Tax-Extender Follies

By Veronique de Rugy

When he learned of the news of the latest crazy-expensive, unfair, special-interest-driven spending proposal cooked up by Congress, Tyler Evilsizer of the Committee for a Responsible Federal Budget tweeted, "I had thought the Ways & Means extenders bill was going to be responsible, offsetting the ~$30 billion cost. It did, but then it created $100 billion new extenders. They'd cost $700 billion if extended!"

I am surprised that Evilsizer is surprised. Scholars at CRFB spend their days documenting the many ways members of Congress have for decades behaved irresponsibly. And indeed, when it comes to spending, legislators are never responsible. They love spending money without paying for it.

They have no problem growing government’s size and scope by concentrating benefits on special interests and diffusing costs on all the rest of us. Members of Congress love pretending there is some incredible crisis coming our way (never a budgetary one though!) as an excuse to shovel more money into the pockets and purses of those who whisper in congressional ears that they "need" the handouts. If national legislators were responsible we Americans would not be $22 trillion in debt, and Uncle Sam’s budget deficits would not be expanding when the economy is growing.

But back to these tax extenders. Every year or so, Congress reauthorizes a package of expiring tax provisions commonly known as "tax extenders." Usually, these extenders grant some economic privilege tailored to some particular group or business interest. What’s different about this year’s extender package is that it consists of, among other things, temporary business tax breaks that Congress let expire almost a year and a half ago. During this time, the world did not fall apart and companies continued to operate all on their own without the government handouts.

Letting these special-interest tax breaks expire was obviously the right thing to do. Temporary tax extenders are bad tax policy. The yearly indecision around the extenders contributes to economic uncertainty, which distorts long-term financial planning and slows economic growth. Yet an ideal situation for tax accountants — if not for the general public — is when Congress allows these extenders to expire but then resurrects them later and makes them retroactive. Economic distortions and business uncertainty are worsened, but the tax-accounting industry booms.

Temporary tax extenders also induce a frenzy of economically unproductive lobbying to make sure that legislators reauthorize the extenders. Legislators love the lobbying since it means more campaign contributions without having to lift a finger. As Chris Edwards of the Cato Institute described back in 2013, "A number of these are used essentially as fundraising tools for members of Congress who serve on tax-writing committees."

If the provisions in tax extenders are such great policy, the right thing to do is to make these provisions permanent; but if they are poor policy, let them expire permanently. The PATH Act of 2015 did exactly that. Some of the temporary extenders were made permanent, and all the others expired.

If you ever believed that Democrats are any less inclined to extend favors to big businesses, check out the $30 billion temporary extenders (those that expired in 2017 or 2018 and the tax breaks set to expire this year, through 2020) doled out by the Democrat-led House Ways and Means Committee.

Over at the Heritage Foundation, Adam Michel writes:

There are 14 tax credits and other privileges under consideration that subsidize certain types of energy production and use. Biofuels, plug-in electric vehicles, coal facilities, and energy efficient homes all have their own carve-outs.
There are other subsidies as well — for instance, for an American Samoan tuna plant; a renewed program for low-income areas that government research has repeatedly found to be ineffective; an increased tax on coal; and a paid family leave subsidy that acts as a windfall tax benefit, as it is almost exclusively used by businesses that are already providing leave in the free market.

According to CRFB, these subsidies amount to $33 billion over 10 years. To pay for the tax-code carve-out, Democrats would let another tax-code carve-out from the Trump tax cuts of 2017 — the estate-tax exemption — expire 3 years ahead of schedule. According to the CRFB that’s $38 billion right there. It balances on paper, but in reality it just exchanges one set of crony tax breaks for another.

And since apparently money is no object, Dems also went all out and added another $100 billion to the list of temporary extenders, this time for families. These include a temporary expansion of the earned income tax credit (a credit that is very expensive, creates some disincentives to work, and suffers from large improper payments), the child tax credit (making it fully refundable), and the child and dependent-care tax credit for two years. It would also provide Puerto Rico and other territories with permanent funds for the earned income tax credit and child tax credit. Democrats and Republicans both love these family handouts, but these are nothing but politically driven social engineering done through the tax code. Not only are the ostensible goals of these government policies not the role of the government nor best achieved through these tax preferences, the preferences themselves bloat the budget deficit and add complexity to the tax code.

Here is how the CRFB scores the overall Democratic package once we account for the low probability that these "temporary" measures won’t expire:

Unfortunately, the estate tax change only raises $38 billion over ten years, while the remainder of the bill costs almost four times that, mostly over the first two years. If policymakers extend the temporary deficit-financed tax cuts permanently, we estimate they would cost $710 billion with interest over the next decade, increasing projected debt in 2029 by 2 percent of Gross Domestic Product (GDP). Most of this cost would be on top of the other significant costs from extending current tax and spending policy.

As Michel notes:

This is the wrong path. Government currently spends over $1.1 trillion a year on over 90 government means-tested programs. Spending on cash, food, and housing aid to families with children is three times the amount needed to nearly eliminate all child poverty in the U.S.

So yeah, members of Congress are not responsible.

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Veronique de Rugy

AIER Senior Fellow Veronique de Rugy is also a Senior Research Fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist. Her primary research interests include the US economy, the federal budget, homeland security, taxation, tax competition, and financial privacy.