The Ways and Means Committee is continuing to work through the set of over 50 tax breaks that expired at the end of 2013, choosing certain provisions to extend permanently. While scrutinizing which tax extenders are worth keeping would normally be commendable, the Committee ignores the cost of making these tax breaks permanent, which would add to the debt. While some argue that extending existing tax breaks is not a tax cut that needs to be paid for, the tax benefits were not paid for when they were created, which is why they are slated to expire.
This week, the Committee held its second markup permanently extending, and in some instances expanding, certain tax extenders; the first made six business extenders permanent at a cost of $310 billion. The Committee approved all six bills, permanently extending the largest expired provision, bonus depreciation, along with several provisions for charitable giving. As a whole, the package would cost over $300 billion. Because the Committee is not offsetting the price of these tax cuts, the entire package would add almost $400 billion to the debt over ten years when increased interest costs are included.
The package would expand bonus depreciation and extend three other charitable provisions that expired at the end of 2013 – allowing retirees to make tax-free donations from their IRAs, increasing the charitable deduction for donating food, and waiving some of the normal limitations when donating conservation easements. The bills would also enact two new charitable proposals from Chairman Dave Camp's (R-MI) tax reform discussion draft: allowing charitable deductions to be counted in the previous year and reducing the tax that certain private foundations must pay on their investment income.
|Costs of Tax Provisions Considered By the Ways and Means Committee on May 29 |
|Extend and expand bonus depreciation||$287 billion|
|Extend tax-free charitable donations from retirement plans||$8.4 billion|
|Allow charitable donations to be counted in the previous year until April 15th||$2.8 billion|
|Extend a provision for businesses donating food||$1.9 billion|
|Reduce tax on certain private charitable foundations||$1.9 billion|
|Extend more generous limits for donating conservation easements||$1.1 billion|
|Subtotal, Provisions Considered by Ways & Means ||$303 billion|
|Interest Cost||$90 billion|
|Grand Total, Addition to the Debt||$393 billion|
|Memorandum: Permanently extending these six provisions at 2013 levels, with interest||$331 billion|
Source: JCT, CBO, CRFB calculations
The vast majority of these costs ($287 billion) come from expanding and permanently extending bonus depreciation, a provision originally enacted as temporary economic stimulus that becomes much more expensive to extend permanently than temporarily. Bonus depreciation has already cost $220 billion since 2008, mostly passed without offsetting savings.
The bills would add nearly $400 billion to the debt, which is enough to increase debt to almost 77 percent of GDP by the end of the decade, more than 1 percent higher than if Congress paid for all new changes. If the tax breaks approved by the Ways and Means Committee last month are added, the bills would add almost $800 billion to the debt, increasing it to 78 percent of GDP. The costs of permanently extending and expanding these ten breaks are almost as much as permanently extending the entire set of over 50 expired tax breaks.
Passing tax cuts increases future deficits, but proponents argue that the extenders do not need to be paid for because Congress has routinely passed them in the past without offsets. However, this fiscally irresponsible practice has contributed to the current record-high levels of debt. These proponents also state that extending current policy does not require offsets, which is budgetary slight-of-hand that makes costs disappear from the budget process. Even if extending current policies was not counted as a cost, the current bills would still cost approximately $60 billion after interest, because they expand some breaks beyond current policy.
Although credit should be given for Chairman Camp's decision to carefully review each tax extender in place of a blanket extension, any long-term extensions should ideally be addressed in the context of fiscally responsible and comprehensive tax reform. This is exactly the approach Chairman Camp took in the Tax Reform Act of 2014, a tax reform package that would have reformed and extended fewer than ten tax extenders and let expire three times that amount.
Importantly, that package paid for the provisions it did extend. Any short- or long-term extension outside of tax reform should take that same approach, abiding by pay-as-you-go rules to offset the cost of any tax cuts with reduced spending or increased revenue elsewhere in the budget.
Update: This post has been updated to reflect the fact that the Committee approved all six bills.