Year-End 'Extenders' Could Worsen Deficits and Inflation

With inflation surging and debt approaching record levels, policymakers might make the fiscal situation even worse in an end-of-the-year fiscal package. We estimate that extending or delaying various expiring or emerging provisions while also waiving the PAYGO sequester would cost $220 billion in the first year alone (a one-year extension of all policies would cost $150 billion due to timing effects). Making these policies permanent would cost roughly $1.85 trillion over a decade. In combination with other legislation being considered, Congress could add up to $4.5 trillion to ten-year deficits in a worst-case scenario. These policies would also meaningfully boost near-term inflation.

The Cost of Extenders

A variety of provisions are scheduled to expire or change but could be modified at the end of the year.

Three provisions from the Tax Cuts and Jobs Act of 2017 (TCJA) could be particularly expensive. Under the TCJA, a limit on net interest deductions tightened at the beginning of 2022, businesses were required to write off research & experimentation (R&E) expenses over several years instead of deducting them immediately starting in 2022, and 100 percent bonus depreciation, which allows business equipment purchases to be deducted immediately, will start phasing out in 2023. Although two of these changes took effect this year, they can be reversed retroactively before businesses file their 2022 taxes in 2023. Though we don't know what length of extension policymakers could pursue, restoring the pre-2022 policy for these three changes would cost roughly $100 billion in the first calendar year they are in effect. If enacted on a truly temporary one-year basis, the ten-year cost would fall to around $25 billion since most taxes not paid in the first year would be recovered in future years for bonus depreciation and R&E expensing. On a permanent basis, however, these policies would cost substantially more, around $600 billion over a decade.

Policy First-Year Cost Ten-Year Cost
Extend 100 percent bonus depreciation $15 billion* $250 billion
Reinstate R&E expensing $60 billion* $155 billion
Restore pre-2022 net interest deduction limit $20 billion $200 billion
Revive remaining 2021 tax extenders $2 billion $20 billion
Extend 3 percent physician payment bonuses $2 billion $25 billion
Extend increased Medicaid funding for territories <$1 billion $5 billion
Subtotal, Policies $100 billion $650 billion
Repeal/delay PAYGO sequester $120 billion ~$1.2 trillion
Total $220 billion $1,850 billion
     
Memo: Cost of one-year extension of all policies above* $150 billion  

Sources: Congressional Budget Office and Committee for a Responsible Federal Budget.
*Expensing of equipment and R&E will have very little ten-year cost if enacted for only one year, since timing of tax payments would just be shifted. However, this low cost of largely a mirage, given the likelihood of further extensions.

Additionally, a few tax extenders expired at the end of 2021 that were not reinstated in the Inflation Reduction Act. Reviving these extenders would cost about $2 billion for a year and $20 billion over ten years on a permanent basis. In addition, a few health-related provisions are also set to expire after this year. Three percent physician payment bonuses enacted late last year would cost about $2 billion to extend for one year and $25 billion over ten years to extend permanently. Higher Medicaid funding to territories most recently enacted in the Fiscal Year (FY) 2022 omnibus would cost about $300 million to provide for another year and about $3 billion over ten years to provide on a permanent basis.

Finally, policymakers will likely try to avoid the PAYGO sequester, an automatic spending cut scheduled to take effect in early 2023 as a result of deficit-increasing policies enacted in 2021 and 2022 – mainly the $1.9 trillion American Rescue Plan. That sequester was originally scheduled to go into effect earlier this year, but lawmakers shifted the cuts into 2023, increasing the intended cut from $370 billion to $740 billion. However, the law only allows the sequester to reduce up to 4 percent of Medicare costs and 100 percent of a small set of programs and accounts that are not exempt, so it is impossible for the sequester to cut that much. For 2023, we estimate the scheduled cut would total about $120 billion. Through 2031, we estimate it would total $1.2 trillion.

Taken together, a year-end package with these elements could cost $220 billion in the first year and $1.8 trillion if made permanent over ten years; a one-year extension would cost $150 billion over ten years. Relative to the Congressional Budget Office's (CBO) baseline, which does not assume the PAYGO sequester is in effect, these policies would cost $100 billion in the first year and $650 billion over ten years if made permanent (a one-year extension would cost $30 billion over ten years).

Further Deficit Spending Could Worsen the Fiscal Outlook

In addition to extending expiring provisions and avoiding scheduled policy changes, there has been some discussion of enacting new deficit-boosting measures at year's end. This includes discussion of increasing the $10,000 cap on state and local tax (SALT) deduction, enacting a retirement bill that advanced in the Senate earlier this year, repealing Social Security's Government Pension Offset (GPO) and Windfall Elimination Provision (WEP), increasing discretionary spending in FY 2023 appropriations, reviving the American Rescue Plan's (ARP) child tax credit expansion, or providing supplemental funding for Ukraine, COVID, monkeypox, and disaster relief.

If lawmakers enacted all of these changes, including the extensions and PAYGO sequester repeal, it would cost $555 billion in the first year and $4.5 trillion over ten years. Enacting these policies on a temporary one-year basis would cost $485 billion.

Policy First-Year Cost Ten-Year Cost
Prevent policies from expiring/changing in 2022 and 2023 $100 billion $650 billion
Increase SALT cap to $80,000 for 2022-2025 $65 billion $235 billion
Enact Senate retirement bill N/A $40 billion
Repeal GPO and WEP $15 billion $150 billion
Fund FY 2023 appropriations at House levels $65 billion $740 billion
Revive ARP expansion of child tax credit $130 billion $1.2 trillion
Provide supplemental funding $45 billion $45 billion
Subtotal, Policies $435 billion $3.3 trillion
Repeal PAYGO sequester $120 billion $1.2 trillion
Total $555 billion $4.5 trillion
     
Memo: Cost of one-year extension of all policies above* $485 billion  

Sources: Congressional Budget Office, Social Security Administration, and Committee for a Responsible Federal Budget. Numbers may not sum due to rounding.
*Expensing of equipment and R&E will have very little ten-year cost if enacted for only one year, since timing of tax payments would just be shifted. However, this low cost of largely a mirage, given the likelihood of further extensions.

Not only would these policies increase deficits, but they would also worsen inflation. In a future analysis, we will produce estimates of the inflationary impact of an expensive end-of-year package. To give a sense of magnitude, if one-quarter to one-half of the $555 billion 2023 deficit increase resulted in higher prices, it would boost the PCE inflation rate by 0.75 to 1.5 percentage points relative to the counterfactual.

* * *

With inflation surging and debt approaching record high, costly end-of-year policy changes should be kept to a minimum. Any policies that are enacted should be fully offset in the near and long terms to avoid adding to the debt or worsening inflation. Fiscal policy should be helping make the Federal Reserve's inflation-fighting job easier in order to reduce the risk of persistent inflation or a painful recession.