The Bottom Line

December 19, 2014

It is clear that Social Security faces financial challenges. This year, its own Trustees estimated the combined trust funds would run out of reserves in 2033 while CBO estimated a 2030 exhaustion date. But yesterday, CBO released a more detailed set of numbers, which show their projections of year-by-year revenue and spending, along with a range of other possible outcomes. The results aren’t pretty.

CBO estimates that the Disability Insurance trust fund will run out during FY 2017 and the Old Age and Survivors' Insurance trust fund would run out in 2032. If lawmakers patched up SSDI by reallocating revenue from OASI, the combined trust fund will run out in 2030, at which point benefits would be cut by 26 percent.

The exhaustion of the trust fund is caused by a large run-up in spending over the next few decades while revenue rises only slightly. As a percent of payroll, outlays have already risen significantly from 10.4 percent in 2000 to 13.8 percent in 2014, both a factor of higher spending and relatively slow payroll growth. Going forward, outlays will continue to rise, exceeding 18 percent in 20 years and 20 percent in 75 years, almost twice as much as was spent in 2000. Meanwhile, revenue will creep up only slightly from 12.8 percent of payroll in 2014 to 13.6 percent in 75 years.

As a percent of GDP, outlays would rise from 4.9 percent in 2014 to 5.7 percent in 2024 and 6.4 percent by the mid-2030s. After dipping slightly, spending would rise again, reaching an all-time high of 6.9 percent 75 years from now. Revenue would stay fairly flat at 4.6 percent.

December 19, 2014

Senator Ben Cardin (D-MD) introduced the Progressive Consumption Tax Act last week that would reform the tax code and change the way that tax revenue is collected, introducing a nationwide consumption tax. The additional revenue generated would be used to cut the corporate rate in half and eliminate the income tax for three-quarters of households.

Cardin describes his the bill as a "comprehensive, progressive, pro-growth" proposal. As he explains:

Credible tax reform is critical to America’s economic competitiveness. Every other developed country in the world, including all other Organisation for Economic Cooperation and Development (OECD) countries, have a consumption tax. The Progressive Consumption Tax Act puts this country on a level playing field with other nations by providing for a broad-based progressive consumption tax, or PCT, at a rate of 10 percent.  The PCT would generate revenue by taxing goods and services, rather than income.

Cardin's plan would adopt a 10 percent tax on most goods and services. However, both businesses and individuals would pay far less in income taxes, and most individuals would not owe any income tax. 

For the individual income tax, a single person earning less than $50,000 or a couple earning less than $100,000 would not owe any taxes. According to the Tax Policy Center, approximately 75 percent of taxpayers had cash income below this threshold in 2013. Above that level, there would be three brackets – 15, 25, and 28 percent – instead of the current seven brackets that max out at 39.6 percent. Taxpayers in the top bracket would see only a small reduction in taxes on income they spend, since the new income tax rate would be 28 percent plus 10 percent on consumption spending. However, any income that goes into savings and investment would not be subject to this additional 10 percent tax.

Many of the deductions and credits currently available to individual taxpayers would be repealed, including the lower rate on capital gains and the alternative minimum tax. Those that the plan would keep – the state & local tax deduction, the mortgage interest deduction, the charitable deduction, and health & retirement benefits – would only be relevant to taxpayers with high enough income to owe tax. The refundable credits, like the Earned Income Tax Credit and Child Tax Credit, would be replaced by larger rebates based on income and family size, which would "practically eliminate the consumption tax burden for lower- and moderate-income families," according to Cardin's office.

December 18, 2014

The Congressional Research Service's Jane Gravelle recently put out a paper on plans to address long-term deficits and debt. The piece both goes through the many problems with the current budget outlook and different plans that have tried to address it.

Gravelle notes that debt will rise significantly over the next quarter-century to exceed the size of the economy, despite the fact that non-health and non-Social Security spending will decline as a share of GDP.

Although the debt held by the public is projected to be relatively stable over the next decade, the Congressional Budget Office (CBO) projects it will rise to 106% of GDP by 2039. This increase in debt is mainly due to growth in federal spending on health care programs and Social Security, as well as increasing interest payments that typically accompany rising budget deficits. Although spending on these programs is rising, other types of federal spending have remained constant or declined. These trajectories are projected to continue under current policy.

The following table shows how certain areas of the budget are expected to grow or contract as a percent of the economy between 2013 or 2024.

December 18, 2014
How Much the Growing Debt Costs U.S. Households

Maya MacGuineas, President of the Committee for a Responsible Federal Budget, wrote a commentary that appeared in the Wall Street Journal Washington Wire. It is reposted here.

 

December 18, 2014

An old saying goes, "Nothing is certain but death and taxes." But in budget projections, neither of those things -- mortality rates nor revenue levels -- nor a host of other economic and technical variables can be predicted with perfect precision. This simple fact has led many commentators to question the usefulness of long-term forecasts that go out as far as 75 years, but also prompted suggestions about how to reduce uncertainty or at least tailor policies to account for it. On Monday, the Brookings Institution's Hutchins Center on Fiscal and Monetary Policy released three working papers and held an event shedding light on both of these questions.

The first paper "The Economics and Politics of Long-Term Budget Projections" by Brookings Senior Fellow Henry Aaron discussed the usefulness of various long-term projections. He argued that 75-year projections for the overall budget -- performed by CBO -- and for Medicare -- performed by their Trustees -- are not all that helpful and should be limited to 25 years. He argued that requiring 75-year numbers forces forecasters to make unrealistic assumptions or otherwise make arbitrary determinations about very uncertain variables like health care cost growth. He did see a use in 75-year projections for Social Security because of lawmakers' tendency to make very gradual benefit cuts, so that lengthy projection period is necessary to fully measure the financial impact of legislation and see how much of a shortfall they have to close.

While Aaron suggested that long-term projections other than Social Security are not useful, University of California, Berkeley's Alan Auerbach takes the opposite conclusion: the uncertainty makes it all the more important to reduce deficits since things could be worse.

His paper entitled "Fiscal Uncertainty and How to Deal With It" started by acknowledging the many different changes in economic variables that can affect the budget. Of course, the uncertainty also compounds the longer projections go for, as more variables factor in and the chance of error increases. But he did not see this as a reason to disregard the projections all together.


Source: Brookings Institution

December 17, 2014

In his final week on Capitol Hill, retiring Senator Tom Coburn (R-OK) introduced a bill with a wide-ranging set of measures to, in his words, protect and strengthen the Social Security Disability Insurance (SSDI) program. Coburn put on the table concrete reform proposals for consideration in the next Congress, advocating for reforms beyond simply restoring solvency to the dwindling DI trust fund:

When the trust fund is exhausted in 2016, many Members of Congress will say we just need to move funds from the Social Security retirement program. Let me be clear: this is not a solution; it is a Band-Aid, a temporary fix that takes money away from seniors and will eventually hurt taxpayers when both funds go broke in 2033.

Coburn proposed a broad mix of proposals, from long-discussed ideas to reform the disability determination process and upgrade SSA’s data sharing and processing systems, to new demonstration projects that help potential beneficiaries remain attached or return to the workforce. This effort is in line with attempts by other policymakers to elevate SSDI to the top of the agenda, notably the SSDI Solutions Initiative, recently launched by former Congressmen Jim McCrery and Earl Pomeroy with support from CRFB, to identify reforms to make the program work better for beneficiaries and those contributing to the system.

Some of the most important reforms proposed in the bill include:

December 15, 2014

Tax reform has been an increasingly common way to pay for infrastructure spending in recent years. Both President Obama and outgoing House Ways and Means Chairman Dave Camp (R-MI) proposed using revenue from business tax reform to fund the Highway Trust Fund (HTF) for a number of years.

Last week, Representative John Delaney (D-MD) proposed a version of this idea as well, but with a twist: he would also set up a deadline for tax reform and a backstop in case it wasn't passed.

Like Chairman Camp's proposal, Delaney's bill would use an 8.75 percent deemed repatriation tax to fund the Highway Trust Fund, in this case for six years. The tax would apply to the approximately $2 trillion of foreign earnings by U.S. companies held outside the country. He would also use the revenue to fund a $50 billion infrastructure bank. Camp's proposal raised $170 billion, $127 billion of which was dedicated to the HTF. It appears that Delaney would dedicate the same amount to infrastructure and use the remainder for the $50 billion bank.

December 11, 2014

The Committee for a Responsible Federal Budget hosted a policy discussion this past Tuesday on dynamic scoring. CRFB President Maya MacGuineas opened the event by noting that dynamic scoring is an issue that will receive considerable attention over the coming months and could have an impact on fiscal policy decisions. Speakers offered their perspectives on the merits and challenges of using dynamic estimates in the legislative and budget process. Senator Rob Portman (R-OH) and Representative Chris Van Hollen (D-MD) offered remarks on their opinions and perspectives on dynamic scoring. A panel of dynamic scoring experts followed, moderated by CRFB President Maya MacGuineas. See CRFB's paper on dynamic scoring for a detailed discussion or our updated 2-page summary.

Sen. Portman spoke in favor of CBO and JCT providing dynamic estimates of bills. He argued that, at the very least, estimates should be done to inform staff and lawmakers how bills will affect the economy. He spoke about the bipartisan support for his bill, which passed by a vote of 51-48 with six Democrats voting in favor of it, when he offered it as an amendment during consideration of the FY 2014 Senate budget resolution. Portman acknowledged that there is a legitimate debate over which models and assumptions should be used, but he encouraged detractors to support presenting dynamic estimates as supplemental information, as his amendment would, not for official purposes. It would be apparent if dynamic estimates are significantly different than current methods, and policymakers would be able to look back to see which estimates were more accurate.

Congressman Van Hollen gave the opposing viewpoint. Van Hollen argued that dynamic scoring inherently demands that CBO or JCT adopt a specific ideology when estimating a bill. He mentioned estimates from the Heritage Foundation predicting revenue increases from the 2001/2003 tax cuts and claims that the 1993 tax increases would harm the economy. He also said that many models for dynamic analysis make assumptions about future actions to offset the cost of tax cuts, effectively giving legislation credit for policies not in the bill. He drew a distinction between the CBO estimate of immigration reform legislation, which took into account the direct impact of additional workers in the labor force, and dynamic estimates which incorporate the estimated indirect economic effects of legislation. Van Hollen reminded audience members that CBO and JCT already use microdynamic analysis in scoring bills—they weigh behavioral responses from individuals and businesses and the factors of supply and demand. He also acknowledged that dynamic analysis is useful as supplemental information, as long as policymakers understand the underlying assumptions.

December 10, 2014

Lawmakers have tried several times to revive tax provisions that expired last year and extend them permanently, at a substantial cost to the national debt. They're trying again.

After an incredibly expensive $440 billion deal to extend the tax extenders fell apart after an appropriate veto threat from the White House and concerns about the enormous cost, Congress appears to be reviving piecemeal elements of this deal by taking up some of the same permanent provisions in the last week of the lame-duck Congress.

The legislation being put forward would revive three of the tax extenders dealing with charitable contributions and continue them permanently, while adding $11 billion to the deficit. Although the cost is relatively small, this is just a piecemeal approach of the same type of policies that failed earlier. In a separate bill, Congress appears ready to extend the rest of the 50 or so tax extenders for just one year, also without offsets, which would cost about $42 billion. (The charitable provisions are about $650 million, less than 2 percent of the bill's $42 billion cost.)

December 10, 2014
How to Improve the Tax Extenders Bill? Start by Paying for It.

Maya MacGuineas, President of the Committee for a Responsible Federal Budget, wrote a commentary that appeared in the Wall Street Journal Washington Wire. It is reposted here.

December 10, 2014

The eagerly awaited $1.1 trillion "CRomnibus" bill was released yesterday, and given its far-reaching nature, many aspects are being scrutinized. From a spending and debt standpoint, the bill wasn't expected to make many waves since discretionary spending levels were already set by the Murray-Ryan agreement last year. On a positive note, the bill includes 11 of 12 full-year appropriations bills which avoid a government shutdown and make real decisions about how the government allocates its resources. Unfortunately, it also includes a number of gimmicks that violate the spirit of budget enforcement. So far, we've found about $30 billion of transgressions.

Hidden Revenue Losses and Spending Increases

The bill violates pay-as-you-go (PAYGO) principles by increasing spending and reducing revenue by what looks like roughly $3.5 billion. The largest provision, $1.4 billion, comes from a fix to exempt expatriates from the requirement to buy health insurance. A bill which allows financially-troubled defined-benefit pension plans to reduce benefits to stay solvent costs $1.1 billion – that reduces Pension Benefit Guaranty Corporation spending upfront, which goes back into extending its solvency, but reduces federal revenue from lost taxation of pension benefits. The final $1 billion comes from various other mandatory spending increases included in the bill. The CRomnibus explicitly exempts the revenue reductions from PAYGO rules which would otherwise require these reductions to be offset.

December 10, 2014

Senator Coburn's office yesterday published the "Tax Decoder", a 300+ page guide describing more than 165 tax expenditures. The report highlights inefficiencies in many of the current tax breaks, drawing attention to areas where these breaks have been abused or provide an over-sized benefit to one specific industry, "allow[ing] Uncle Sam to put a thumb on the scale, placing politicians instead of markets at the center of capital allocation." See the full document here.

The report covers nearly every tax break. It describes attention-grabbing breaks like a tax break for a tuna company, breaks for NASCAR tracks, tax-free financing of stadiums built for private sports teams, and private foundations used by celebrities. It also tackles the largest tax expenditures, providing a serious treatment of large provisions like accelerated depreciation, the child tax credit, and the mortgage interest deduction. As the report says:

This report is meant to help decode the tax code for the public and policymakers alike, exposing special giveaways and surprising tax preferences unknown to many Americans who cannot afford tax lawyers or accountants.

The report "is designed to provide the building blocks of comprehensive tax reform for lawmakers wishing to enact a meaningful overhaul of the tax code in the coming years." It gives plain language summaries of many of the breaks that will come under discussion in tax reform. Many members, including outgoing Ways & Means Chairman Dave Camp (R-MI) and former Senate Finance Chairman Max Baucus (D-MT), started the work of reforming the tax code over the last several years. Hopefully, this report will inform the public and the lawmakers who will continue those discussions in the next Congress.

December 9, 2014

Earlier today, CRFB Senior Policy Director Marc Goldwein testified before the House Energy and Commerce Health Subcommittee. The hearing, entitled "Setting Fiscal Priorities," discussed policy options to reduce health care spending. Also testifying were Executive Director of the Medicare Payment Advisory Commission Mark Miller, the American Action Forum's Director of Health Care Policy Chris Holt, and Georgetown Professor of Public Policy Judy Feder. The witnesses represented different perspectives and focused on different parts of the health care system.

Miller's appearance made up the first panel, and naturally, his testimony focused on Medicare. He gave some background on Medicare but focused on the types of savings policies that MedPAC has recommended in its reports. These policies include simple recommendations on annual payment updates (increases or decreases) or more far-reaching recommendations like site-neutral payments and bundled payments (two policies that were part of our PREP Plan). Questions for Miller spanned a far range of topics, including the Affordable Care Act's payment reductions.

The second panel had the other three witnesses. Goldwein's testimony focused on both the need to rein in health spending to control debt and the options available to do so. He noted the large run-up in debt that is projected to have in the coming decades and the central role health care plays in that.

For solutions, he focused on two different types of policies: "Benders" which have the potential to bend the health care cost curve and "Savers" which are not as transformative but lead to a better allocation of health care spending. In his oral testimony, he focused on the policies in the PREP Plan, which involve reforming Medicare's cost-sharing structure and provider payments to encourage more efficient care. His written testimony included many other options with the potential for bipartisan support.

December 8, 2014

With Congress set to retroactively revive the tax extenders for the past year at a cost of $42 billion, our president, Maya MacGuineas, published a commentary online in the Wall Street Journal criticizing them for adding the costs to the deficit.

J.D. Foster, deputy chief economist at the U.S. Chamber of Commerce, however, published a blog on the U.S. Chamber's site calling our reasoning "a tad skewed" and arguing that letting these myriad tax breaks remain expired should be considered a "tax hike" because many people now consider them to be permanent provisions of the tax code. His implied conclusion is that restoration of these extensions does not need to be paid for.

Foster argues that "many of these provisions have been in the law for decades." A few have been around that long – the research & experimentation tax credit was enacted in 1981 – but most are more recent. In 2000, there were only a quarter as many provisions that expired within one or two years.

Furthermore, many of these provisions only passed in the first place because they weren't permanent, lowering their budgetary cost. For instance, Congress enacted the sales tax deduction temporarily because it only offset the cost of the deduction for two years, requiring lawmakers to come back to the table if they wanted to make it permanent. The provision was scored with a total ten-year cost of $5 billion when it was enacted, but it has been repeatedly extended at an annual cost of about $3 billion, bringing the real ten-year cost of the provision closer to $30 billion.

Other tax breaks in the extenders package were explicitly intended to be temporary stimulus in response to the recent recession, including the most costly provision, bonus depreciation – which would add almost $250 billion to the debt over the next ten years if made permanent. The expiration of temporary infusions of money into the economy should not be considered tax hikes or spending cuts. When Congress sends rebate checks to every taxpayer, as they did in 2001 and 2008, is it a tax hike or spending cut if they do not continue the checks the next year?

Allowing lawmakers to extend these provisions for free would incentivize them to disguise more tax cuts as temporary provisions. Lawmakers would avoid paying the full cost when creating the tax break and would later add to the debt when extending it without offsets. If lawmakers, however, really want temporary tax breaks to be included in the baseline so extensions do not need to be offset, they should change scoring rules so that permanent costs are scored when the provision is originally created. Individual spending provisions, such as Unemployment Insurance or the Sustainable Growth Rate (SGR) patches, follow the same rules: they are required to be offset.

December 5, 2014

Before debating a potential "CRomnibus" bill to fund the government, lawmakers are ready to check one item off their lame-duck to-do list: a defense authorization for FY 2015. The House and Senate Armed Services Committees agreed to a bill that addresses a number of issues involving military operations overseas and military compensation, among other items.

On the first issue, the authorization sets war spending -- mostly intended for combat related activities in Iraq and Afghanistan -- at $63.7 billion, the level requested by the Administration. It encouragingly scales back a $4 billion Counterterrorism Partnership Fund, which is only tangentially related to combat spending, to $1.3 billion. However, it also shifts $350 million of funding previously designated for Iron Dome, an Israeli missile defense system that is clearly not directly related to Afghanistan and Iraq war spending, to the war category. Note that since this is just an authorization, these funding decisions are not final and will be made in the Defense appropriations bill. The soundness of the decisions they made is mixed: encouraging on the funding levels but less so on the gimmickry with Iron Dome. It would be better if the authorization had gone further and outlined criteria for what could qualify for the war designation.

In terms of military compensation, we highlighted last month two decisions that lawmakers were considering on TRICARE drug co-pays and the Basic Allowance for Housing (BAH). In both cases, the authorization does make changes but only partway to what the Defense Department suggested. The bill raises co-pays by $3 for generic and brand-name retail drugs and for brand-name and non-formulary mail-order drugs. Generally, these increases are much lower than the ones the Pentagon included, saving $2.4 billion over ten years. The only area where lawmakers exceeded requests is in generic retail drugs -- the Pentagon had a $1 per year increase over the next nine years starting in 2016. Regarding housing changes, the authorization would reduce the BAH by 1 percent of housing costs (to 99 percent); that is, one-fifth the size of the 5 percent decrease the Pentagon suggested.

December 4, 2014

The House passed the ABLE Act yesterday, a bill that helps those who have been disabled since youth accumulate savings. The bill, with an estimated cost of $2 billion over the next 10 years, would create tax-free savings accounts that do not count against the account holder for means-tested programs. The bill is an encouraging example of fiscal responsibility, since it is fully paid for with savings in other parts of the budget.

Currently, low-income individuals cannot accumulate more than a certain amount in their savings accounts without losing SSI and Medicaid payments. For instance, individuals with more than $2,000 or couples with more than $3,000 in savings and assets are ineligible to receive SSI payments. Many have pointed out that these limits prevent people with disabilities save for medical bills, education, or equipment they may need to stay in the workforce

To remedy this, the bill would allow any child or person who became disabled before the age of 26 to establish an ABLE account and contribute up to $14,000 annually (subject to other state caps). The balance of the account would not count against the asset limits for low-income programs. Contributions into the account are made with after-tax dollars but there is no tax on the account's accrued interest or dividends.

December 4, 2014

The House approved last night a deficit-increasing one-year tax extenders package. After a correction by the Joint Committee on Taxation, the updated cost of the bill is $41.6 billion over 10 years. Notably, this cost violates various budget rules, or points of order, which the House waived.  More significantly, the legislation included language excluding costs from statutory pay-as-you-go (PAYGO).

Furthermore, tax extenders are intentionally made temporary to hide their costs when they are repeatedly extended year after year. If the extenders in this bill were extended for the next 10 years, debt as a share of the economy would be 3 percentage points higher by 2024, an increase of $850 billion.

Because the legislation had over $40 billion in costs that were not offset, it violates several budget enforcement provisions.  First, it reduces tax revenue below the current law levels called for in the Ryan-Murray agreement serving as this year's budget. Section 115(b)(3) of the Ryan-Murray budget agreement set revenue levels for the next ten years at the levels in CBO's most recent baseline. The bill violates Section 311 of the Congressional Budget Act, which enforces the budget resolution's totals, because CBO's baseline assumes that those temporary tax breaks remain expired. While the Ryan-Murray agreement did not call for increased revenues as the Senate's FY 2014 budget resolution did, it maintained revenues at current law levels as the House-passed FY 2014 budget did, effectively assuming expired tax breaks would be paid for if renewed

December 2, 2014

Update (12/3): This blog has been updated to reflect a correction the Joint Committee on Taxation made to its estimate of the wind production credit.

After proposing a nearly $450 billion budget-busting deal on the tax extenders that received a veto threat from the White House, Congress is scaling back its plans to a one-year retroactive extension of the extenders. This $42 billion plan would end the uncertainty on tax extenders for the upcoming filing season by extending the provisions for 2014, but it would leave the issue to be dealt with again next year (with extensions again needing to be retroactive). Furthermore, many of these policies were meant to encourage economic activity or provide economic stimulus, but by being done retroactively, this extension is simply providing a windfall for activities that have already taken place. Retroactive tax cuts are poor policy and a sign of a broken legislative process.

Still, this approach is a clear improvement over the previous deal because it has a much lower cost, and it doesn't permanently lower baseline revenue for tax reform, which will be needed to pay for an aging population. Encouragingly, it also limits extensions to current policies and no longer includes expansions as the previous package did.

Cost of One-Year Retroactive Extensions of Tax Extenders
Extension 2015-2024 Cost
R&E Credit $7.6 billion
Wind Production Tax Credit $6.4 billion
Subpart F Exception for Active Financing Income $5.1 billion
Mortgage Debt Forgiveness Exclusion $3.1 billion
State and Local Sales Tax Deduction $3.1 billion
15-Year Recovery Period for Leasehold, Restaurant, and Retail Property $2.4 billion
Bonus Depreciation $1.5 billion
Section 179 Expensing $1.4 billion
Work Opportunity Tax Credit $1.4 billion
Biodiesel Production Credit $1.3 billion
Look-Thru Rule for Payments Between Related Subsidiaries $1.2 billion
New Markets Tax Credit $1 billion
Exclusion of Gains on Small Business Stock $0.9 billion
Mortgage Insurance Premium Deduction $0.9 billion
Other Provisions $4.3 billion
Total $41.6 billion

Source: House Rules Committee
Numbers may not add up due to rounding.

Even with the more responsible nature of the package, lawmakers should still offset the lower cost so they don't reverse the progress that has been made on deficits in recent years. That's where CRFB's PREP Plan can help.

PREP gives three principles for offsetting tax extenders in a way that maintains fiscal responsibility and sets up broader reform of the tax code. They are:

    1. Address most tax extenders permanently in the context of tax reform
    2. Fully offset the cost of any continued extenders in the interim without undermining tax reform
    3. Include a fast-track process to achieve comprehensive tax reform

Obviously, a one-year extension would satisfy the first criterion, but 2 and 3 have yet to be fulfilled. On 2, the PREP plan includes enough savings to offset a two-year, $83 billion extension of all of the provisions that expired at the end of 2013, except for bonus depreciation. Doing a one-year extension means that lawmakers could pick and choose among these provisions rather than having to do the whole package (or something equivalent).

December 1, 2014

Maya MacGuineas, President of the Committee for a Responsible Federal Budget, wrote a commentary that appeared in the Wall Street Journal Washington Wire. It is reposted here.

The tax-extenders deal got off on the wrong foot, and it just keeps getting worse.

At issue are 55 tax breaks that are part of the tax code on a temporary basis but are routinely extended. These breaks expired at the end of 2013, and Congress is scurrying to restore them. That we are only now discussing what do to about tax breaks that expired nearly a year ago underscores just how broken our government has become. It does not work to govern retroactively. Businesses cannot plan, invest, or compete when they don’t know the tax rules they must abide by each year.

What Congress should be doing is comprehensive tax reform. Many of these expired tax breaks, along with the $1.2 trillion worth of permanent deductions, credits, and exclusions that pepper the tax code, could be permanently eliminated or reformed, allowing rates to be lowered and providing the certainty needed to enhance economic competitiveness. In February, House Ways and Means Committee Chairman Dave Camp proposed an impressive array of tax-code fixes to do just that. But Congress ignored his plan and procrastinated, and now legislators complain that time is too short for real reforms.

Still, policymakers could go through all the expiring tax breaks and choose which ones to keep and which ones to get rid of. That’s what they did the last time they dealt with this issue. But, no, Congress is looking to extend the lot of them.

November 25, 2014

Congressional negotiators are reportedly nearing a deal to address the year-end tax extenders while adding $500 billion to the debt. By reinstating, making permanent, and in some cases significantly expanding a number of tax provisions, this deal would give away half of the revenue raised from fiscal cliff deal or about half the savings generated from the sequester, undoing some of the progress that has been made toward long-term deficit reduction. Horse trading one permanent provision for another and adding other "sweeteners" reportedly under consideration could push the price tag even higher.

Policymakers should fully offset the cost of any new spending or tax breaks, especially permanent ones. But perhaps most disconcerting about these discussions is that they are apparently considering expanding a number of provisions beyond what a permanent extension would cost – the expanded version of the R&D credit under discussion would double its pricetag. The table below outlines the reported deal with cost estimates for each provision (though based on reports of the total cost, some provisions may not have been reported yet).

Because of expanding the provisions, the deal will cost about $120 billion (after interest) than a straight extension.

Potential Tax Extenders Deal (Ten-Year Cost)

Policy Cost of Reported Deal
Incremental Costs Above Straight Extension
Expand and make the research & experimentation credit permanent ~ $160 billion ~ $ 85 billion
Restore 2013 levels of small business expensing permanently (Section 179) $73 billion $4 billion
Extend the American Opportunity Tax Credit permanently and index to inflation ~ $73 billion ~ $5 billion
Permanently allow state residents to deduct sales tax instead of income tax $34 billion -
Extend the Wind production tax credit for 2 years, and phase it out over the next two ~ $20 billion -
Permanently extend increased deduction for mass transit commuters $2 billion -
Permanently extend tax-free charitable donations from retirement plan $8 billion -
Extend 2 S-Corporation provisions $2 billion -
Create a category of tax-free savings account for disabled individuals (ABLE Act) $2 billion $2 billion
Permanently extend a provision for businesses donating food $2 billion -
Extend more generous limits for donating conservation easements  $2 billion  -
Extend the rest of the tax extenders through the end of 2015 $43 billion -
Other unreported provisions ~ $20 billion ?
Potential Costs of the Lame Duck
~ $440 billion ~ $100 billion
Interest Costs  ~ $90 billion  ~ $20 billion
Total Debt Impact
 ~ $530 billion ~ $120 billion

Source: JCT, CBO, CRFB calculations

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