Taxes

The Fiscal Irresponsibility of the Tax Deal in 6 Charts

It's no surprise that a deficit-financed tax cut deal costing $830 billion after interest would be bad for the budget. We've been describing the emerging deal in various blogs over the last month, but below are the most important charts, updated for the actual numbers from the announced deal.

The Deal Would Add More Than $2 Trillion to the Debt Over 20 Years

The Joint Committee on Taxation has scored the deal as costing $680 billion over ten years, which would rise to $830 billion if interest costs are included. Although 20-year estimates are inherently uncertain and imprecise, we estimate that the costs grow over time to exceed $2 trillion over 20 years.

The Deal Squanders Recent Deficit Reduction

Although lawmakers have been adding to the debt repeatedly for the past few years, the $680 billion tax deal is easily the largest step backwards and is comparable in magnitude to the deficit reduction lawmakers enacted between 2011 and 2013. The deal easily swamps the net savings from the 2013 Ryan-Murray agreement, almost equals the revenue raised in the fiscal cliff agreement, amounts to three-quarters of the sequester savings, and is more than two-thirds of the savings from the Budget Control Act spending caps.

Negotiated Tax Deal Would Cost $680 Billion

Lawmakers have announced a negotiated package of business and individual tax breaks costing about $680 billion over ten years. After interest, we project the cost at about $830 billion over ten years. The package is split between two bills, one extending most of the tax breaks, and the omnibus bill providing discretionary spending for the rest of the fiscal year.

The deal largely focuses on reviving tax breaks that expired at the end of 2014, making some permanent and extending others for either two or five years. However, it also permanently extends three refundable tax credit expansions that would have expired in 2017, originally enacted in the 2009 stimulus bill. The bill also pauses or delays three taxes from the Affordable Care Act, opening the door to further delays or possible repeal of the taxes, undermining the health care law's deficit-reduction and cost-control efforts. Specifically, it would pause the medical device tax for 2016 and 2017, pause the health insurance tax for 2017, and delay implementation of the so-called "Cadillac tax" for two years while subsequently making the tax deductible against a company's corporate income tax (and tasking a study of how the tax's thresholds are indexed). If these three taxes are subsequently repealed, it would cost a combined $257 billion over ten years:

Hoyer Slams Tax Extenders Deal

House Minority Whip Steny Hoyer (D-MD) took to the House floor on Tuesday to assert his opposition to a potential tax extenders deal, citing a recent piece by CRFB president Maya MacGuineas to back up his opposition.

He cited a large increase in deficits that would result from the package and the double standard between spending and tax cuts when it comes to offsets, an argument also made in a recent letter by a group of Senate Democrats.

The cost of such a package runs in the $600 - $800 billion range – none of which is paid for, ballooning our deficits in a way that reinforces a misguided double standard that investments in the growth of jobs and opportunities must be offset, but tax cuts are always free.

Short-Term Extenders Package Is Still Irresponsible

Faced with the possible opposition over a $700 billion deal to extend permanently some of the expiring "tax extenders", Congress may consider a bill that would only extend them for two years. Yet the legislation introduced in the House, despite its lower price tag, would still be fiscally irresponsible – not only because it would add to the debt without offsets, but because it would actually expand a number of tax breaks beyond their traditional cost.

According to the Joint Committee on Taxation, simply reinstating all recently expired tax breaks for two years (2015 and 2016) would cost about $96 billion. The House bill by itself would cost $12 billion more, or $108 billion. Even more troubling, the House bill sets the stage for continued expansions; and if made permanent those would cost $860 billion  – that is $120 billion more than a permanent extension of all provisions, and nearly $160 billion more than the permanent deal we discussed last week.

Senate Democrats Ask for Extenders to be Offset

Last week Senators Tammy Baldwin (D-WI), Sheldon Whitehouse (D-RI), Jack Reed (D-RI), Angus King (I-ME), and Elizabeth Warren (D-MA), sent a letter to Senate Finance Committee Chairman Orrin Hatch (R-UT) and Ranking Member Ron Wyden (D-OR) making the argument that tax extenders legislation should be paid for by closing tax loopholes.

This excerpt captures the argument of the letter spearheaded by Sen. Baldwin (full letter here):

Last month, Republicans and Democrats were able to come together in a bipartisan manner to pass legislation preventing harmful cuts to federal programs for two years. However, that legislation also included a variety of spending cuts and revenue increases to ensure that the federal spending would not add to the deficit. Therefore, extending expired tax breaks, or making them permanent, without offsetting the cost is a troubling double standard whereby tax cuts and credits don’t need to be paid for but investments in education, job training, infrastructure, research and innovation must be paid for. Not requiring the same standard for these mostly business tax cuts is not only unfair, it would also add to the deficit and increase pressure to make additional cuts to domestic programs.

Instead of passing tax cuts and credits that increase the deficit, we urge you to offset the cost of extenders by closing loopholes in the tax code.

GOP Campaigns Discuss Tax Plans

The Conservative Reform Network and Americans for Tax Reform recently hosted a forum where representatives from the Republican presidential campaigns of Gov. Jeb Bush, Sen. Ted Cruz, Gov. John Kasich, Sen. Rand Paul, and Sen. Marco Rubio discussed their candidates’ tax reform proposals. You can read our brief summaries of the candidates' tax plans here.

Cruz and Paul both advocate for flat tax proposals combined with what is essentially a value-added tax, while Bush, Kasich, and Rubio propose reforms to lower corporate and individual rates while broadening the tax base. Bush’s primary goals for tax reform are growth and increasing workforce participation. Cruz wants to fix the broken system with a simplified tax regime. Kasich proposes a three-part test for tax reform: it should increase jobs, growth and freedom; it should be able to pass Congress; and it should unite the Republican Party. Paul argues for eliminating the payroll tax for workers, taxing business on what they produce, and taxing imports while exempting domestic production. Rubio promotes a pro-family policy that also establishes parity among all corporate and non-corporate businesses.

Washington Post Criticizes Senate Vote to Repeal the Cadillac Tax

There were many legislative developments in the past week, including the passage of a five-year highway bill and continued negotiations on a tax deal, and among them was the Senate's narrow passage of a reconciliation bill to repeal many key provisions of the Affordable Care Act. There were several amendments considered, but one of the more discouraging adopted amendments was a 90-10 vote to repeal the Cadillac tax (the original legislation instead delayed its start date to 2025). Over the weekend, the Washington Post editorial board rightly criticized the vote as a backwards step for health care policy.

The editorial gives a good summary of some reasons to claw back the tax preference for employment-based health insurance, as the Cadillac tax would do.

Current law provides a tax exclusion for employer-paid insurance. This is how nearly half the public gets insurance, but the exclusion subsidizes overutilization of health care, causes “job lock” by linking work and insurance, and redistributes income upward because tax breaks increase in value for higher income brackets. According to the Congressional Budget Office, 34 percent of the benefits go to the top 20 percent of income earners.

Repealing the exclusion would have been a progressive way to curb health-care costs and raise revenue for coverage expansion. Taxing high-value plans was a second-best solution that would claw back $87 billion in revenue between 2018 and 2025, according to the CBO.

Who Gets What in the Tax Extenders Deal?

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.

Tax Deal Goes Beyond Simple Extensions

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.

Emerging Tax Deal Could Add $2.3 Trillion in Debt by 2035

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.

Policy Ten-Year Cost
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
Subtotal ~$700 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

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