Slipping Permanent Tax Breaks into the Lame Duck

Lawmakers have tried several times to revive tax provisions that expired last year and extend them permanently, at a substantial cost to the national debt. They're trying again.

After an incredibly expensive $440 billion deal to extend the tax extenders fell apart after an appropriate veto threat from the White House and concerns about the enormous cost, Congress appears to be reviving piecemeal elements of this deal by taking up some of the same permanent provisions in the last week of the lame-duck Congress.

The legislation being put forward would revive three of the tax extenders dealing with charitable contributions and continue them permanently, while adding $11 billion to the deficit. Although the cost is relatively small, this is just a piecemeal approach of the same type of policies that failed earlier. In a separate bill, Congress appears ready to extend the rest of the 50 or so tax extenders for just one year, also without offsets, which would cost about $42 billion. (The charitable provisions are about $650 million, less than 2 percent of the bill's $42 billion cost.)

No matter how valuable the provision, budget rules (and the current budget agreed to by both the House and Senate) require that any change costing money – such as extending these tax breaks – is paid for with savings in other parts of the budget. The legislation would violate these rules and exclude costs from statutory PAYGO, a requirement in place to prevent legislation from adding to the debt. As we've written before, using PAYGO also forces lawmakers to make choices and prioritize spending, prevents costs from disappearing from the budget process, and prevents a spending spree that results if there is no budget discipline. Unless Congress follows PAYGO, budget forecasts will show permanently lower revenue, potentially complicating efforts to achieve comprehensive tax reform if some lawmakers want to make up that lost revenue.

Costs of Proposed Charitable Package
Policy Cost (2015-2024)
Extend tax-free charitable donations from retirement plans $8.0 billion
Extend a provision for businesses donating food $1.9 billion
Extend more generous limits for donating conservation easements $1.2 billion
Total, Making Charitable Provisions Permanent $11.1 billion

Source: JCT

Each of these provisions serves a worthy goal. The first allows retirees to make tax-free charitable donations from their IRAs, instead of claiming the money as income and then taking a deduction. The second gives non-corporate businesses an "enhanced deduction" for donating food to encourage them to donate it rather than throw it away. The last increases the limits and amount of time that a deduction can be claimed when setting aside land for conservation. But if Congress decides a policy is worthwhile, it should be willing to pay for it.

The White House released a statement that the President's advisors would recommend vetoing the bill, citing the potentially expensive precedent:

If this same, unprecedented approach of making certain traditional tax extenders permanent without offsets were followed for the other traditional tax extenders, it would add $500 billion or more to deficits over the next ten years, wiping out most of the deficit reduction achieved through the American Taxpayer Relief Act of 2012. Earlier this year, House Republicans themselves passed a budget resolution that required offsetting any tax extenders that were made permanent with other revenue measures.

If lawmakers want to permanently extend these provisions, they should fully offset the cost. Our PREP Plan included over $80 billion of tax compliance measures, more than enough to pay for these provisions and the other one-year extensions.  Unfortunately, there doesn't seem to be interest in offsets for the extenders.

Policymakers could also look to charity-related reforms to raise this money. For instance, policymakers could make the charitable deduction available to all taxpayers (rather than just itemizers) and add a $500 floor. This would both raise federal revenue and increase the number of contributions, as we explained in the Tax Break-Down, raising about $30 billion. Of course, policymakers may not want to push through large reforms to charitable provisions in the last week of the lame duck, which is a good reason to handle any permanent extensions in tax reform next year. Luckily, the one-year extension of all these provisions would allow lawmakers time for thoughtful consideration.

Policymakers and academics have proposed numerous changes to charitable provisions that would save money:

  • Limiting the value that companies get from donating intellectual property to the value of the property itself, not the income it generates in later years
  • Prevent non-profits from shifting losses between their taxable businesses to reduce their tax bill
  • Phase-out the tax benefits given to nonprofit hospitals, who in some ways act similarly to for-profit hospitals. This is one of many recommendations in a recent report by Senator Coburn.
  • Impose various limits on conservation easements, which are difficult to value and sometimes abused: by converting the deduction to a capped credit, eliminating it for golf courses, or limiting it for personal residences and historic property.
  • Limit deductions to $500 of clothing or household items, which are often overvalued
  • Prevent deductions for donating property that is not useful to the receiving non-profit
  • Prevent taxpayers from claiming the charitable deduction for donations required to buy collegiate athletic tickets, or prevent deductions for donations to college sports teams altogether
  • Simplify the complicated language around the measurement of deductions
  • Limit the deduction to "traditional" charities forming part of the social safety net
  • Reform and simplify the rules regarding partial gifts (for example, when co-owners give a piece of art)
  • Prevent abuse of charitable trusts
  • Prevent taxpayers from claiming the deduction based on capital gain
  • Require charities to report large gifts to the IRS (over $250 or $600, for example)
  • Impose a tax when charities sell their assets to private organization for less than market value
  • Limit the tax benefit of non-profit fraternal beneficiary societies that provide commercial insurance.

Continuing these tax breaks costs money, and Congress should make sure they responsibly pay for provisions to avoid adding to the debt. Our children and grandchildren shouldn’t have to continue to pay for our poor fiscal choices.