Camp Makes Responsible Choices on Tax Extenders

While Ways and Means Chairman Dave Camp's (R-MI) Tax Reform Act of 2014 (TRA) misses a critical opportunity to use tax reform to slow the unsustainable growth of the federal debt, his proposal should be commended for abiding by pay-as-you-go rules and responsibly paying for the set of expiring tax provisions often called the "tax extenders" and certain temporary expansions of refundable tax credits.

Although many of these provisions—such as the research and experimentation tax credit—have technically already expired due to a lack of Congressional action, they are often extended retroactively and often without being paid for. Extending all of these provisions permanently without offsets, as some in Congress have proposed, would be irresponsible and would reduce revenues by between $630 billion and almost $1 trillion over the next 10 years. With interest costs, debt would be 3.0 to 4.4 percentage points of GDP higher than scheduled in 2024.

By abiding by PAYGO based on current law (under which all of these provisions would expire and thereby increase federal revenue), the TRA at least maintains revenue at currently projected levels. It should not be taken for granted that revenue will stay at projected levels, as many policymakers from both parties have advocated extending tax cuts and putting the bill on the nation's credit card.

Broadly, these expiring provisions could be thought of in three categories:

1. Refundable Credits. Three refundable tax credits (the American Opportunity Tax Credit, Earned Income Tax Credit, and Child Tax Credit) were expanded in the 2009 stimulus bill, and were extended in 2010 and 2012. However, these expansions are set to expire at the end of 2017.
2. Normal tax extenders. A host of temporary provisions, such as the research and experimentation credit and incentives for alternative energy production, expire every year or two and are continuously renewed on a temporary basis. Currently, most of these measures are expired but can be renewed retroactively.
3. Temporary economic stimulus. A number of temporary tax provisions were implemented during the Great Recession to help support the fragile economy. Two measures—bonus depreciation rules intended to boost business investment and tax relief for mortgage debt forgiveness—were in the tax code in 2013 and could be renewed retroactively

If all three categories of provisions were extended without offsets, deficits would be nearly $1 trillion higher over ten years (or $1.2 trillion with interest). Even if the temporary stimulus provisions were allowed to expire as currently scheduled, deficits would be $620 billion higher ($750 billion with interest). Thus, the draft would raise $620 billion more than if the rest of the "extenders" and refundable credits are extended without offsets. The TRA, at least represents a significant improvement over the current modus operandi in Congress—financing tax cuts with larger deficits.

Under current law assuming a war drawdown, debt is expected to reach 76.7 percent of GDP by the end of the decade. The Tax Reform Act is revenue-neutral, which means that debt ends up in nearly the same place. However, if all of the expiring tax provisions were extended without offsets, debt would be 4.4 percentage points higher, at 81.1 percent of GDP.

The draft deals with these various provisions in different ways (as shown below), but importantly, no extension or expansion is allowed to add to the debt. Given our perilous fiscal trajectory, however, it is not sufficient to avoiding digging a deeper hole. Hopefully, lawmakers can work together to improve upon the TRA, and also use tax reform as an opportunity to reduce our indebtedness.

Costs of Major Tax Extenders (2014-2024, Billions)