Committee for a Responsible Federal Budget

House Keeps Increasing Deficits With Extenders

Jun 12, 2014 | Taxes

The House passed today two bills permanently reinstating three tax provisions that expired at the end of 2013. Extending these provisions would cost about $75 billion. Because they approved these tax cuts without offsetting savings, the two bills would add about $95 billion to the deficit, including interest.

The House is continuing to go through the tax extenders, tax cuts that generally expire every year or two, choosing some to make permanent. While scrutinizing which are worth keeping would normally be commendable, the House completely ignores the cost of making these tax breaks permanent, which would add to the debt. Last month, they approved an expanded research and experimentation tax credit costing $156 billion.

These three tax breaks are for small businesses, with the cost mostly consisting of one provision which allows businesses to fully write-off immediately the cost of a certain amount of purchases.

Small Business Expensing (Section 179) - Generally, companies that make large capital purchases must deduct the cost over several years according to a set of depreciation schedules. Section 179 allows small business owners to immediately write off most depreciable assets, up to a certain limit. Section 179 has been allowed since 1958, but the limit has changed over time. In 2013, small businesses could write off up to $500,000 of purchases, an amount that phased out when total purchases exceeded $2.5 million. Now that this provision has expired, total deductible expenses dropped to $25,000, phasing out after $200,000 of purchases. The bill would permanently reinstate the 2013 levels and index them to inflation.

S Corporation Provisions - The bill would permanently extend two provisions dealing with S Corporations, adjusting the treatment of stock of S corporations with charitable donations and companies that convert from C corporations to S corporations.

Adding these provisions to the other provisions which have been permanently extended by the Ways and Means Committee brings the total cost excluding interest to $613 billion through 2024. Adding in interest costs brings the total increase in debt to about $770 billion. Note that because of expansions of provisions and new policies that the Ways and Means Committee has approved, this package would add $145 billion more to the debt through 2024 than if these provisions were made permanent at their current levels.

Costs of Tax Provisions Approved By the Ways and Means Committee
Policy Cost (2014-2024)DescriptionHouse Floor Status
Research and Experimentation Credit $156 billionExpansion (~$80 billion)Approved
Small Business Expensing (Section 179) $73 billionExpansion (~$5 billion)Approved
Two S Corporation Provisions $2 billionExtensionApproved
Bonus Depreciation $287 billionExpansion (~$40 billion)Not yet considered
Active Financing Exception $59 billionExtension Not yet considered
Controlled Foreign Corporation Look-through $20 billionExtensionNot yet considered
Tax-free charitable donations from retirement plans $8 billionExtensionNot yet considered
Allow charitable donations to be counted in the previous year until April 15th $3 billionNew PolicyNot yet considered
Enhance the charitable deduction for businesses donating food $2 billionExtensionNot yet considered
Reduce tax on private charitable foundations $2 billionNew PolicyNot yet considered
Extend more generous limits for donating conservation easements $1 billionExtension Not yet considered
Subtotal, Cost of Tax Provisions $613 billion  
Interest Cost $158 billion  
Grand Total, Addition to the Debt $771 billion  
Memorandum: Permanently extending these provisions at current levels, with interest $627 billion  

Source: JCT

The Administration weighed in on these pieces of legislation, threatening to veto both bills. While their Statement of Administration Policy (SAP) said that they supported extending the 2013 levels for section 179 expensing permanently, they cited concerns about cost as the reason for their opposition to the bills and compared the cost of the permanent extension approach to the revenue from the fiscal cliff deal, as we have done in the past.

However, the SAP is also inconsistent in its criticism of the bills. It says that (emphasis added):

"However, as with other similar proposals, the Administration strongly opposes House passage of H.R. 4457, which would permanently extend and expand the current expensing provisions for small businesses without offsetting the cost, adding to long-run deficits.

...

House Republicans also are making clear their priorities by rushing to make business tax cuts permanent without offsets even as the House Republican budget resolution calls for raising taxes on 25 million working families and students by letting important improvements to the Earned Income Tax Credit, Child Tax Credit, and education tax credits expire."

Of course, it is inconsistent to criticize a tax cut bill for increasing the deficit while claiming House Republicans are increasing taxes by not extending other tax cuts. Either extending both increases the deficit or extending neither raises taxes; the Administration can't have it both ways.

To be fair, the President's budget includes more than enough revenue increases to offset the cost of the tax cuts it does extend. But lawmakers cannot follow a pattern of simply ignoring the costs of policies they like. Pay-as-you-go rules need to be applied universally.