unstable and subject to ritual lobbying.
Tax Credit Smorgasbord
Congress has had multiple opportunities, both in the 2015 PATH Act and during the TCJA negotiations, to make the so-called zombie extenders permanent, but haven’t — perhaps for good reason. The zombie extenders are a real hodgepodge of provisions that mostly benefit very niche and disparate industries, including, but not limited to:
- biodiesel and renewable diesel
- motorsports complexes
- Indian reservation business property holdings
- two-wheeled plug in electric vehicles
On June 20, the House Ways and Means Committee passed a tax extender package on a party-line vote of 25 to 17. A portion of the bill was offset by scheduling an early sunset of TCJA estate tax provisions, which would raise $37.6 billion. The House bill also did not include certain extenders — some dealing with fossil fuels, and others that were made permanent by TCJA. Ahead of a House floor vote, Chairman Neal plans to combine the tax extenders with an expansion of refundable tax credits for lower-income earners, which also passed committee during the June 20 markup. The whole package is scored at $174 billion.
Generally, House Democrats want tax extenders to be offset with revenue increases, contra Grassley/Wyden legislation in the Senate, which would provide a straight-forward reauthorization through 2019. Senate Finance Committee Chairman Grassley was careful not to take a firm position on Neal’s bill, though he said that “there’s a lot of things that I don’t like about it.” Bipartisan tax extender working groups, or ‘task forces,’ in Senate Finance are expecting to release reports later this month.
Why Should We Care?
- An uncertain tax policy to plan on: Tax policy should be predictable, fair, non-distortionary, simple, and easy to understand. The tax extenders process is almost the complete antithesis to this good government model. Ambiguity in the tax code is unfair to businesses and individuals who need certainty. Many of the expired 2017 provisions are clearly distortionary as they favor one particular industry, with questionable economic benefits.
- Corporate giveaway/campaign source: Many of the extenders that passed through the House Ways & Means Committee last month had been expired for a year and a half. The roughly 30 expired 2017 tax provisions have been dead for 18 months without any noticeable effect on industry. By retroactively renewing these tax breaks, Congress is providing a giveaway for business activity that has already occurred. The main reason extenders keep getting extended? Major campaign contributions from companies and their lobbyists that benefit. Until we really reform campaign finance, extenders might be here to stay.
- Permanent tax policy by other means: Using tax extenders that aren’t selective giveaways but genuine trial incentives might make sense, but the zombie extenders are a trial that never ends. If these extenders get resurrected, not only will they reduce federal revenues with questionable economic effects, but they will result in distorted baseline budget projections. This is because the CBO, with one exception, has to assume that temporary provisions expire when scheduled while making baseline budget projections.
Prospects for the Package
There is some bipartisan agreement that tax extenders, along with modifications to TCJA, will ride along a budget bill or tax vehicle before the end of the calendar year. Ongoing negotiations will determine which, if any, provisions are left out of the final product beyond those made permanent by TCJA. There is also the question of pairing extenders with middle-class tax cuts, either in the form of expanding refundable credits or making TCJA individual provisions permanent. The question might not be if, but when. Ultimately, there does not seem to be a clear constituency in Congress rallying to end extenders, so there is an element of fatalism about their inevitable renewal.