What We Propose If Congress Renews a Host of Expiring Tax Provisions

By Carolyn Burstein
November 21, 2014

Economists generally agree that temporary tax policies are ineffective for economic growth, yet Congress has consistently extended a host of tax provisions that are known collectively as “tax extenders” in lieu of genuine tax reform.

A study by economists at George Mason University entitled “The Economic Costs of Tax Policy Uncertainty” shows that policy uncertainty itself has negative implications for the economy by reducing investment, consumption, employment and growth.

The study maintains that regular renewal of tax breaks is nothing more than a vehicle for politicians to acquire financial and political support from special interests in exchange for tax handouts. The only employment achieved is a growing supply of lobbying jobs to protect various industries’ tax privileges. So the primary beneficiaries of “tax extenders” are private interests, especially high-income taxpayers and various corporations (e.g., racetrack builders, the rum industry in Puerto Rico, and the Virgin Islands) and lobbyists.

The Economic Policy Institute (EPI) points out that the four largest “tax extenders” are:

  1. The research and development tax credit
  2. The renewable electricity production credit
  3. The active financing exception, which allows financial services firms and manufacturers to defer U.S. taxes on certain types of income earned overseas
  4. The deduction for state and local taxes

Combined, these account for 60% of the value of the most recently passed extender package. EPI says that these “tax extenders” are both regressive and inefficient because they provide benefits to individuals and businesses that act in ways they would have acted even without the tax provision. Furthermore, the “temporary” classification of these and several other tax provisions is deceptive because they have been routinely extended for years.

Unless the “temporary” tax provisions are extended by December 31, income taxes for individuals and businesses will be affected for 2014. Politico reports that powerful conservative groups funded by the Koch brothers (e.g. Americans for Prosperity, Heritage Action for America) as well as many House Republicans want the GOP to capitalize on their election victory by killing some of the “tax extenders,” such as one subsidizing the wind energy industry. Some Republicans are threatening a refusal to pass any “tax extenders” bill until at least January when they take over both houses of Congress. Representative Dave Camp (R-MI), Chairman of the House Ways and Means Committee during the lame duck session, along with several other Republicans, favor comprehensive tax reform with no temporary extenders.

While it is true that many of the 50+ “tax extenders” provide tax relief for certain businesses and high-income taxpayers, provide some benefits for ordinary taxpayers, such as a deduction for sales taxes and another offering a break to those who have had mortgage debt forgiven in the aftermath of the housing crisis. For these and other reasons, Democrats in both houses of Congress want to make only minimal changes in the bills and extend all tax provisions for two years, whereas Republicans want to permanently renew a few tax provisions and end tax breaks for most, including the wind credit, and prepare for major tax reform when they will control Congress in January 2015.

At the present time (November 20, 2014) top Republicans and Democrats on the Senate Finance and House Ways and Means committees are in negotiations to forge a deal on the “tax extenders.” Senator Ron Wyden (D-OR), current chairman of the Senate Finance Committee, told Politico this week that he was pushing for the bill introduced by his committee earlier this year (but never passed) that continues almost all of the “tax extenders” for two years (through 2015), but was willing to consider making some of the tax provisions permanent, specifically mentioning the R&D credit. He conceded, however, that negotiations are in a preliminary stage and have a long way to go. Like Dave Camp, Wyden wouldn’t rule out any possibility for the tax provision package at this time.

EPI says that the R&D credit is based on the widely accepted premise that some private research may not just improve the quality and lower the prices of goods and services produced by the firm itself, but may have “spillover effects” by increasing productivity growth across an entire industry and even the entire economy. The R&D credit is designed to offset only the costs of a company’s new research, not its entire research budget. Despite these good qualities, the current structure of the R&D credit is not flawless, as Wyden would quickly point out, especially the lack of data collection to show that the R&D credit is actually incentivizing R&D spending. There may not be time in this session of Congress to solve this problem and others that exist in the structure of the R&D credit.

Time is of the essence, as IRS Commissioner John Koskinen warned lawmakers last week that failure to address the tax provisions soon – in early December – could greatly complicate the tax filing season and delay tax refunds.

Another key fact about “tax extenders” that cannot be overlooked is their cost to the Treasury. Americans for Tax Fairness (ATF), basing their calculations on those of the Congressional Budget Office (CBO), has estimated that the two-year cost of extending these tax breaks would amount to $142.4 billion; a permanent extension (based on a 10-year cost) would amount to $691 .1 billion. By far, business tax provisions predominate among the “tax extenders.” For a two-year extension they constitute 78.1% of the costs; energy, individual, charitable and community assistance provisions constitute the remaining 21.9%.

As Congress debates whether these tax provisions, all of which assist the upper three quintiles of Americans, are worth the cost, we at NETWORK believe that policymakers must also address the needs of individuals and families in the lower two quintiles, who are struggling on a daily basis to make ends meet. Specifically, it is critically important to extend two credits that will soon expire – the Earned Income Tax Credit (EITC) and the refundable Child Tax Credit (CTC). Let’s not talk about the permanence of tax cuts without considering the permanence of these two significant credits.

Economists agree that the EITC and the CTC continue to be the most effective anti-poverty programs developed in this country. Together they keep about 16 million Americans, including more than 5 million children, out of poverty. As Sister Simone Campbell’s letter to Chairman Wyden, dated November 13, 2014, states: “[A]nother 50 million Americans, including 31 million children, would lose part or all of their Child Tax Credit or Earned Income Tax Credit if it is not extended. These credits strengthen opportunity for workers who are struggling to get by and help families become more economically secure. They – along with a strong minimum wage – have the power to raise the living standards and lift millions of working Americans out of poverty.”

EITC and CTC help create a more equitable and secure society, promote the common good, and lay the groundwork for a truly healthy economy. Only by ensuring that the 100% are strengthened will we be able to create strong communities that can resolve the crises that beset our society from time to time.

Both the EITC and the CTC encourage and reward work and the Center on Budget and Policy Priorities (CBPP) reminds us that there is growing evidence that income from these credits leads to improved school performance, higher college enrollment, and increased earnings in adulthood. Both credits have consistently enjoyed bipartisan support in Congress, and making them permanent should be a congressional priority. As Pope Francis wrote in The Joy of the Gospel “the dignity of each human person and the pursuit of the common good are concerns which ought to shape all economic policies” – and that includes tax policies!

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