President Barack Obama and some of his allies are trying to transform an ugly piece of tax legislation into something that gives critical help to millions of low-income Americans.
The gambit hasn't gotten much attention until now. But if it works, the resulting commitment of resources would arguably represent the biggest anti-poverty effort of Obama’s second term.
The legislation is a big bundle of tax breaks that could be worth somewhere between $700 billion and $800 billion over the next 10 years, depending on how negotiations go. To put those numbers in perspective, the high end of that range would approach the projected cost of the Affordable Care Act in its first decade. The package has no offsetting spending cuts or revenue, which means that, at least on paper, it would increase the federal deficit.
Most of the tax breaks are for corporations, and while some have dubious justification, some have no justification at all. Probably the worst and most notorious among them is one that became law relatively recently -- a “bonus depreciation” provision that lets companies write off the full cost of new equipment right away, rather than spreading it out over time. This provision became law in 2009, as part of the Recovery Act, and it was supposed to encourage businesses to invest in production equipment and then hire more workers. There’s no good reason to think it did.
In theory, this and the rest of the business tax breaks are temporary. In reality, they haven't been. Whenever they expire, or are about to expire, corporations demand that Congress extend all of them, and Congress complies. Republicans vote yes. Democrats vote yes. Nobody worries what it does to the deficit. Approval of the “extenders,” as they’ve come to be known, has actually become something of a holiday ritual, since it usually happens just before Congress adjourns for December -- and the Internal Revenue Service is getting ready to print the next year’s tax forms.
The renewals have become so routine that corporations assume they will become law and make financial plans accordingly. But companies still wish they didn’t have to wait for Congress to act and their biggest allies, in the Republican Party, have other reasons to make the tax cuts permanent. By enshrining them in the tax code now, the thinking goes, it will be easier to pass other tax reforms later. To make the business tax cuts permanent, Republicans need votes from congressional Democrats and, of course, they need a signature from the president. That has given liberals, including the one in the Oval Office, a little leverage -- and now that leverage may produce some results.
Back in 2009, when Congress was trying to pump up the economy, it didn’t just create that bonus depreciation tax cut. It also expanded the Child Tax Credit, which gives relief to families with children, and the Earned Income Tax Credit, or EITC, which basically makes small paychecks bigger.
The EITC may sound familiar, because it has a well-deserved reputation as one of the most effective anti-poverty measures around. And while it generates antipathy from some Republicans, who allege (incorrectly) that the program is prone to fraud, it also has a history of moderate bipartisan support -- largely because, to claim the credit, you have to have an income. To Ronald Reagan, probably its best known champion, that made the EITC the antithesis of a welfare giveaway.
Like the bonus depreciation cut, the EITC and Child Tax Credit enhancements were also temporary, though Congress has since extended them twice. All along, Obama, the Democratic leaders in each house, and key allies like Sen. Sherrod Brown (D-Ohio) and Rep. Rosa DeLauro (D-Conn.), have been agitating to make these cuts permanent. In the past, they’ve proposed offsetting the lost revenue with higher taxes on the rich.
That’s not happening in this Congress, so Democrats have also offered what amounts to a trade. They’ll sign off on a package that extends some of corporate tax breaks permanently, as long as it limits or winds down the less defensible ones while making those tax cuts for the working poor and middle class permanent. (The package would likely include a tax credit for education costs, in addition to the enhancements of the Child Tax Credit and EITC.)
The impact for the people who get these tax credits would be considerable. According to calculations by the Center on Budget and Policy Priorities, expiration of the tax credits for the working poor would put 16.4 million people, about half of them children, into or deeper into poverty. And while the improvements are not set to expire for another two years, waiting means risking the outcome of the next election. If Republicans win control of the White House and Congress, they may demand a much higher ransom for extending the EITC and Child Tax Credit. Or they could refuse to do so at all.
The officials and advisers trying to put this deal together from the left aren’t wild about extending the corporate tax cuts, particularly without offsetting spending cuts or revenue. But, they reason, the alternative is to continue the existing charade, with Congress approving these tax cuts year after year -- and adding to the deficit anyway. If the deal works out as some promoters hope, some of the largest and least attractive tax cuts, like bonus depreciation and some shelters for multinational corporations, would remain temporary and require new acts of Congress to extend.
That last part is important. Since the more egregious cuts would no longer come up for renewal as part of much larger packages, with more defensible features, Congress would be more likely to let them expire. That would produce savings, relative to what Congress would do absent a deal. Bonus depreciation alone accounts for more than one-third of the total value of the business extenders.
Or so the argument goes. Groups like the Committee for a Responsible Federal Budget take a very different view, and they have company on both sides of the aisle. They argue that the deal would reaffirm a double-standard conservatives have long favored, in which new spending requires offsets but new tax cuts don't. These critics of the deal also worry that the package will get worse in negotiations, accumulating more corporate giveaways, while making future deficits worse.
Those concerns may still cause negotiations to unravel. So could arguments among the bill’s supporters. Congressional Democrats, for example, want the bill to include postponement of the Affordable Care Act’s “Cadillac tax” -- a levy on expensive health insurance policies that economists say helps to hold down health costs, but that is highly unpopular with just about everybody else. The White House opposes that. Tea party Republicans could still stage a revolt, since tax breaks for poor people, even the ones who work, are not especially popular with their supporters.
Still, negotiations over this bill have gotten farther than many people ever expected. Legislation could still pass. And whatever else its effects, that would mean bolstering two programs for the working poor -- at a time when the working poor can use all the help they can get.
For years, Congress has struggled with what to do with scores of temporary tax breaks that have come to be known as the “tax extenders.” The usual resolution: Lawmakers fiddle for months. Then, sometime in December, they mindlessly continue the immortal mostly-business tax breaks for another year or two.
Last year, Congress never could agree on what to do, so most of the measures technically expired. But fear not, it’s another December. And this time lawmakers think they have a better idea—restore and extend most of the subsidies, make a bunch of others permanent, and repeal a couple of recent tax hikes in the bargain. The Committee for a Responsible Federal Budget figures that one version of this deal now floating around Capitol Hill would add $850 billion to the debt this decade and $2.3 trillion by 2035.
With neither party much interested in budget discipline these days, lawmakers may fix their extenders problem simply by giving everyone most of what they want. Politico’s Bernie Becker compares it to the day Oprah gave everyone in her studio audience a car. As she might have screamed, “You get a tax cut. And you get a tax cut. And so do you.”
Republicans want to make permanent several business subsidies. Thus, a working version of the extender compromise would do just that for small business expensing, the research credit, and a handful of others. Those that don’t make the cut would still be temporarily extended. Weirdly, most GOP presidential hopefuls would repeal nearly all of these tax subsidies in their tax reform plans. More on that in a bit.
Democrats want to make permanent some provisions of the Earned Income Tax Credit and the Child Tax Credit that were included in the 2013 fiscal cliff bill but are due to expire in 2018. They also want to expand the EITC to childless adults and make permanent the American Opportunity Tax Credit. Those proposals could find their way into the package as well.
But such an extender bill is not yet a done deal. Among the sticking points: Some Republicans want to bar undocumented immigrants from receiving refundable credits—a non-starter for Democrats. Others want to crack down in what they see as abuse of the EITC. Unions and most Republicans want to repeal the Affordable Care Act’s Cadillac Tax on high-cost employer sponsored health plans and other lawmakers want to dump the ACA tax on medical devices. The White House may choke on some of those provisions.
If this story seems familiar, that’s because it is. Last year, Congress came down to the wire on an extender bill that also would have made some of these same provisions permanent. At the last minute, the bill collapsed--which makes this year’s effort all the more urgent.
Whatever happens in the next few weeks, keep in mind that the tax reform proposals of most GOP presidential candidates would repeal the very provisions Congress is working so hard to make permanent. It sounds crazy. It is crazy. But it makes perfect sense in the wonderland that is congressional budgeting.
Making these tax breaks a permanent part of the official congressional budget baseline actually makes rate-cutting tax reform easier. Why? Because killing a permanent tax break produces more revenue than killing the temporary version of the same subsidy—more money on paper that could be used to further reduce tax rates. Never mind that it adds hundreds of billions of dollars to the government’s borrowing needs.
The calculation is not so simple for Democrats. The kind of deal being debated this week would give them a win on important refundable tax credits. But adding nearly a $1 trillion to the debt over the next decade would come back to haunt them should a Republican win the White House in 2016. In that event, they can be sure that this same increase in the deficit would be a prime justification for GOP efforts to cut Social Security, Medicaid, and Medicare.
But that’s next year’s problem. For now, everybody wins. Unless you care about the budget deficit.
No description is available.
No description is available.
By a vote of 83-16 in the Senate and 359-65 vote in the House of Representatives last night, Congress passed the newly-rechristened Fixing America’s Surface Transportation or “FAST” Act, sending it to the White House where President Obama is expected to sign it into law.
The five-year, $305 billion act is the first long-term authorization passed by Congress since the $286.4 billion “Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users” or “SAFETEA-LU,” back in 2005, which expired in 2009.
“It is a tremendous relief to know that with the FAST Act, state departments of transportation will have some reasonable long-term certainty regarding the levels of federal investments for surface transportation,” noted Paul Trombino, president of the American Association of State Highway and Transportation Officials (AASHTO) and director of the Iowa Department of Transportation, in a statement.
“We have long said that states, which are the primary implementers of the federal program, need a long-term federal commitment in order to plan for and invest in the kind of transportation projects the nation needs now and well into the future to support our quality of life and economic prosperity,” he added.
The Committee for a Responsible Federal Budget (CRFB), however, is one interest group that is taking a dim view of the FAST Act.
“Overall, the Congressional Budget Office (CBO) estimates that the bill saves $71 billion over ten years to finance a $70 billion transfer to the Highway Trust Fund (HTF), which will keep the fund solvent through fiscal year 2020,” CRFB noted in a recent blog post. “At the same time, the bill would increase highway contract authority by $25 billion above the baseline over the next five years, or nearly $65 billion if that amount of spending were extended out for ten years.”
The group added that increased spending in the FAST Act will “only make it more difficult for lawmakers to close the HTF shortfall in the future,” noting that its higher spending would increase the 2021-2030 shortfall by $50 billion on top of the already-existing $215 billion shortfall.
“The bill technically rescinds the increased spending in 2020, but it is unlikely that a future Congress would allow the 13% spending cut that would entail,” CRFB said. “Increasing highway spending is not necessarily irresponsible, but it is when lawmakers provide only temporary funding to do so. Instead, they should raise the gas tax or find another permanent financing source if they want to spend more.”
Yet Brian McGuire, president and CEO of Associated Equipment Distributors (AED), believes the FAST Act will help boost heavy equipment sales to the tune of $13 billion.
“This is more than a philosophical victory,” he said in a statement. “Over the next five years, the hundreds of billions of dollars in federal highway and transit investment guaranteed in the bill will stimulate more than $13 billion in equipment sales, rental and maintenance activity and support more than 4,000 dealership jobs each year.”
WASHINGTON — Republican and Democratic negotiators closed in Friday on a major package of tax cuts for businesses and individuals that could exceed $700 billion in forgone revenues over a decade, and planned to work through the weekend in hopes that Congress can approve it before quitting for the year.
The package would extend or make permanent around 50 temporary tax breaks that have expired or will soon lapse. By combining business breaks that are priorities of Republicans with tax credits for lower-income workers and families that are critical to Democrats, negotiators are seeking a balanced package that could transcend the partisanship that often paralyzes Congress.
Negotiators also are considering whether to suspend for two years another tax in the health insurance law, a levy on medical device manufacturers.
By week’s end, people in both parties suggested the tax package was becoming a Christmas tree that could fall of its own weight. Supporters argue that many of the tax breaks have been on the books for years, but that short-term extensions have masked their long-term cost. Making them permanent and conceding the revenue loss upfront would amount to more honest budgeting, supporters say.
To critics among budget watchdogs and some Democrats, the deal, if it comes together, could set a troubling double standard, with only new spending — but not tax breaks — requiring offsetting budget cuts to avoid adding to deficits. Republicans, who now control both houses of Congress, have long argued that tax cuts do not need to be paid for with budget cuts. Now Democrats are going along in return for Republicans’ dropping their opposition to tax breaks for the working poor.
In contrast, Congress and the White House agreed to a bipartisan deal for new spending in October, and a highway measure this week, only after hard-fought compromises on budget cuts to pay for the spending increases.
Some Democrats in the House and Senate have registered protests, although a meeting of Senate Democrats on Thursday showed greater support for the emerging package than many expected. Among the opponents is Senator Mark Warner, Democrat of Virginia and a member of the Finance Committee, who recalled the hard fights to win a bit more spending for education, infrastructure, medical research.
“Yet people now are talking about spending $800 billion in lost revenue — that’s spending,” Mr. Warner said. “For those of us who think there are key areas where government needs to invest more — you know, education, infrastructure, research — if we spend the money on tax relief, on a so-called tax extender package, then it’s hard to make the case that we can spend money on other key priorities.”
Senator Tammy Baldwin, Democrat of Wisconsin, sent a letter to Mr. Wyden signed by her and four other senators calling for the tax bill to be paid for by curbing tax breaks for hedge-fund managers and corporate executives’ compensation.
The Republican Study Committee in the House, which includes most Republicans there, circulated its demands to end tax breaks for renewable energy, including wind and solar projects, and to require proof of legal status before workers can claim tax breaks. Democrats are protecting the renewable energy provisions, but discussing ways to address Republicans’ concerns about undocumented workers getting tax breaks.
The tax package would phase out over five years a bonus depreciation tax break for corporations, which was intended as a short-term stimulus measure, and two provisions that benefit foreign corporations and American multinational corporations. Republicans wanted to make the corporate breaks permanent, but Democrats and the administration objected, especially given the recent controversy involving Pfizer and other corporations that have acquired foreign companies to relocate in countries with lower corporate taxes.
A tentative trade-off would have Republicans agreeing to the five-year phaseout of the corporate tax breaks they favor in return for Democrats dropping their insistence on indexing the child tax credit so it increases in value with inflation. But House Democrats, led by Representative Nancy Pelosi of California, have been insisting on indexing the child credit.
The writer is a former mayor of Omaha and former congressman from Nebraska’s 2nd Congressional District. He currently serves as a member of the University of Nebraska Board of Regents.
Our national debt is the single biggest threat to the future economic security of Americans.
It is the one impediment to guaranteeing a healthy and prosperous future for generations to come.
Sadly, very few presidential candidates have been willing to acknowledge that fact.
Former Secretary of State Hillary Clinton will be campaigning in Omaha later this month. My hope is that she comes armed with ideas to reduce our mounting debt.
Deficits have been declining in recent years, but as the nonpartisan Campaign to Fix the Debt points out, trillion-dollar deficits will return within the next decade.
Meanwhile, the debt as a share of the nation’s economy — 74 percent of the Gross Domestic Product — is projected to keep growing and will exceed the size of the economy by 2040.
There are no easy solutions.
But as someone who served as chairman on the Social Security Advisory Board, I know that we can’t keep ignoring the looming insolvency of Social Security.
If we don’t act, the combined trust funds will be depleted in the early 2030s, resulting in an immediate 20 percent to 30 percent across-the-board cut for all retirees. We can’t afford to let that happen.
As a former member of the House Ways and Means Committee, I also understand how important it is to enact pro-growth tax reform that lowers rates, eliminates special deductions and raises revenues to help pay down the debt.
These are some of the important issues that candidates should address on the campaign trail.
We believe allowing the American people to keep more of their hard-earned money is not something that needs to be paid for.”
|One-year tax extenders||$45|
|Bonus depreciation (allows businesses to immediately deduct the cost of equipment purchases.)||$281|
|R&D tax credit||$182|
|Active financing (lets financial institutions defer taxes on income earned outside the U.S.)||$78|
|Section 179 expensing (A standard deduction on business equipment purchases, up to $25,000)||$77|
|Retail 15-year depreciation (Allows retail business improvements and construction to be deducted over a 15-year period rather than a 39-year period.)||$28|
|CFC look-through (allows corporations to move earnings to tax-haven shell companies without paying U.S. taxes)||$21|
|Permanent Earned Income Tax Credit and Child Tax Credit expansion||$150|
|Two-year delay in medical device tax||$5|
|Two-year delay in Cadillac tax||$15|
|Zadroga 9/11 responder bill||$7|
Another one-year or shorter extension of lapsed tax extenders won't be acceptable, said Senate Finance Committee Chairman Orrin G. Hatch (R-Utah).
That happened last year when all the provisions were extended for 2014 only, after talks on making some long-temporary tax credits permanent and continuing others on a short-term basis fell apart (245 DTR G-5, 12/22/14).
Hatch said that isn't an acceptable fall-back option if similar talks this year fail to produce an agreement. “It's got to be multi-year,” Hatch told Bloomberg BNA Dec. 2. “We're not going to put up with one year.”
For weeks, lawmakers have continued discussing a possible deal on permanency for popular tax breaks like the business credit for research and development and the Earned Income Tax Credit that households can claim (230 DTR G-5, 12/1/15).
But Hatch reiterated that EITC fraud and payment errors need to get reined in, first and foremost, underscoring a common refrain among other Republicans on Capitol Hill. “It's a big problem, about 25 percent fraud,” Hatch said (see related story in this issue).
EITC permanency is paramount for President Barack Obama and House Minority Leader Nancy Pelosi (D-Calif.), Hatch said.
To claim the EITC, which is available to low-income taxpayers and is based on their earnings and number of children, taxpayers must provide Social Security numbers for themselves, a spouse if filing a joint return and any qualifying children, according to a Congressional Research Service report released Dec. 1. For the other refundable credits such as the additional child tax credit, taxpayers can make claims using a Social Security number or an individual taxpayer identification number, the report said.
Hatch said he remains hopeful for an agreement, a point echoed by House Ways and Means Committee Chairman Kevin Brady (R-Texas).
“We're making a lot of progress,” he told reporters.
But neither he nor Hatch would commit to a deadline to accept the two-year extension Hatch's committee approved earlier this year as a back-up to the permanency discussions. Others in Congress said they are less inclined to forecast an outcome.
“The honest answer is we don't know where things are,” said Ways and Means ranking member Sander M. Levin (D-Mich.).
In contrast to the hand-wringing over what lawmakers might or might not agree to make permanent, many of them seem less concerned about offsetting the cost of extenders of any duration.
Hatch has admitted that the price tag could exceed $500 billion over a decade if a bigger agreement comes together.
Budget hawks outside Congress have reacted negatively.
The deal could cost up to $840 billion in that 10-year period when factoring in interest costs and other considerations beyond the scope of more routine extensions in the past, namely expanding some of the existing provisions in addition to making them permanent, according to an estimate from the Committee for a Responsible Federal Budget.
That would happen with the research and development credit if congressional Republicans get their way.
A House-passed bill (H.R. 880) to expand it and make it permanent would cost $182 billion over a decade, whereas a permanent extension of existing policy would cost $109 billion, according to Joint Committee on Taxation estimates.
Congress is eyeing a year-end budget-busting tax cut blowout.
The bipartisan plan taking shape, a throwback to the George W. Bush era of big tax cuts that ballooned the deficit, has some wondering if it will collapse under its own weight. It could also run afoul of the budget that Republicans adopted in May, which promised to balance the government’s books within a decade. Policy disputes may also trip up the package, with the influential Republican Study Committee issuing several 11th-hour demands.