Tax extenders – prelude to December?

Though members of Congress left town for the summer amid criticism over a lack of legislative accomplishments, gridlock can occasionally have its benefits. Over the last few months, for example, it prevented expired energy investment tax credits (ITCs) from coming back to life via an unrelated Federal Aviation Administration (FAA) bill. This is an important development in the fight against corporate welfare and is perhaps also a prelude to a broader fight on the horizon.

This December, more “tax incentives” will expire. They include giveaways to race-horse owners, motorsports entertainment facilities, film and television companies, and various other industries. Congress usually revives similar giveaways in what have come to be known as “tax extenders” bills. It’s a bad habit. As economist Milton Friedman once lamented, “Nothing is so permanent as a temporary government program.”

{mosads}That’s why what happened to the ITCs this summer is important, even if they were just a drop in Washington’s corporate welfare bucket.

ITCs allow government to pick winners and losers by lowering the tax burden of people who buy qualifying products to the benefit of the companies that produce them. It is akin to the government printing coupons to encourage people to shop at one particular store or buy a certain type of product. This favoritism is also problematic because of its impact on the incentives to innovate and compete. If government has already picked a winner, what’s the point of entering the race? With billions of dollars in special privileges flowing to industries picked by bureaucrats instead of markets and investors, we risk smothering better products and technologies from inventors and entrepreneurs without influence in Washington.

The ITCs expired at the end of 2015, when they were left out of the tax extenders package in last year’s omnibus spending bill. Some members of Congress called their omission a “mistake” and tried to tie their reauthorization to a FAA authorization bill this summer. Others, such as Rep. Charles Boustany (R-La.) contended that the ITCs were purposefully curbed. Before leaving for the summer, Congress passed a relatively clean FAA bill, containing few provisions unrelated to the FAA. For now, therefore, the ITCs remain expired.

Whether or not it was intentional, Congress’s failure to renew this program effectively cut $1.4 billion of corporate welfare over the next 10 years. The practice of doling out corporate welfare hurts us all. The standard mechanisms for determining whether a product is desired by consumers—namely, prices, profits, and losses—are all muddled. Businesses and industries are encouraged to spend their time and money lobbying for government favors instead of identifying and meeting consumer demands. When the government, instead of the market, decides who succeeds, special interests are able to rig the game in their favor. So any time a form of corporate welfare expires, no matter which industry benefits from it, it is good riddance.

Lobbyists for industries benefitting from the tax carve-outs that will expire in December have undoubtedly begun to make their case on Capitol Hill, armed with warnings of economic calamity should Congress not act to renew these incentives. The reality is that corporate welfare poses a far more serious threat to American prosperity. When government picks winners and losers, it results in a two-tiered system that benefits the wealthy and well-connected while everyone else pays for it.

When Congress returns it will make a choice to either revert back to the habit of acquiescing to special interests or begin a new precedent that rejects corporate welfare. The good news is that for the latter to happen, Congress simply has to do nothing—just let the tax credits expire.

Patrick Hedger is a senior policy and research analyst at the Charles Koch Institute.