Yes, Tax Cuts Increase the Debt

Dec 8, 2014 | Taxes| Budget Process

With Congress set to retroactively revive the tax extenders for the past year at a cost of $42 billion, our president, Maya MacGuineas, published a commentary online in the Wall Street Journal criticizing them for adding the costs to the deficit.

J.D. Foster, deputy chief economist at the U.S. Chamber of Commerce, however, published a blog on the U.S. Chamber's site calling our reasoning "a tad skewed" and arguing that letting these myriad tax breaks remain expired should be considered a "tax hike" because many people now consider them to be permanent provisions of the tax code. His implied conclusion is that restoration of these extensions does not need to be paid for.

Foster argues that "many of these provisions have been in the law for decades." A few have been around that long – the research & experimentation tax credit was enacted in 1981 – but most are more recent. In 2000, there were only a quarter as many provisions that expired within one or two years.

Furthermore, many of these provisions only passed in the first place because they weren't permanent, lowering their budgetary cost. For instance, Congress enacted the sales tax deduction temporarily because it only offset the cost of the deduction for two years, requiring lawmakers to come back to the table if they wanted to make it permanent. The provision was scored with a total ten-year cost of $5 billion when it was enacted, but it has been repeatedly extended at an annual cost of about $3 billion, bringing the real ten-year cost of the provision closer to $30 billion.

Other tax breaks in the extenders package were explicitly intended to be temporary stimulus in response to the recent recession, including the most costly provision, bonus depreciation – which would add almost $250 billion to the debt over the next ten years if made permanent. The expiration of temporary infusions of money into the economy should not be considered tax hikes or spending cuts. When Congress sends rebate checks to every taxpayer, as they did in 2001 and 2008, is it a tax hike or spending cut if they do not continue the checks the next year?

Allowing lawmakers to extend these provisions for free would incentivize them to disguise more tax cuts as temporary provisions. Lawmakers would avoid paying the full cost when creating the tax break and would later add to the debt when extending it without offsets. If lawmakers, however, really want temporary tax breaks to be included in the baseline so extensions do not need to be offset, they should change scoring rules so that permanent costs are scored when the provision is originally created. Individual spending provisions, such as Unemployment Insurance or the Sustainable Growth Rate (SGR) patches, follow the same rules: they are required to be offset.

Whether you want to call it a "tax hike" or "letting provisions remain expired" is semantics. One thing is clear: these tax breaks, if restored, will add $850 billion to the debt over the next ten years, or about 3 percent of GDP. Whether Congress decides to use the language of "reinstating tax breaks" or "averting a tax hike," the effect on the debt is the same. 

Budget projections that show the debt remaining stable for the next couple of years and increasing thereafter do not include the cost of reinstating these provisions. The budget outlook would be worse if it assumed extenders continue permanently.  In fact, the House-passed FY 2015 budget, assumed current-law levels of revenue to achieve balance by 2024, effectively requiring that restoration of these tax breaks be offset with other revenue. The House-passed budget would not have achieved balance if it assumed these expired tax breaks were brought back without offsets. The tax reform discussion draft by Ways and Means Chairman Dave Camp (R-MI) also paid for the provisions it kept.

Congress has not paid for the costs of all of its tax cuts in the past, but that sort of fiscal irresponsibility is one reason we have such a large debt problem, with debt at record highs and set to continue growing with no end in sight.

PAYGO rules require that Congress pay for the costs of extending these breaks, but don't specify that "tax hikes" must be used, either spending reductions or tax increases would work. A fiscally responsible position Foster and the U.S. Chamber could take would be to call for the extension of the tax cuts paid for with spending cuts.

Back in March, we said "Ideally, Congress would resolve the quasi-permanent status of these extenders as part of tax reform, evaluating each one and either making it permanent or letting it expire." They still should.