Congress is still considering a potential fiscally irresponsible deal to extend the 50-some tax breaks that expired at the end of the year, known as tax extenders. Although negotiations continue, press reports suggest an outline of an emerging deal that will cost around $700 billion, or $840 billion once interest costs are included.
Using those press reports, we have attempted to sketch our best understanding of the deal, which seems to build on House legislation passed earlier this year to permanently continue and expand various costly tax breaks. Paired with those tax breaks are extensions of tax credit expansions scheduled to expire at the end of 2017 and delays of some Affordable Care Act taxes.
If press reports reflect the actual deal, we estimate approximately three-fifths of the package will go to businesses, mostly due to an expanded research credit, provisions allowing businesses to deduct expenses more quickly, and two tax breaks for multinational corporations. The remainder would go to individuals, largely from continuing stimulus-era tax credits that expire in 2017.
Even though the deal largely extends expired tax breaks, it also contains some new and expanded policies, as we described in Tax Deal Goes Beyond Simple Extensions. And while most costs are due to tax revenue loss, the deal also contains increased spending. Outlays include the continuation of renewable tax credits that provide payments to low-income families with no tax liability, increased interest payments as a result of the deficit-financed tax bill, and payments to insurers in the health exchanges who insure higher-cost patients.
Congress is in the process of negotiating a potential $700 billion deal that would extend several tax provisions that expired at the end of 2014 known as tax extenders. The deal could cost up to $840 billion over ten years when interest costs are included. However, that deal would go beyond what typical year-end tax extenders bills do. Rather than simply reviving expired tax breaks, the deal would reportedly also expand some of these provisions, create new policies, and include policy riders unrelated to expired tax provisions that will increase the bill's cost by one-sixth, or about $110 billion.
While the deal is being developed, the precise contours of the deal remain unknown, but there are some indications in the press what it could include. For instance, a permanently extended research credit would cost $109 billion over the next ten years, according to the Joint Committee on Taxation. Yet, an expanded – and more expensive – version of the research credit passed by the House at a cost of $182 billion is rumored to be included in the deal.
A fiscally irresponsible bipartisan deal is emerging to re-instate, make permanent, and in some cases expand many expired tax breaks known as tax extenders. According to several press reports (behind paywall), the deal could cost $700 billion over a decade. When interest is included, the emerging tax extenders deal could add nearly $850 billion to the debt this decade and $2.3 trillion by 2035.
Although details are scarce and negotiations ongoing, we have attempted to itemize our best understanding of the emerging deal. The deal would likely build on House legislation passed earlier this year to permanently continue various costly tax breaks and significantly expand one of the most expensive ones – the research and experimentation (R&E) credit. These tax breaks, which go largely to businesses, would be paired with the extension of low-income tax credit expansions scheduled to expire at the end of 2017. The deal would also reportedly include a two-year delay of the "Cadillac tax" on high-cost health insurance plans and the medical device tax.
By our estimate, this deal could increase the debt in 2025 by about $840 billion, bringing debt to GDP to 80 percent – 3 percentage points higher than currently projected.
|Extend and Expand Research Credit*||$180 billion|
|Extend Refundable Tax Credits^||$195 billion|
|Extend Provisions for Multinational Corporations: Active Financing Exception and CFC Look-through||$100 billion|
|Extend Section 179 Small Business Expensing||$70 billion|
|Extend State & Local Sales Tax Deduction||$40 billion|
|Delay Medical Device Tax and Health Insurance Cadillac Tax for Two Years||$15 billion|
|Other Provisions||$100 billion|
|Interest Costs||~$140 billion|
|Grand Total||~$840 billion|
All of these numbers represent very rough estimates due to uncertainty over which provisions are in the reported deal.
Estimates based on Congressional Budget Office and Joint Committee on Taxation projections.
*Press reports aren’t clear whether the deal includes the $70 billion House expansion, but it is assumed here.
^We assume the extension of all expiring refundable credits, though press reports only definitively include two of the three: the Earned Income Tax Credit and Child Tax Credit expansions, excluding the American Opportunity Tax Credit
By the end of the year, lawmakers will likely to try to revive the “tax extenders,” a set of more than 50 tax breaks that expired at the end of 2014 for individuals and businesses, ranging from broad breaks for research, renewable energy, and small businesses to narrower breaks for film production, teachers, and racehorses. Extending these tax provisions will further add to the debt if they are not offset, compounding the effects of the fiscally irresponsible budget deal that only offset half of its cost.
The House and Senate have taken two different approaches to tax extenders. The Senate Finance Committee approved a bill in July that would cost almost $100 billion to temporarily extend most of them for 2015 and 2016, while the House has passed bills to permanently expand and extend a small amount of provisions.
Newly appointed House Ways and Means Chairman Kevin Brady (R-TX) has said he wants to permanently extend certain tax provisions, and the House has been working to do so in a piece-meal fashion. In mid-September, the Ways & Means Committee approved tax breaks costing nearly $420 billion over ten years, or almost $520 billion with interest. Along with other proposals approved earlier in the year, the Committee’s tax cuts would add about $1 trillion to the debt.
No matter which of these provisions lawmakers chose to keep, they should all be paid for. At this point, neither side of Congress appears willing to stand up for fiscal responsibility, as each chamber has shown it wants to extend the tax breaks without offsets. If these bills are not paid for, here are some of the problems that may result.
This blog is part of a series of "Policy Explainers" for the 2016 presidential election, where we explain some of the candidates' policy proposals that affect the federal budget.
Republican Presidential candidate Senator Rand Paul (R-KY) recently released his Fair and Flat Tax Plan. His plan would dramatically overhaul the tax code by eliminating most preferences and replacing existing income taxes with a 14.5 percent flat tax for individuals, businesses, and investments. He would also eliminate other taxes including payroll taxes, estate taxes, and tariffs. Two outside groups have evaluated the costs of his plan, finding a wide range of revenue losses between $1.8 trillion and $15 trillion.
Individual Income Tax Reform
On the individual side, the 14.5 percent flat tax would apply to wages, salaries, dividends, capital gains, rents, and interest. The plan would maintain the mortgage interest deduction, charitable deduction, the Earned Income Tax Credit, and the Child Tax Credit. It would increase the standard deduction and dependent exemption in such a way that a family of four would not be taxed on its first $50,000 of income (up from $28,600 now). By providing one flat rate of 14.5 percent, taxpayers currently in the 15 percent bracket would only see a very small reduction in their marginal rates, while the rates of the highest income individuals would fall by over 25 points.
CRFB’s new Fiscal FactCheck project released an infographic today comparing the costs of several GOP presidential candidates’ tax plans. So far, the Tax Foundation has scored plans from Bush, Cruz, Jindal, Paul, Rubio, Santorum, and Trump. Although these plans offer a number of thoughtful improvements to the tax code, they would also add trillions to the deficit. See how the candidates stack up below:
This blog is part of the “Fiscal FactCheck” series designed to examine the accuracy of budget-related statements made during the 2016 presidential campaign.
Last night marked the first Democratic Presidential debate, held in Las Vegas, and the candidates debated a number of different issues. While they did not mention any of our 16 Budget Myths to Watch Out For in the 2016 Presidential Campaign, there were other claims that related to the federal budget. Below is our analysis of these claims, and be sure to check our other fact checks of the first and second Republican debates.
Eliminating the Payroll Tax Cap Could Extend Solvency to 2061 and Allow for Expanded Benefits
Sen. Bernie Sanders (I-VT) discussed his plans to increase Social Security benefits and extend the program's solvency by saying "And the way you expand it is by lifting the cap on taxable incomes so that you do away with the absurdity of a millionaire paying the same amount into the system as somebody making $118,000. You do that, Social Security is solvent until 2061 and you can expand benefits." He is presumably referring to his plan that the Social Security Administration (SSA) evaluated in 2013, a plan that taxed all income over $250,000 and allowed the current payroll tax cap to eventually catch up so that all income was taxed. This plan did extend solvency to 2061 -- leaving a deficit of 1.5 percent of payroll in 2062, growing to 2 percent by 2090 -- but did not also increase benefits. If it had increased benefits, the insolvency date would be sooner.
Republican presidential candidate Louisiana Governor Bobby Jindal announced his tax reform plan with a centerpiece that promises to ensure every American pays at least a little tax. The plan cuts taxes for individuals and eliminates the corporate tax and estate tax. Finally, it taxes capital gains and dividends as ordinary income under three consolidated brackets. According to one estimate, the plan would cost $9 to $11.4 trillion, which represents about one-quarter of all government revenue.
Individual Income Tax Reform
Governor Jindal’s plan would consolidates the tax brackets from seven to three – 2 percent, 10 percent and 25 percent, with most citizens falling into the middle bracket of 10 percent instead of the 15 and 25 percent brackets they're taxed at today. This plan is similar to, but reduces rates more aggressively than, either Jeb Bush’s or Donald Trump’s plans.
In addition to lower rates, the plan identifies several other tax cuts including:
- Repealing the Alternative Minimum Tax (AMT)
- Consolidating existing savings incentives into a tax-free savings account with a cap of $30,000 per year. Currently uncapped accounts like 529 plans, would not be subject to the new restrictions.
- Eliminating the marriage penalty (and increasing marriage bonuses).
- Eliminating all Affordable Care Act taxes.
Jindal’s plan would be partially paid for by:
- Eliminating the personal exemption and standard deduction, but adding a new, nonrefundable dependent credit
- Eliminating all itemized deductions except for the charitable and mortgage interest deductions, while reducing the cap for the mortgage deduction by 50 percent.
- Taxing all capital gains at ordinary rates (the top rate would increase from 23.8 to 25 percent)
Interestingly, this plan is one of the few campaign plans so far to address the largest tax break – the unlimited exclusion for employer-provided health insurance, which would be replaced with a new standard health deduction available to anyone with health insurance.
In light of the recent reconciliation package that repeals the Cadillac tax on high-cost health insurance plans and Democratic Presidential candidate and former Secretary of State Hillary Clinton's (D-NY) call for repeal, 101 economists -- including CRFB board members Robert Reischauer, Alice Rivlin, and Eugene Steuerle -- wrote a letter to the Chairmen and Ranking Members of the House Ways and Means and Senate Finance Committees recommending that they spare the tax.
The letter cites three main reasons to keep the tax. First, the tax will help control health care costs by discouraging overly generous employer-provided health insurance plans. Second, it could help wage growth by reducing the share of employee compensation that goes toward insurance. Finally, repealing the tax would cost $91 billion over the next ten years. The letter concludes that:
We, the undersigned health economists and policy analysts, hold widely varying views on other provisions of the Affordable Care Act, and we recognize that measures other than the Cadillac tax could have been used to restrict the open-ended health insurance tax break.
But, we unite in urging Congress to take no action to weaken, delay, or reduce the Cadillac tax until and unless it enacts an alternative tax change that would more effectively curtail cost growth.
Republican presidential candidate Donald Trump announced his tax reform plan yesterday to lower tax rates and simplify the tax code with the goal of promoting economic growth. It cuts taxes for both individuals and businesses, lowering tax rates across the board and eliminating the income tax for some people while scaling back or eliminating some tax preferences and changing international taxation to offset some of that cost. The campaign has stated that the plan will be revenue-neutral, though three outside organizations have provided estimates of the plan, which could cost as much as $12 trillion.
Individual Income Tax Reform
On the individual tax side, Trump's plan would reduce the number of tax brackets from seven rates ranging from 10 percent to 39.6 percent down to three rates of 10, 20, and 25 percent so that nearly every taxpayer would face a lower marginal tax rate. This is similar to but more aggressive than Gov. Bush's plan to reduce rates to 10, 25, and 28 percent.