Committee for a Responsible Federal Budget

Things to Consider When Evaluating Tax Extenders

Jun 8, 2012 | Taxes

It is encouraging to see the House Ways and Means Subcommittee on Select Revenue Measures hold a series of hearings on the many temporary tax preferences known as the "tax extenders." Far too often Congress intentionally waits until the eleventh hour so that they can extend them as a wholesale package without any review of the policies involved. The latest hearing came earlier today on methods for dealing with and evaluating tax extenders. In it, there were some interesting comments.

In his testimony, Tax Policy Center director Donald Marron suggested breaking down tax extenders into categories for review and, for timeliness sake, reviewing them in waves to spread out the expiration of tax extenders that are in fact allowed to expire. He also proposed changing budget rules for temporary tax cuts (in a way that could be applied to other temporary provisions as well). In particular, he mentioned that CBO could construct its baseline such that no tax provision could be in effect for less than five years, regardless of what the law said. This would force proponents to immediately budget for the provision's longer-term existence. He also mentioned forcing offsets to happen over the same time period as extensions to prevent the practice of offsetting a year of cost with ten years of offsets (which is technically "deficit-neutral" but deficit-increasing relative to the cost not existing).

Outside of the pure budgetary effects, two of the other witnesses discussed further considerations for tax extenders. Alex Brill of the American Enterprise Institute said that extenders should not simply be evaluated based on the activity they are subsidizing or for the level of activity they generate, but rather the level of activity they generate that would not have happened otherwise--in other words, its marginal effect. He used the R&E tax credit as an example: while subsidizing research and development is generally considered a good idea because the overall returns to society are greater than a private company would benefit from, this does not necessarily mean the R&E tax credit is a good policy; in fact, it would be poor policy if it simply provided windfalls to companies who would do R&D anyways.

Jim White from the Government Accountability Office agreed that policymakers should be focused on the marginal benefit of policies, pointing, for example, to a GAO report that showed that much of the R&E tax credit subsidized research and development that would have happened anyway. He also emphasized that each individual tax extender should be evaluated within the context of the goal it is working towards and the other policies involved in reaching that goal. Coordination would be needed among these policies, and policymakers should also watch out for tax extenders that duplicate other benefits.

Lawmakers would be wise to take these insights into account in the tax extender debate. Ultimately, we will see if these hearings bear any tax code-improving fruit.

The full video of the hearing is below.