House Bill Would Double the Cost of the Research Credit

Recent press articles report that policymakers are negotiating a deal to accompany a temporary restoration of most of the 55 expired tax extenders with a permanent extension of a few provisions. The most commonly mentioned provision is the Research & Experimentation (R&E) credit, which would add $77 billion to the deficit if made permanent. Making the R&E credit permanent without offsets would be a costly and fiscally irresponsible mistake, but not as bad as what some reports suggest policy makers might do: expand the R&E credit and more than double its cost to $156 billion.

The unfortunate reality is that once policymakers abandon pay-as-you-go (PAYGO) rules, it makes it easier to throw budget discipline out the window. The Tax Reform Act of 2014 put forward by Ways & Means Chairman Dave Camp – which did abide by PAYGO – reformed the R&E credit and cut its cost in half to $34 billion over ten years. Meanwhile, the House-passed R&E credit, which appears to be on the negotiating table, would increase the credit from 14 percent to 20 percent of the incremental increase in research expenses and cost $79 billion more than simply making the current credit permanent.

Reinstating expired provisions for any period of time without offsets is fiscally irresponsible, which is why our PREP Plan combined a temporary continuation of the extenders with offsets from tax compliance and a process for tax reform. Making a provision permanent without offsets, however, is worse than a temporary continuation. Even worse is an unoffset (and unadvertised) expansion.

Unfortunately, the fiscal damage might not end there. A number of reports suggest the R&E credit will be traded for other permanent provisions, resulting in a package that would add hundreds of billions of dollars more to the debt.

With debt at record-high levels, policymakers should be using the current brief period of stability to enact long-term deficit-reducing reforms, or at least follow PAYGO rules to prevent the situation from getting worse.

A lame-duck Christmas tree bill that extends and expands everyone's favorite tax break without offsets would represent exactly the wrong direction for tax and fiscal policy, undermining much of the progress made so far.