Drawing the line on tax extenders

There was an unusual scene last week on the Senate floor.  Democrats pushed for tax cuts, and Republicans objected.  Specifically, Republican leadership shot down Majority Leader Reid’s (D-Nev.) attempt to renew by unanimous consent an array of unpaid-for tax cuts, known among tax wonks as “the extenders.”

The Republican objections may have been more procedural than substantive, but the bill deserved to die.  The tax extenders should either be allowed to expire or should be paid for.  This could very well be the most important fiscal issue that Congress considers over the next year, and it is time to draw a firm line.

{mosads}The tax extenders represent over 50 temporary tax provisions—most benefiting businesses—that have been hanging around in the tax code for a number of years (and, in some cases, even longer than that).  Despite being temporary and wasteful in many cases, they have, in the past, been extended year after year, and without being paid for.  Democrats and Republicans have been equal opportunity offenders in this regard.

In Washington’s fiscal debates, the tax extenders tend to be the lonely stepchild.  Entitlement reform and fundamental tax reform get all the attention.  However, the tax extenders should be front and center.  That’s because Congress must deal with the extenders, unlike entitlement reform and fundamental tax reform, which seem unlikely to move in the current Congress, and that’s also because of the large dollar amounts involved with the extenders.

Permanently continuing the extenders expiring this year would cut revenues by about $700 billion over the next decade.  That’s not chump change: that would add roughly 10 percent to the size of projected federal deficits by the end of the decade.

A number of these tax extenders should simply disappear as scheduled.  To name a few that should be on the chopping block:

There’s a temporary stimulus provision that allows businesses to immediately write off half the cost of new investments, which may have made sense when the recession began but now no longer does.  That’s nearly $300 billion if permanent.

There are complex extenders that aid multinational companies in avoiding taxes both here and abroad.  Those are over $100 billion if permanent. 

Then, there are smaller extenders, which show the creativity and influence of lobbyists.  Take Hollywood.  They have a special write off for movie and television production.

I don’t mean to say that all the extenders are undeserving.  For instance, the tax credit for research and experimentation.  It makes sense to encourage a company to engage in research which will benefit others beyond the company itself.  That credit should be reformed, made permanent, and paid for.

Unfortunately, if Congress were to follow its strategy of recent years, it would wait to the last minute and then swoop in and renew most of the extenders for a year or two (and even retroactively)—without paying for them.  That’s a bad approach.

Doing this in increments doesn’t make the tax cuts any less expensive.  Whether extended one time forever or many times forever, the end result is the same—higher deficits.

And, higher deficits now will have to eventually be paid for with a future tax increase or spending cut.  By requiring that the extenders either expire or be paid for now, policymakers would impose an essential disciplining mechanism on themselves; they’d have to weigh the benefit of the extenders versus the cost of having someone else actually finance the policies.

Despite Majority Leader Reid’s recent gambit, there’s reason for some hope.  The Senate Budget Resolution, the House Budget Resolution, and the President’s Budget all assume that these tax extenders are either allowed to expire or are paid for.  In a city in which no one can seem to agree on tax policy, that’s an important convergence.   

So, Congress and the president can do a whole lot of good by simply sticking with their own budget plans.  Allow the extenders to expire or pay for them.  For those worried about our fiscal future, that’s the line that most needs defending in the current Congress.

Kamin is assistant professor of Law at New York University School of Law.  He was special assistant to the president for economic policy, focusing on budget and tax policy, from August 2010 to March 2012.  He was an advisor to the director of the Office of Management and Budget from January 2009 to August 2010.