Republicans and Democrats hardly agree on anything these days, with one exception: It’s a lot easier to hand out tax breaks to special interests when you don’t have to offset them with spending cuts or tax increases on someone else.
Consider the negotiations underway between the Republican-controlled House and the (still) Democratic-led Senate over a “tax extenders” tax bill. This legislation is a periodic bonanza for lobbyists, necessitated by Congress’ bad habit of adopting certain tax deductions and credits on a temporary but renewable basis. It’s a fiscal potpourri made up of some items that are large and rational (a business credit for research and development) and some that are small and parochial (a break on auto racetracks). The total annual price tag runs to tens of billions of dollars.
Traditionally, Congress considered the tax extenders bill must-pass legislation, free of the usual requirement to be fully “paid for” because it would include a “fix” to the otherwise oppressive alternative minimum tax. That tax got permanently repaired at the end of 2012, however. So, in theory, Congress should have to “pay for” the next tax extenders bill, which must be enacted by the end of the year so taxpayers enter the 2015 filing season knowing what rules apply to their 2014 income.
In theory. In practice, soon-to-be-ex-House Ways and Means Committee Chairman Dave Camp, R-Michigan, and soon-to-be-ex-Senate Majority Leader Harry Reid, D-Nevada, are discussing a deal under which some of the costliest temporary tax breaks, such as the research and development credit, a small-business-investment deduction and a college-tuition credit, would become permanent. Others, such as bonus depreciation for business, would be extended — and none would be paid for.
While undoubtedly the path of least resistance for legislators, this approach could skew any future tax-reform effort. Switching the tax breaks in the extenders bill from one- or two-year items to permanent ones would lower expected revenue by more than $400 billion over 10 years, according to news reports on the negotiations. The rate-cutting process under tax reform would have to produce only that amount of revenue to be considered “deficit-neutral.” The burden of balancing the budget would accordingly fall more heavily on the spending side — or perhaps on tax-code benefits for the poor, like the earned-income tax credit and the child tax credit, both of which expire in 2017 but are reportedly not slated for newly permanent status in the discussions on Capitol Hill.
There would be a certain transparency in finally dropping the pretense that certain oft-renewed breaks, most notably the research and development credit, are temporary. The problem is simply the practical one of blowing a new hole in the budget while making the long-term goal of bipartisan tax reform harder to achieve. Congress should allow more of the temporary special breaks to expire while paying for more of the ones it chooses to make permanent. Instead, it may be about to force President Barack Obama to choose between signing a bad bill or none at all.