House Republicans are reportedly close to reaching a compromise on tax extenders with Senate Majority Leader Harry Reid, D-Nev. The deal would make permanent tax breaks for research and mass transit users, and a deduction for state sales taxes. Nearly every other tax break that expired at the end of 2013, including a break for racehorse owners, would be extended retroactively through 2015. The wind production tax credit would be fully extended through 2015 but then get phased out entirely in 2017.
Deficit hawks, such as the Committee for a Responsible Federal Budget, are coming out against the deal, since it would add more than $500 billion to the deficit over the next 10 years when interest costs are included.
If this deal were certainly the last word on tax extenders, that would be a fair critique. But the true status quo of tax extenders is that they get renewed every two years after significant debate but without much alteration. Some provisions have been extended for decades and are temporary only in budgetary scoring. For instance, everyone knows the research tax credit enjoys bipartisan support and neither party would let it expire. By making a few more-useful extenders permanent, the reported deal would be an improvement over the current status quo of fully renewing tax extenders every two years.
From a strategic pro-tax reform point of view, it is better for more tax breaks to be made permanent now, no matter how bad they are. That way, when tax writers go to cut rates as part of reform, they can remove such tax breaks in order to make up lost revenue. As long as the tax breaks are scheduled to expire at the end of 2015, tax writers won’t get any budgetary credit for permanently eliminating them. Thus, the more permanent tax breaks there are in the budgetary baseline, the more there is for tax writers to trade out for lower tax rates as part of a revenue-neutral comprehensive tax reform plan.
Making tax extenders permanent still gives Congress an opportunity to pursue spending cuts now to reduce the deficit. The Congressional Budget Office just released a report outlining 45 different ways to cut spending without touching health-related issues. Combined, these reforms could cut over a trillion dollars from the deficit.
The Obama administration has already threatened to veto the reported deal over tax credits that expire in 2017. Congress should offer to make those credits permanent too, as long as offsetting spending cuts are made. When the GOP goes to design comprehensive tax reform in the next session of Congress, it can judge those credits on their merits and decide whether to keep them or cut rates further.
There’s also an advantage to having a tax code that doesn’t rely on constant congressional re-approval. If every tax break were made permanent, it would also reduce uncertainty for those who depend on the credits. Low-income workers that rely on mass transit to commute would not have to keep worrying about which way the political winds will blow on extenders, nor would businesses that rely on the research tax credit to fund innovation.
Some tax extenders are ridiculous — so narrowly designed that making them permanent would have little benefit. Tax breaks on racehorses and Puerto Rican rum should really be allowed to expire. But there are benefits to making useful tax extenders permanent, even if they are permanent in name only until comprehensive tax reform can be achieved.
