Tax Cut Deal Revealed

It appears that President Obama and Republican lawmakers have reached a deal to extend the tax cuts enacted from 2001 to 2003. Part of the deal includes changes to the estate tax, the Alternative Minimum Tax, a series of business and individual tax breaks, a payroll tax reduction, an extension of unemployment benefits and separate deal on the "doc fix." Overall, this plan could cost somewhere in the vicinity of $800 billion when compared to current law, making this nearly as expensive as the 2009 stimulus package.

The deal includes (with estimated costs):

Cost (in billions)
2-year extension for all 2001/2003 tax cuts $389
AMT patch for 2 years $104
2 percentage point tax cut in payroll tax $120
2-year modification of the estate tax from current law with a $5 million exemption at a 35% rate $88
13-month extension of unemployment insurance $56
Extension of the expanded EITC, an extension of the child tax credit, and the American Opportunity Tax Credit $40
Various business tax breaks Unknown
Total* >$797

*Not counting the cost for the business tax breaks

Additionally, it is being reported that there is a tentative deal on a year-long extension of the so-called Medicare "doc fix" by changing the repayment rules for people whose income rises above the threshold for health insurance subsidies in the recently passed health care reform.

Further complicating this issue is that the current PAYGO law enacted earlier this year requires that any extension of the tax cuts for individuals earning above $200,000 ($250,000 for couples), any AMT patches after 2011, and any estate tax extension below its 2009 levels be offset. The law requires that any additional mandatory spending increases or tax cuts be paid for, so long as lawmakers do not exempt any policies from this requirement by labeling them as “emergency” legislation. It will be interesting to see how this develops--to say the least--and we urge lawmakers not to waive PAYGO requirements.

While we can't say we were surprised that the tax cuts were extended, the scope of the package and the apparent disregard for its impact on our debt is striking. This plan will add billions to the deficit and may end up costing more than the stimulus, yet it was not tied to any future deficit-reduction measures. There has been no discussion of how to offset these measures or even any pretense of addressing their costs.

While some measures in the package, such as the payroll tax cut and assistance to unemployed workers, do follow the CBO's advice for crafting effective short-term stimulus, lawmakers ignored CBO's warning that failing to offset the tax cut extension will impair economic growth in the long-run.

CRFB has argued that aiding the fragile economy in the short term is important, but that steps should be taken to ensure that such measures do not add to the debt in the longer-run. Moreover, the costly income tax and estate tax extensions will have little, if any, stimulative effect. The package would be much more effective if coupled with a deficit reduction plan that assured markets that the U.S. will deal with the growing fiscal gap.

As CRFB President Maya MacGuineas said today in a release: 

"The critical objective is to pair any stimulus for the short-term with a credible plan to reduce the debt in the medium- and long-term. It would only make sense to pair this package with serious policies to reduce the debt over the rest of the decade. We should be talking about what triggers to attach, how to pay for this new package over the decade, and what spending cuts and tax reforms to make. Instead lawmakers are tripping over themselves to add more deficit-financed measures to the bill."

Everyone likes to cut taxes. Making the decisions needed to confront our fiscal challenges is much more unpopular. But that's what's needed now more than ever.