Finance Committee Approves Extenders, Adds to Debt
The Senate Finance Committee today approved a package of 50-plus tax breaks that expired last year known as "tax extenders." Unfortunately, they chose to extend almost all of them for two years by adding the costs of the tax cuts to the national debt.
The tax breaks are called the "tax extenders" because Congress typically only extends these expiring provisions a year or two at a time, but many of these provisions are quasi-permanent. (The research credit, for instance, has been extended at least 15 times since its creation in 1981.) The provisions expired at the end of last year, but Congress can extend them retroactively because most people do not pay their 2015 taxes until 2016.
The bill costs $95 billion over ten years to extend all 50-plus provisions for two years (retroactively for 2015 and forward for 2016). The Committee did not offer a way to pay for the cost, so the amount will be added to the deficit. In markup, the Committee did slightly expand more than a dozen of the provisions and the expansion was paid for, as opposed to extenders legislation in the House of Representatives which dramatically expanded some provisions by adding to the deficit.
If policymakers were serious about paying for the cost of these tax cuts, they could look to the PREP Plan, a package we proposed last year to pay for two years of extenders by improving tax compliance and closing loopholes. Or, policymakers could pay for one year of extenders (which costs about $45 billion) with legislation that the House Budget Committee proposed to ban corporate inversions, as we mentioned yesterday in Inversions Come Up As An Offset Possibility, or lawmakers could look to a list of common ideas between the tax reform plans of President Obama and former Ways & Means Chairman Dave Camp (R-MI). All of these plans would pay for the extenders for a short time, allowing their fate to ultimately be decided in a larger tax reform deal.
The bill directs nearly 65 percent of its benefits to businesses. The rest is split between provisions that help individuals and provisions that affect the energy industry. The package will add $170 billion to deficits over the next two years, but some provisions represent timing shifts that will raise revenue after they expire, so the cost shrinks to $95 billion after ten years.
|Cost of Extending the Tax Extenders|
|Policy||Two-Year Cost||Ten-Year Cost|
|Research & expensing credits||$12.1 billion||$22.6 billion|
|Active financing income exception||$13.5 billion||$13.5 billion|
|Renewable electricity production credit||$0.1 billion||$10.5 billion|
|Deduction for state and local general sales taxes||$6.5 billion||$6.7 billion|
|Mortgage forgiveness exclusion||$5.1 billion||$5.1 billion|
|Bonus depreciation||$87.5 billion||$3.6 billion|
|Small business expensing (Section 179)||$24.0 billion||$3.5 billion|
|All other provisions||$21.4 billion||$29.7 billion|
|Total||$170.2 billion||$95.2 billion|
Source: Joint Committee on Taxation
However, Congress tends to extend these provisions year after year. Based on Congressional Budget Office data, we calculate that if they continue extending all of these provisions on an annual basis, they will cost about $700 billion over the next ten years.
Ideally, Congress would address the tax extenders as a part of tax reform, choosing which provisions to pay for and keep as a permanent part of the tax code and which to let expire. Yet if Congress insists on doing another short-term extension, they should at least pay for the costs to avoid adding to the national debt.
- House Considers $320 Billion of Tax Cuts, discussing the House's approach to extending only certain provisions, but permanently (and still deficit-financed).
- Senate Moves Forward On Increasing Deficits With Tax Extenders (2014), listing eight reasons why extenders should be paid for.
- Want to Understand the Tax Extenders? Here's a Few Charts (2014)
- Tax Break-Down: Tax Extenders, which explains the history and rationale of the provisions.