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The Trouble With “Tax Extenders”

May 23rd, 2008 . by economistmom

This Wednesday the House passed a pay-go compliant ”Energy and Tax Extenders Act of 2008″ (H.R. 6049), despite all the “banana peels” on the House floor.  Avoiding an increase in the deficit is a good thing, but I still don’t like these “tax extenders”, also known as renewal of “expiring tax provisions.”  What’s the problem with renewing these expiring tax provisions?

First, they’re constantly expiring, most over short (1-2 year) periods of time, which means that the cost of the underlying policy is grossly understated in the official, current-law budget baseline.  This  means our baseline grossly overstates the amount of revenue the federal government will collect under current tax policy (as opposed to current tax law), and thus grossly understates the budget deficit.

Second, they’re constantly being renewed (not allowed to expire), which means: (i) for all practical purposes, the “expiring” label is virtually meaningless, and (ii) for all practical purposes, the need to revisit these provisions year after year to renew them (yet again, for yet just another year at a time) is really a pain in the legislative butt.

So if they’re constantly expiring and constantly being renewed, why don’t we just pass them in permanent form and avoid the once-a-year legislative hassle?…

The answer is not as simple as you may think, if you’re thinking this is just like the expiration of the 2001 and 2003 tax cuts–where the expirations were designed to artifically hold down an already gargantuan cost.  Many of these one-year tax provisions–which by the way are tax cuts (or “tax expenditures“), never tax increases–are individually quite small in cost.

I never understood the “why” about expiring tax provisions until one very late night markup of the “extenders bill” several years ago while I was working for the Ways and Means Committee.  Bleary-eyed, one of usually twinkly-eyed members plopped down in a chair next to me in back of the dais–just to take a little rest away from his member’s seat.  I asked him “why do we have to do this every year?…why can’t we just pass these things permanently?” 

His eyes suddenly twinkled again, as he looked at me with a combination of amusement and disbelief.  He said:  “Are you kidding me?… We couldn’t do that!… Why, I’d lose all my friends!…Who would come visit me and say kind things to me and do nice things for me then, if they didn’t have to come back every year to ask for these tax provisions?!!”  And he nodded at me, pleased, when he saw that I was nodding at him.

Since then I’ve never suggested to a politician that they really should make these things permanent.  But the annual ritual still annoys me.  I suppose that lately it annoys me even more because of the “biggest banana peel” problem.  The House members who supported extending these expiring provisions without paying for them argued on the House floor that it “doesn’t make sense to pay for renewing these tax cuts by raising other taxes.”  That sounds so much more compelling than a more accurate description of their position which would say “it’s ok to pay for renewing these government subsidies by raising our children’s taxes” (the federal debt).

While I think the renewal of these temporary provisions ought to be paid for, it does bother me that the offsets used in this bill, when not outright gimmicks, were largely permanent in nature, because it means we can never again go to that revenue source when we over and over again have to revisit these tax cuts and find newer and newer ways to pay for them.

Oh, and by the way, these paid-for tax extenders passed in the House this week did NOT include the most expensive of all the expiring tax provisions, relief from the Alternative Minimum Tax (AMT), which already expired at the end of 2007.  (The cost of a one-year AMT “patch”, estimated at over $60 billion, is greater than the full cost of this week’s bill ($54 billion), which includes the other extenders PLUS all new energy tax incentives PLUS some “stimulus”-type temporary tax provisions.)  Congress will have to pass AMT relief later this year, and of course we’re fully expecting a repeat of last year, when AMT relief was ultimately not paid for (except maybe through our children’s future taxes).  And even without a paid-for AMT patch, the White House has threatened to veto this House-passed bill anyway, because of the offsets (revenue increases) used to pay for the smaller expiring tax provisions.

Aaaaargh!  

That’s some of the trouble with “tax extenders.”

2 Responses to “The Trouble With “Tax Extenders””

  1. comment number 1 by: Jason Elder

    Excellent Blog. I’ve been reading along and just wanted to say hi. I will be reading more of your posts in the future.

    - Jason.

  2. comment number 2 by: Deborah Chu

    Americans are the greatest assets
    of the tax system.

    Political objectives
    should never be mingled with
    the welfare of the people.

    Tax system should evolve with times.
    But constant revision exposes
    the accountability of the system.

    If the US military spending
    chokes off a large share of tax revenue,
    by the same token,
    the issues of pension plans,
    health care and education
    can also be euqally weighted.