Tax Extenders Time is Here (December 11)

Update 318: Tax Extenders Time is Here;
Perennial Policy Debate is Itself Debated

No holiday season on the Hill is complete without a tax extenders bill to re-up the temporary tax breaks expiring that given year.  A policy perennial, the annual debate can be seen as a natural way to review and renew breaks not ready to be codified.

But the argument is vitiated when these same breaks come up year after year and when the breaks become an occasion to fill the campaign coffers of members on the tax committees.  

More on the ecology of the extenders and an effort to end them below.  

Best,

Dana

———

When Temporary Becomes, Well, Permanent

The set of tax breaks known as “extenders” is the temporary tax reductions, deferrals, and exemptions for individuals and businesses expiring in a given calendar year. They are used to achieve policy objectives or to promote or benefit certain investments. Their temporary status comes into question upon expiration.

In February this year, the Bipartisan Budget Act retroactively extended 32 provisions for tax year 2017. 28 of these 32 provisions are due to expire at the end of this year and Congress will likely vote to extend them yet again.

The Price of Permanent Indecision

The tax extenders saga has persisted for decades, as the number and scope of the tax extenders become narrower and narrower. Most valuable provisions have already been made permanent. What remains is a hodgepodge of provisions that fit into three buckets:

    • Special-interest provisions: These extenders give unfair tax advantages to disparate special interests, ranging from mortgage insurance premium deductions to tax credits for business activity in American Samoa. They are by far the largest category of provisions.
  • Duplicative cost of capital provisions: Seven of the remaining extenders provide more amenable depreciation schedules for various industries. Provisions in the Tax Cuts and Jobs Act (TCJA) render some of these efforts redundant and inherently unfair, as they distort investment decisions to favor particular industries over another.
  • Provisions that could be made permanent: Two of the remaining extenders offer an incentive for railroad maintenance and a credit toward mine rescue training costs. They are not as noxious as the rest and could be made permanent, either through law or through the appropriations process rather than by this perennial cycle of extension.

The nominal amount of the tax extenders is relatively small — around $90 billion if they were all continued permanently. However, the extenders set a bad policy precedent and fuel an annual breeding ground on K Street for quid pro quo negotiations between lobbyists and lawmakers.

There are other reasons why implementing tax policy by way of extenders is bad practice:

    • Retroactively authorizing tax provisions creates uncertainty and undermines any incentives that may be behind the provisions. Many tax extenders are provisions designed to create an incentive for a particular behavior by an individual or a business. The process of retroactively applying these tax breaks creates unnecessary uncertainty and undermines the original intent of some tax policy meant to incentivize behaviors.
  • Many tax extenders are pure giveaways to special interests. Examples of these niche provisions that give a break to special interests include tax write-offs for racehorses and special depreciation schedules for “motorsports entertainment complexes.” These extenders clearly give special favors to certain industries.
  • Tax extenders distort budget projections. Budget baselines assume that tax extenders expire at the end of their current extension. Their perennial renewal means that these supposedly temporary provisions are not adequately projected in budget forecasts, making their impact under-the-radar and not fully accounted for in the budget process.

Eliminating Extenders: A Signal Reform

There is a growing consensus across the political spectrum that tax extenders are not good policy. Organizations have individually expressed opposition in the past, but recently, a broad coalition released a letter rejecting tax extenders. This coalition includes a number of groups that don’t often agree on the correct course of action:

    • Committee for a Responsible Federal Budget
    • Economic Policy Institute
    • Freedom Partners
    • U.S. PIRG
    • Heritage Action for America
    • Institute on Taxation and Economic Policy (ITEP)
  • Americans for Prosperity

The reasoning behind the coalition’s opposition to tax extenders is simple: tax policy should not be changed from year to year. The use of tax extenders often results in retroactive policy and special interest tax giveaways, as opposed to long-term, meaningful tax reform. Although current Senate Finance Chair Orrin Hatch promised to end the practice by 2015, it has continued to be a widely used policy option in Congress.

Congressional Support

Senator Ron Wyden, Ranking Member of the Senate Finance Committee, is another vocal opponent of the year-by-year tax extenders process.  Wyden was a supporter of the PATH Act of 2015, a bill intended to curtail the repeated tax extenders exercise by permanently renewing some of the extenders. The bill was an important first step, but did not end the practice in its entirety.

On the House side, the incoming Ways and Means Committee Chair Richard Neal has expressed frustration about the consistent lapsing of tax provisions, but has not taken a position on tax extenders as a whole, instead focusing on specific extenders as they lapse.

Last Hurrah

In the dog days of this lame-duck, outgoing House Ways and Means Chair Kevin Brady is pushing for a sweeping tax bill that is unlikely to get to the Senate for a full vote, even if it were to pass the House. The original package contained provisions that would renew the tax extenders, but these provisions were not included in the latest version. Extenders may therefore move separately through Congress, making them more likely to pass before the end of the year.

There is a swath of bipartisan support in Congress for perpetuating the tax extenders, but calls for their removal from both the left and the right are growing. There may be some benefit in trialing certain incentives on a small scale for a temporary period, but the tax extenders process essentially turns what are meant to be temporary measures into de facto permanent provisions. Tax extenders ultimately lead to undesirable outcomes, and their practice should be ended.

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