Senior Senate Finance and House Ways and Means staff were at the negotiating table much of this weekend, working on a growing tax extenders-plus package now rumored to cost in the $700-800 billion over ten-year ballpark. The package began with the Senate Finance bill reported in July extending or making permanent the 50-odd tax breaks known as collectively as the “extenders.” Late in the fall, once the GOP accepted the expansions to the EITC and child tax credit (CTC) included in the 2012 year-end fiscal cliff bill but due to expire in 2018, and credit for four-year college costs — pushed by Senate Democrats and the administration — and other key items were added, lending the package increasing legislative momentum.
The bill now also delays implementation of the “Cadillac” plan tax in the ACA from 2018 to 2020. Before these trimmings, the extenders package had languished on the Senate sidelines for months. But the above inducements, combined with a tacit agreement that the package had grown beyond the constraints of PAYGO, mean it could end up being biggest tax deal since the Bush tax cuts were capped in 2012.
The GOP appears to have signed off on a deal for the EITC and the CTC expansions. These can be made permanent, but “improper payments” to fraudulent claimants must be addressed. without addressing ways to reduce problems with the payments. Finance and Ways and Means staffers are working on an integrity proposal short of requiring a Social Security Number or an in-person Taxpayer Identification Number. And Democrats may yet give on a GOP tax priority of longstanding — a delay for a 2.3 percent tax on medical device manufacturers. Also still on the block: indexing the CTC for inflation and, if PAYGO is applied, a provision closing the carried interest loophole.
The emerging package is taking so long to because it is not an just an across the board effort to extend or make permanent all of the 52 tax breaks. The latest versions have the bonus depreciation phasing out over the next four years, 2016-2019, and the Subpart F exemption for active financing and CFC look-through is extended for two years through 2016. The wind production tax credit may be phased out in 2019 starting next year. The solar credit’s fate has yet to be determined, but it’s on life support.
But such an extender bill is not yet a done deal. Some poison pill items are in the mix. Some Republicans want to bar undocumented immigrants from receiving refundable credits—a non-starter for Democrats. Unions and most Republicans want to repeal the Cadillac Tax on high-cost employer sponsored health plans and other lawmakers want to dump the ACA tax on medical devices. The White House may choke on some of those provisions.
Other than that, the only obstacle to the bill may be its own size. The eye-popping numbers are raising the ire of Democrats who spent much of this year debating mandatory spending cuts to offset the cost of raising the spending caps set by the 2011 Budget Control Act.
Sen. McCaskill: “I’m going to have trouble supporting any extenders package. I think it’s too big and there are way to many goodies being given out to special interests. How are we ever going to get tax reform if we keep giving out goodies at Christmas?” Sen. Carper: “We’re running a $400 billion budget deficit that’s expected to rise in the next half dozen years back to a trillion dollars. When we’re talking about an extenders tax package that is not paid for, small is better.” A Pelosi aide said Friday, “The initial package is too big in the leader’s view.”
Drilling down on the points of contention to be resolved before a deal can be announced:
The Cadillac tax — Both parties are interested in including language to repeal or delay of ObamaCare’s “Cadillac” tax on high-cost insurance plans in the extenders package. The Senate on Thursday passed an amendment to repeal the tax by a vote of 90-10. But the amendment was included in a bill that will be vetoed because it would repeal ObamaCare. The administration supports the Cadillac tax, which is currently slated to take effect in 2018, because it raises revenue and is an incentive to lower healthcare costs. The Congressional Budget Office estimated that a repeal of the Cadillac tax would cost about $93 billion in lost revenue.
EITC — Speaker Ryan and President Obama have propose to change the EITC provision in almost exactly the same way. They would phase in the credit more quickly as a worker’s earnings rise, raise the maximum credit to about $1,000, and lower the eligibility age from 25 to 21. These changes would make a big difference. Currently, a childless worker with poverty-level wages receives an EITC of $172, not nearly enough to offset the $1,188 he or she owes in income tax and the employee share of payroll taxes. The Ryan/Obama proposals would give that worker an $841 EITC, a major step towards lifting the worker back to the poverty line.
Energy: The deal could extend the Wind Production Tax Credit and the Solar Investment Tax Credit for five years with a phase out. But the GOP wants to let the credits phase out as scheduled. The wind credit expired at the end of 2014, and the solar credit is set to expire in 2016. There is also some interest in using the tax extenders package as the vehicle for lifting the ban on crude oil exports. Some lawmakers want to an end to the ban included in the bill in exchange for extending the renewable energy credits. Kevin Brady, Ways and Means Chair, said that Congress is looking at several possible vehicles for achieving that and said he favors lifting the ban.
The price tag — The sheer size of the deal, which could cost upwards of $700 to $800 billion over a decade, is a major a concern to fiscal hawks. These are dollar figures reminiscent of the stimulus. If it is tarred as such, it could lose moderates like McCaskill and Carper. Even Elizabeth Warren has taken issue with the fact that the bill wouldn’t be paid for. But the prevailing reasoning follows these lines. Rep. Charles Boustany, Chair of the House Ways and Means Committee’s tax-policy subcommittee: “We’re not going to raise taxes now at this point to give tax breaks in other areas.” Kevin Brady: “We shouldn’t have to pay for returning people’s hard-earned money to them. People are just pulling these numbers out of the air. I’m convinced if there’s a package, it will be much more focused than what we’re seeing floating around.”
Length of Extension: The deal under consideration would make some expired breaks permanent, extend some for five years, and extend the rest for two years. Exactly which provisions end up in which bucket appears to be somewhat settled but may not be completely final. Aside from the tax credits benefiting families, the list of provisions that would be cemented include many of the business and other tax breaks that the House and the Ways and Means Committee voted to make permanent earlier this year.